Microeconomics Principles and Applications

This assignment delves into key microeconomic principles. It examines how price changes affect quantity demanded, explores the concept of price elasticity of demand, and analyzes the impact of government restrictions on market equilibrium. Students are challenged to apply these concepts to real-world scenarios involving CDs and service providers.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................4
Answer 3:.........................................................................................................................................7
Answer 4:.........................................................................................................................................9
Answer 5:.......................................................................................................................................12
Answer 6:.......................................................................................................................................12
References......................................................................................................................................14

2ECONOMICS ASSIGNMENT
Answer 1:
Changes in quantity demanded:
Keeping all other factors constant, when the price of hat changes, the quantity demanded of the
same changes, with the change being in the opposite direction as that of the change in price (hat
being a normal commodity). This phenomenon is known as the change in quantity demanded of
hats:
Figure 1: Change in quantity demanded
(Source: As created by the Author)
In this case, the movement takes place along the same demand curve as can be seen from the
above diagram.

3ECONOMICS ASSIGNMENT
Change in demand:
If the other factors, excluding the direct price of hats, change, including income, price of
substitutes, consumers’ preferences and others, then there is a change in demand for hats:
Figure 2: Change in demand
(Source: As created by the author)
As can be seen from the above diagram, in this case the entire demand shifts inward or outward
(here, it shifts outward as can be due to an increase in the income of the consumers), with the
consumers buying different quantity at the same level of price.

4ECONOMICS ASSIGNMENT
Answer 2:
a)
Figure 3: Excess supply in the market
(Source: As created by the author)
In this case, as the price is above that of the equilibrium, so the demand is at Qd while the
quantity supplied is Qs. The high price leads to excess supply of amount QdQs in the solar panel
market, which forces the producer to decrease the price level such that the economy comes back
to the initial equilibrium (Rios, McConnell and Brue 2013).

5ECONOMICS ASSIGNMENT
b)
Figure 4: Change in price elasticity of demand
(Source: As created by the author)
With the fall in the price elasticity of demand of the households by 50%, the households become
less responsive to the change in the price of the commodity. As can be seen from the above
diagram, with the change in the price elasticity, the demand curve shifts from D0 toD1. The

6ECONOMICS ASSIGNMENT
change in price from P0 to P1, which initially increased the demand from Q0 to Q1, now
increases the same from Q0’ to Q1’, the change being less than the previous case.
c)
Figure 5: Increase in the supply of solar panel
(Source: As created by the author)

7ECONOMICS ASSIGNMENT
Due to the increase in the number of producers of solar panel, by 50%, there is an increase in the
supply of the same, thereby shifting the supply curve from S0 to S1. Demand remaining the
same, the shift in the supply curve, will decrease the price from P0 to P1 and will increase the
quantity demanded from Q0 to Q1.
Answer 3:
The demand and supply dynamics in the watermelon market in summer and winter can be
explained with the help of the following diagram:

8ECONOMICS ASSIGNMENT
Figure 6: Changes in demand and supply of watermelon
(Source: As created by the author)
In summer, the demand of watermelon increases, which can be seen from the shift of the demand
curve, from D0 to D1, in the above diagram. However, due to the harvesting of watermelons in
the summer season, the supply of watermelons in summer is much higher than that in the winter,
which can be seen from the shift of the supply curve from S0 to S1. Therefore, in summer, due to
an increased demand and an even increased supply, the quantity of watermelon increases from

9ECONOMICS ASSIGNMENT
Q0 to Q1, but, the price decreases from P0 to P1 and the equilibrium shifts from E to F, as can be
seen from the above diagram. The high increase in the supply explains the fall in the price in
spite of the presence of a comparatively higher demand of watermelon in summer.
Answer 4:
With an increase in the demand for yoga services in the economy, as well as the restrictions
imposed by the government on the number of service providers, two scenarios can occur, which
are explained as follows:

10ECONOMICS ASSIGNMENT
Case 1:
Figure 7: Restricted supply which increased quantity than the initial level
(Source: As created by the author)
In this case, without the imposition of restriction on part of the government, on the number of
service providers, the quantity demanded would have increased to Q1 from Q0 and the price
would have increased to P1. However, with the restrictions, the supply is restricted to only Q’
(Q0<Q’<Q1) and the price increases to P’ (P’>P1).

11ECONOMICS ASSIGNMENT
Case 2:
Figure 8: Restriction which decreases quantity more than the initial level
In this case, the restriction is so high that the quantity supplied decreases to Q’ (Q’<Q0<Q1) and
the price increases even more to P’ (P’>P1>P0). In this case the impact is higher than that in the
previous case, as the restriction forces the supply to lower down to such a level that in spite of
the increased demand in the market, the quantity is restricted to a much higher level. The price is
much higher than that would have prevailed in an unrestricted equilibrium condition.

12ECONOMICS ASSIGNMENT
Answer 5:
a) The price of CD has been slashed from $21 to $15:
Therefore, the percentage change in price = [(-6)/15]*100 = -40%, that is there has been a 40%
fall in the prices.
The demand is expected to boost by 40%.
This means that the absolute value of elasticity is 1, which means there is existences of unitary
price elasticity in the market as per the estimate of the Universal CD company.
b) Here, the elasticity of demand being unitary, the cut in price by 40% only increases the
demand by 40% and the demand does not increase by a greater than proportionate amount than
the decrease in the level of price. Therefore, in this scenario, a price cut is not an advisable
policy as it will not have significant positive impact on the revenue of the company.
Answer 6:
In the economy, if all the entry restrictions are removed by the government, then a perfectly
competitive market situation occurs in the economy, which results in the decrease in the super-
normal profit of the existing as well as the new entrants.

13ECONOMICS ASSIGNMENT
Figure 9: Long run equilibrium in the perfectly competitive market
(Source: As created by the author)
With the entry of new firms, the possibility of the firms to earn super normal profit decreases and
in the long run the firms earn only normal profit, where P2 = MC. The equilibrium quantity in
the perfectly competitive market becomes Q1 (Kolmar 2017).

14ECONOMICS ASSIGNMENT
References
Kolmar, M., 2017. Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.