Sample Economics Paper on Elasticity and Utility

Introduction

Demand elasticity refers to changes in the demand for a particular product in relation to changes in various economic variables, such as consumer income and the price of the product. On the contrary, cost analysis is the comparison of costs. Utility is defined as the total satisfaction received from consuming a certain good or service. Consequently, utility influences the demand for a commodity or service. Though hard to measure, it can be determined indirectly by consumer’s response towards a particular product (Journal of Economics & Management, 2000).

Variable Cost

Variable costs are those that vary in direct proportion to the amount of output. Unlike fixed cost, which remains constant, variable cost raises when production increases and falls when production declines (Journal of Economics & Management, 2000).

Total variable cost= Total Quantity of Output * Variable Cost per unit of output,

or Total cost – Total fixed cost.

Average Variable Cost

The average variable cost (AVC) is equal to the total variable cost per unit of output.  It is calculated by dividing the total variable cost by total output (Journal of Economics & Management, 2000).

Fixed Cost and Average Fixed Cost

Fixed cost refers to cost that does not change with a change in output.

Since fixed cost is given to be $5000 per 1000miles, the total fixed cost of the whole project is calculated by multiplying the number of miles to be covered by fixed cost per 1000miles (see the spreadsheet).

Consequently, Average fixed cost.

Marginal Cost

It is the increase or decrease in total cost due to the production of one more unit of a product.

Marginal cost (MC)  Where; = Change, TC= Total Cost and Q= quantity.

 

Cross Elasticity of Demand

Cross price elasticity of demand refers to the ratio of percentage change in quantity demanded to the percentage change in the price of another product. It is used to show the relationship between two products, as it measures the change in the quantity of one product due to change in the price of the other. Hence, the cross price elasticity of demand indicates whether the two commodities are either independent goods, complementary goods, or substitute (Journal of Economics & Management, 2000).

Cross elasticity of demand=.

The percentage change is calculated by use of mid-point formula, which divides actual change by average of initial and final values.

Or, Cross elasticity of demand=  where Q1 and Q2 are last and first quantities claimed of product A respectively; and P1 and P2 are final and initial prices of product B

Cross elasticity of demand= =2

When the cross-price elasticity of demand of one product relative to the change in the price of the other product is positive, it implies an increase or a decrease in quantity demanded for one product due to an increase or decrease in the price of another (Journal of Economics & Management, 2000). Hence, alternative source of energy is a substitute to crude oil because, an increase in prices of crude oil cause an increase in quantity demanded of alternative energy sources. Thus, they have a positive cross price elasticity of demand.

 

 

Reference

Journal of Economics & Management. (2000). Retrieved from http://onlinelibrary.wiley.com/journal/10.1111/%28ISSN%291530-9134/issues