Answer to Question #205795 in Economics of Enterprise for Malik ismail

Question

China is the world’s largest producer of gold and India is the world’s largest buyer of gold. Gold mining in China is becoming more capital-intensive which is making the supply of gold less price inelastic. The wages of workers employed in the industry are rising but other costs of production are falling.

 

         (a.)           Explain two reasons why the supply of a product may be price inelastic.

(b.) Analyse what effect an increase in output will have on fixed, variable and average costs.                                                    

Answer 1

a. No substitutes coupled with low competition due to monopoly power. In the case of automobiles, there is no alternative but to buy petrol to fill up the vehicle. If you rely on the bus to get to work, the bus firm can change its fares with little or no fall in demand.

A small percentage of income. If you buy a good infrequently, such as salt, you are less likely to be sensitive to price. Salt takes only a small percentage of income, therefore you may be less concerned about its price as compared to other goods.

b. Fixed variable costs. A fixed cost is one that remains constant regardless of the level of output of products and services. This cost increases as the level of production output increases and lowers as the level of production output drops.

Because the same amount of fixed costs is spread over a larger number of units of production, the average fixed cost drops as the total number of units of the good produced grows.

The average fixed cost per unit of output is the fixed cost per unit of output. Because the same amount of fixed costs is spread over a larger number of units of production, the average fixed cost drops as the total number of units of the good produced grows.

The average cost is calculated by dividing the total production cost by the number of units produced. It can also be calculated by adding the average variable and fixed expenses together.