Economics Outcome 1
1. SteamScot face a ‘basic economic problem’ what is this ‘problem’ and what is the opportunity cost of the replace and repair programme?
The basic economic problem refers to a situation where human wants are unlimited while human resources are finite; it is the economic problem of scarcity of resources. At any one particular time, the resources of the earth are capable of producing a limited number of goods and services, however, human wants exceed limited production possibilities and this gives rise to what is known as the economic problem of scarcity.
In the passage ,Steam Scot have a budget of £2.5 million and this can be spent on adding a new route are repairing and replacing existing railways; the choice …show more content…
Give reasons for your advice. In the first situation the price increased from 4 pounds to 5 pounds and demand fell from 60,000 to 40,000 units resulting in a loss of revenue of 40,000 pounds. According to the profit maximizing principle, a firm should pursue a course of action that generates the greatest profit and this is indicated by not changing the price. There is no information given about the result of the drop in passenger travel on the cost structure of Steam Scot and in the absence of this information it would appear that the best course of action would not be to raise the price as it results in falling revenue which is contrary to the principles of profit maximization. In the second situation, dropping the market price from 4 pounds of 3 pounds would result in extra traffic of 20,000 units; however, this is without an increase in revenue as elasticity of demand appears to be unitary. There is no clear-cut recommendation in this case as there are advantages and disadvantages to dropping market price. In terms of advantages, dropping the market price will attract more traffic and these extra passengers may spend more money on associated goods and services that would benefit the railway. The railway may also be in a better position to promote its services because of the increase in traffic that would benefit its reputation and image in the marketplace. On the other hand, the increased traffic would result in extra wear and tear on the