Assessment 1 (Case Study Analysis 1)

“Charlotte is Requesting Your Economic
Advice”
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1
1. Introduction
The following business report is economics based that involves the knowledge of basic and
important terminologies to develop the report. The basic analytical tools involve for designing of
business report are steps and procedure of calculating the desired value from given equation. It
includes the economic variables (profits and costs), demand function of price and quantities, and
ceterus paribus. Derivation of profits by applying the formula of Revenues x Costs and that tool
of solving this is driven from the concepts of mathematical economics (linear programming).
Moreover, the accounting and economic costs where former involves explicit costs addition to
depreciation cost and later involves accounting costs in addition to implicit costs. Likewise, price
elasticity of demand that is the ratio of percentage change in quantity to percentage change in
price. Then, assessing the elasticity value on the scale of elastic, unit elastic and inelastic. After
devising all the basic concepts, then develop an analysis based upon the given tasks through
managerial decision making and combination of economics, statistics, and mathematical tools.
2. Analytical Development
Task 1
In order to find the economic profit, we need to understand the relation between accounting and
economic profits as well as normal profits.
Table 1
Price Quantity Economic Profit
5.00 70 0
2
Task 2
To develop this task, I will use the formula of ‘Price elasticity of demand’ which will show how
the increase in price has changed the elasticity.
Table 2
Price change Value of the Elasticity of Demand
From $5.00 to $10.00 0.5
Task 3
Based on the price elasticity of demand in task 2, the calculated value is 0.5 which is less than 1
and it shows the “Inelasticity of demand.” Inelastic demand shows that there is less
responsiveness to the change in price, some customers turned over to other products due to
increase in price but some will keep on buying because of particular characteristics. Although, in
monopolistic competitive market they (firms) have control over the prices charged. So, it’s not a
good decision to increase the selling price because of the reason demand is inelastic. However,
revenue increases from $350 to $500 and some customers are willing to pay more yet the firm
not produce more output due to profits. As firm is earning zero economic profit because price
equals the average cost same like in competitive market and Charlotte’s firm cannot take full
advantage of economies of scale in production, due to outweighing of quantity effect by price
effect.
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3. Conclusion
Charlotte used this formula to calculate the economic costs (Economic costs = Accounting Costs
+ Implicit Costs + Economic Depreciation) but this formula is not correct. The clear definition of
accounting costs is “explicit costs plus depreciation costs”. While the clear definition of
economic costs is “accounting costs plus implicit costs”. Hence, the formula Charlotte is using is
wrong in a sense that depreciation costs are accounting depreciation and accounting plus
economic depreciation are equal. But she added economic depreciation as an extra term which
will double count the depreciation costs, one in accounting cost and one in economic costs
separately. That’s why the formula used is incorrect and not accurately calculate the economic
costs.
4. Appendix
Task : 1
Charlotte who is a monopolist following a demand curve is described by this equation: Q = 90 –
4 x P To find the economic profit we first must find the Quantity as follows:
P = $5; putting the value in the demand curves, we will obtained the quantity as:
Q = 90 – 4(5)
Q = 70 units
So, by charging the price of $5, she sells 70 units of output. The revenue will be find as:
Revenue = Price x Quantity
R = 5 x 70
R = $350, the revenue collected from the sale of 70 units of output is $350. Now, to calculate the
economic profit we have to subtract total revenue from the economic costs but as the costs are not
given, we will develop the relationship between economic profit and accounting profit. We can
answer that in the folllwoing way:
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Accounting profit = Normal Profit (Given in question)
Normal Profit = Implicit Cost
Accounting profit = Implicit cost
Economic profit = Accounting profit – Implicit cost
= Implicit cost – implicit cost
“Economic profit is zero.”
Task : 2
To calculate the value of elasticity of demand we will consider the changes in price and quantity.
The given demand function is Q = 90 – 4P, so we will calculate it as follows:
If P = $5, If P = $ 10
Q = 90 – 4(5) Q = 90 – 4(10)
Q = 70 Q = 50
So,
% change isQuantity
Price elasticity of demand =
% change∈ Price
50−70
% change in quantity = x 100 = -33.333
70+50/2
10−5
% change in price = x 100 = 66.666
10+5/2
Price elasticity of demand = 0.5 (Always negative)

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“Charlotte is Requesting Your Economic

economic profits as well as normal profits.

the increase in price has changed the elasticity.

From $5.00 to $10.00 0.5

advantage of economies of scale in production, due to outweighing of quantity effect by price

Revenue = Price x Quantity

Normal Profit = Implicit Cost

Accounting profit = Implicit cost

Economic profit = Accounting profit – Implicit cost

= Implicit cost – implicit cost

“Economic profit is zero.”

The given demand function is Q = 90 – 4P, so we will calculate it as follows:

Price elasticity of demand = 0.5 (Always negative)

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