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Copy this diagram and show economies and diseconomies of scale.

Category: Financial Econometrics Paper Type: Case Study Writing Reference: APA Words: 1100


Economies of scale represents the situation when long run average total cost decreases as output increases, while diseconomies of scale occur when long run average total cost increases as output increases, and constant returns to scale occur when costs do not change as output increases. In this diagram, at point A, long term average cost is decreasing and quantity increasing, it representing economies of scale while on point B cost and output are not changing therefore it is representing constant return. At point C the long term cost is increasing as well as output also increasing it represents diseconomies of scale (Silberston., 1972).

What is the difference between short run and long run cost curves? State two points.

·         No fixed cost in long run while short term have both fixed and variable cost as well.

·         In long run general price level adjusted according to the economy but in short term price level do not condensed according to the economy.

What are economies of scope? Give one example.

Economies of scope refer to the concept that the unit cost to produce the product will decrease when there is increase in variety of products increases. For instance you are manufacturing shoes for both male and female, you want to add variety of children that increase the economies of scope because production cost will increase to introduce new one.

A PPF curve shows different points on the graph:

Define a Production Possibility Frontier (PPF)

While conducting analysis of the business, the production possibility frontier PPF is a curve that explains the changing quantity of two products that could be produced depending on the limited resources.

List three sources of economic growth (outward shift)

·         Natural factors

·         Human factors

·         Physical factors

List three sources of economic decline (inward shift)

·         Loss of investment

·         Higher interest rate

·         Stock market crash

Draw a circular flow of economic activity and label the diagram in detail.

Consumer household possesses the factors of the production that is based on the land, labor, capital organization that are used in the production of the products and services. In the chart, the offer of commodities by firms to buyers in the market is appeared in the lower part of the inward float from left to right; and the offer of their management to firms by family units or customers in the factor showcase is appeared in the upper bit of the internal hover from option to left.


In a modem economy, employment happens through budgetary streams which move in the converse bearing to the genuine streams. The achievement of products in the item vehicle by customers is their utilization consumption which turns into the income of the organizations and is appeared in the external hover of the lower divide from option to left in the diagram. The acquisition of commodities in the item advertises by buyers is their utilization use which turns into the income of the organizations and is appeared in the external hover of the lower parcel from option to left in the diagram. 


The utilization of firms in purchasing profitable assets in the factor advertise from the buyers turns into the income of family units, which is appeared in the external float of the upper bit from left to directly in the diagram.

Assume that Oman implements a combination of contractionary fiscal and monetary policies. What will be the effect of these policies on each of the following?

·         Aggregate demand

Monetary policy impact several elements of aggregate demand that are based on the contractionery monetary policy leads to the higher interest rate and decrease the quantity of the loans that could reduce the elements aggregate demand (Bature, 2014).

·         Price level: The economy is initially creating over the potential GDP level of yield and is running into pressures for an inflationary rise in the price level. As a result, if an economy is creating at an amount of yield over its potential GDP, a contractionary money related arrangement can lessen the inflationary weights at an increasing price level.

·          Interest rates: With the higher interest rate the investment demand is increase that increases the interest rate in the economy. It is generally progressively alluring to place those assets in a budgetary speculation than to make an interest in physical capital. Furthermore, higher loan fees will debilitate customer obtaining for expensive things like houses. On the other hand, free or expansionary money related strategy that on time lower financing costs and a higher amount of loanable finances will in general increment business enterprise and purchaser obtaining for first-class things.

What is a business cycle?

Business cycle is based on four phases of situation of market such as boom, trough, contraction and recovery. It represents the fluctuation in the long term of growth measuring in the domestic product (Chari, Kehoe, & McGrattan., 2007).

·         Explain what is happening during each phase of the cycle with:

(i)                 Output: In the boom of the cycle, output of the firms is at maximum while with the decreasing in the boom to recession output also decreases in the economy.

(ii)              Employment: Employment level increase when the business cycle is at the boom and in contraction, employment level decrease.

(iii)             Inflation: In boom of business cycle, inflation rate is in control and as compared to boom, in recession inflation remain in control.

The following table shows the number of donuts or cupcakes that John and Erica can each produce in one day:














(i)     Who has the absolute advantage in producing donuts? Explain.

John is taking the absolute advantage of producing donuts as it is based on the concept of economies of scale by producing it on large scale.

(ii)  Who has the comparative advantage in producing donuts? Explain

According to the economies of scale, john is producing donuts according to the economies of scale and getting comparative advantage.

The following table shows labour-market data for country X:



Frictionally unemployed


Structurally unemployed


Cyclically unemployed


Not in the labor force


Calculate the unemployment rate in Country X. Show working.


The formula for unemployment rate is: Unemployment Rate = Number of Unemployed Persons / Labor Force.

Country x has unemployment rate of 0.25 or 25% in the relevant year.


Unemployed persons = 20,000

Labor forced = 180,000-100,000 = 80,000


Bature, B. N. (2014). "An Assesment of Monetry Policy Transmission Mechanisms in Nigeria.

Chari, V. V., Kehoe, P. J., & McGrattan., E. R. (2007). Business cycle accounting. Econometrica , 75 (3), 781-836.

Silberston., A. (1972). "Economies of scale in theory and practice. The Economic Journal , 82 (325), 369-391.

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