Economic Analysis - Questions and Answer

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that production can be altered through changing variable inputs such as labor, raw materials and energy. Fixed costs do not vary directly with the level of output. Examples include the rental costs of buildings; the costs of purchasing capital equipment such as plant and machinery; the annual business rate charged by local authorities; the costs of employing full-time contracted salaried staff; the costs of meeting interest payments on loans; the depreciation of fixed capital (due to age) and also the costs of business insurance. An increase in fixed costs has no effect on the variable costs of production, it has no bearing on marginal costs. Variable costs are costs that vary directly with output – when output is zero, variable costs will be zero but as production increases, variable cost will rise. Examples of variable costs include the costs of raw materials and components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and the depreciation of capital inputs due to wear and tear. The distinction between fixed and variable costs is not always clear because many costs for a business appear to be overheads but they are affected in part by the short-term level of output . Business costs such as vehicles, computer systems, and buildings will depreciate to a degree even if not used and so it is not always clear whether they are fixed or variable or have an element of both. Also the time periods used differ from one industry to another, for example, the short-run , If you are starting out in business with a new venture question is, how long is your short run? And how long is your long run? The long run could be as short as a few days.

In the question on whether the labor is always variable then the answer is No because It depends on the nature of payment and work, if labor is fixed in amount and don’t have any relation with the volume of production then it is fixed otherwise it will be variable.

With regards to the capital as to whether it is always fixed factor then the answer again is No because capital is only fixed in the short run because company cannot of course increase its capacity in the short run but in the long run capital can now vary depending on the companies output target. If the company wants to increase its production in the long run then company may increase its capital then it became variable because it is now directly proportional with the increase in production output.

5. How (if at all) would each of the following affect the natural rate of unemployment and why:

(a) An influx of inexperienced workers into the economy?

(b) Rapid shifts in the industry composition of a country’s output?

(c) An increase in the generosity of unemployment benefits?

(d) Better surveillance technology that makes it easier to detect shirking workers?

(e) A decline in the share of workers belonging to labor unions.

(f) An increase in aggregate demand.

1. An influx of inexperience workers into the economy would increase the rate of unemployment because more people will not find work that fits experienced required jobs.

2. A rapid shifts in the industry composition of a country’s output would decrease the unemployment rate because more workers

3. An increase in generosity of unemployment benefits would increase the rate of unemployment because people who find it hard to look for a job tend to prefer to be unemployed because of the additional benefits that is provided by the government.

4. Better surveillance technology that makes it easier to detect shirking workers would result to increase in unemployment rate because shirking employees will be fired to work that would be unemployed and be looking for another job.

5. A decline in the share of workers belonging to labor unions

6. An increase in aggregate demand maybe the result of a decrease of price of a goods due to more supply so it would increase the unemployment rate because company would not produce more due to low price but rather cut the number of employees involve in production.

6. For each of the following, tell whether it would affect aggregate demand or aggregate supply and what effect it would have:

(a) An increase in the price of imported oil

(b) An increase in government spending

(c) A decrease in union wage demands

(d) An improvement in productivity due to technological advancement

(e) An increase in the expected long-run profitability of capital

(f) An increase in expected future incomes

(g) A depreciation of the value of the peso.

1. An increase in the price of imported oil will affect the aggregate supply of Oil. The effect is a decrease in the aggregate supply because the price is high most importer tend to lower the importation because they will have lesser revenue as the price of imported goods increases.

2. An increase in the government spending will affect the aggregate demand for labor because normally spending on infrastructure and development demand more construction workers to complete the infrastructure project.

3. Decrease in union wage demand will affect the aggregate supply because companies would have lower labor cost and the company tend to produce more so they will have more profit due to lower cost of production.

4. An improvement in productivity will affect the aggregate supply because the company would have produce greater output at normal time so production is very efficient that means lower cost on factor of production.

5. An increase in the expected long-run profitability of capital will affect the aggregate supply because as the company increases its profit the greater the chance that the company to produce more in order to earn more.

6. An increase in expected future income will affect the aggregate demand for normal goods because people will have a greater purchasing power so they tend to look for more quality goods that is the normal goods over the inferior goods.

7. A depreciation of a value of a peso will affect the aggregate supply of imported goods because peso and dollar conversion is in effect an increase in the price of imported goods.

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