AS Level Economics Question?

Question

The output of Firm X depends not only on the quantities of factors of production employed by Firm

X. It also depends directly on the level of output of Firm Y.

What does this illustrate?

A complementary goods

B cross-elasticity of demand

C an externality

D joint production

the correct ans. is C. Please explain.thx

Answer 1

Answer is A.

A complementary good or complement good in economics is a good which is consumed with another good; its cross elasticity of demand is negative. This means that, if goods A and B were complements, more of good A being bought would result in more of good B also being bought.

A perfect complement is a good that has to be consumed with another good. Many goods in the real world exhibit characteristics close to perfect complementariness. An example would be a left shoe and a right. Because of this, shoes are naturally sold in pairs, and the ratio between sales of left and right shoes will never shift noticeably from 1:1 - even if, for example, someone is missing a leg and buys just one shoe.

The degree of complementariness, however, does not have to be mutual; it can be measured by cross price elasticity of demand. In the case of video games, a specific video game (the complement good) has to be consumed with a video game console (the base good). It does not work the other way: a video game console does not have to be consumed with that game.

A classic example of mutual perfect complements is the case of pencils and erasers. Imagine an Accountant who will need to prepare financial statements or tax liability, but in doing so he or she must use pencils to make all calculations and an eraser to remove all calculations and present a clear and clean final product (number). The Accountant knows that for every 3 pencils, 1 eraser will be needed. Any more pencils will serve no purpose, because he or she will not be able to erase the calculations. Any more erasers will not be useful either, because there will not be enough pencils for him or her to make a large enough mess with in order to require more erasers. The accountant is then left to determine how many of each he or she would like to purchase.

So, if the output of Firm X depends directly on the level of output of Firm Y, then these two products are complementary goods.

I hope this helps

Answer 2

Externalities are the effects of transactions on third parties.  A cigarette smoker blows smoke to your face. The utility company that supplies electricity to your home also produces soot that discolors your curtains and pollutants that despoil the air and even affect your health. Externalities are social costs because, in the majority of cases, affect society as a whole.

Externalities cause market failure which in turn needs government intervention. This defect of the market can be remedies by the use of market-oriented policies.