Microeconomics and Inflation Analysis

This economics assignment analyzes a market structure with a horizontal demand curve, identifying it as perfectly competitive. It delves into different types of inflation, using Pakistan's example to illustrate cost-push inflation driven by fuel and raw material price increases. The assignment also examines Germany's economic situation, where a decline in export demand unexpectedly led to an increase in real wages due to shifts in national income components.

Running head: ECONOMICS ASSIGNMENT
ECONOMICS ASSIGNMENT
Name of Student:
Name of University:
Author Note:

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TABLE OF CONTENT
ANSWER 1:....................................................................................................................................2
ANSWER 2:....................................................................................................................................4
ANSWER 3:....................................................................................................................................7
REFERENCE..................................................................................................................................9

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ANSWER 1:
Source: (As per question)
The horizontal demand curve underlying in the above market stricture indicates that it is
perfect competition. Marginal revenue curve captures the unit effect of price in demand (Hansen
2016). The slope of the curve is zero since for one unit smallest change in price there would be
infinitely large change in the demand made by the consumers (Kalecki 2013) This makes the
demand be perfectly elastic and any increase in price by the seller would cause the buyers to
switch their purchase to zero. This happens when market is highly competitive amidst presence
of many sellers selling identical goods. Hence, the market is perfectly competitive.
The market price in such market is equal to Marginal Revenue hence it is $40 here.
Profit maximizing output is 200 unit produced where Marginal cost is equal to marginal revenue.
The total revenue TR= Q*MR

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= $(40*200)
=$8000
Total cost TC= ATC*Q
=$(24*200)
=$4800
At profit maximizing output the seller earns profit equivalent to $(8000-4800)= $3200
Total Cost of the firm is sum of total fixed cost and total variable cost. From the graph we see for
150 unit of production the ATC =20 AND AVC=14
At that point of production then total cost is $(150*20)=$3000 and total variable cost is TVC=
Q*AVC
= $(150*14)
= $2100
Then TFC=TC-TVC= $(3000-2100)=$900
From this we can derive AFC= $(900/150)=s$6. Then for 200 unit of production the total fixed
cost would be $(200*6) = $1200
Total variable cost for 200 unit production is $(200*14) = $2800
The marginal cost curve is the short run supply curve facing the firm.

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The firm is not operating in long run equilibrium since it earns huge economic profit. This would
attract more firms into the market who will share this profit and over long term the industry
profit would be driven down to normal profit (Hansen 2016).
ANSWER 2:
Rapidly accelerated price level leads to phenomenon of running inflation. It appears
when the price rate in an economy rises more than 10% annually in an economy (Kalecki 2013).
The range of this kind of inflation is 10-20% increase in the price level annually.
When price level rises by more than 20%, increases in in double, and triples digit like 30%,
400% or 900% then it is termed as galloping inflation. The price level rising more than 20% and
less than 1000% falls under such kind of inflation. Economy of Pakistan faced Consumer Price
Index to be spiked at 11.8% in the first ten month of the fiscal year. For the same period last
year, the CPI persisted at 22.35 %. From the theory of types of inflation, it can be said that the
economy faces galloping inflation last year.
Compared to that, this year the inflation rate is pretty lower almost by half of the last year and it
can be said that the economy faces running inflation.

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3
10
20
100
00
Price Rise
( %)
Years
TYPES OF INFLATION
Source: (Author)
The reason behind such high level of prices and higher fluctuation within only one-year
period stems from the increased price of fuel, food, raw material transportation construction
material. The country is highly dependent of imported oil and fluctuation in world supply and
prices affects the country directly. Higher cost of importing oil is one of the major causes behind
huge inflation of the country since the entire economic activity is dependent on oil consumption.
This inflicts rise in food prices. The input cost in terms of production raw materials also
increases which reflects into higher Wholesale Price Index. From the last one year, the WPI has
been rising 21.99% reflecting huge increase in the cost of fuel and consequent hike in the cost of
production. Higher cost of production leads to higher price charged in the market indicating a
cost pushed inflation. Moreover, information reveals that the country faces reduced subsidy on

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energy. This leads to higher cost of production faced by the producers also contributing to cost
push inflation.

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ANSWER 3:
Germany is facing weakened economic growth. Amidst this one of the concern grabs
attention which is experienced fall in the demand for export goods within economy. However,
proving wrong all the concern this phenomenon has actually been able to improve real wage rate
in the economy.
To explain the reason behind such, we have to explain the national income equation:
Y = c + I + G + NX
NX captures net export that is the export of goods and services ad minus the imports of
good and services of the national economy (Hansen 2016). Now when the citizens reduce
demand for the goods, which are exported outside the country, this allows the country to earn
more export revenue with same level of production without increasing the size of production
(Kalecki 2013). This also reduces the total cost of production of the country. More revenues
transfers into income that is more nominal and at a fixed price level at certain point of time the
increase in nominal income leads to increased real wage. NX is non-income component in the
national income accounting equation and net positive increase in NX would shift the aggregate
demand curve of the upward or rightward (Hansen 2016). Moreover increased real wage rate
would increase income induced consumption. The increased consumption spending would create
more demand in the market and to meet that aggregate supply has to increase in order to bring
macroeconomic equilibrium. This would increase the national output boosting the overall
national economic activity. More production implies more employment creating jobs and
opportunity for the people. The nation can increase its export revenue by producing exportable
goods more.

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AD1
AD2
AS
P
Q
AD-AS EQUILIBRIUM
Source: (Author)
Because of increase in the demand the national output will increase and also the entire
price level. Here the aggregate demand curve is shifted rightward with changed slope because of
the increase in income-induced consumption as well as the increase in the net export.

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REFERENCE
Hansen, B., 2016. A Study in the Theory of Inflation. Routledge.
Kalecki, M., 2013. Theory of economic dynamics (Vol. 6). Routledge.