Microeconomics Principles and Application

This assignment delves into fundamental microeconomic concepts. It contrasts monopoly and competitive market structures, emphasizing price-setting versus price-taking behavior. Four key decision-making principles in economics are outlined: tradeoffs, incentives, marginal thinking, and opportunity cost. Furthermore, it analyzes the impact of output changes on a firm's price and revenue within a competitive market. The characteristics of public goods and common resources are explained with illustrative examples. Lastly, the assignment calculates price elasticity of demand for a DVD player, classifies its demand as elastic or inelastic, and demonstrates how percentage changes in price and quantity demanded are interrelated.

NAME 1
Course
Name
Institution Affiliation
Due Date

NAME 2
Question 1 [1.5 mark for each sub section; Total 15 marks]
Explain and draw a graph for each of the following effects on the market equilibrium for
pizzas:
a. Increase in your income by 0.4%
D2
D1
The increase in income may lead to an increase in the consumption of pizzas which leads to an
increase in the demand curve, the equilibrium price increases as well as the equilibrium quantity.
b. Decrease in pizza prices by 6%
D2
D1
Decrease in pizza prices leads to an increase in the quantity demanded for pizza that shifts
the demand curve outwards. This leads to an increase in the equilibrium price as well as the
equilibrium quantity
c. Increase in prices of hamburgers (related product) to pizzas by 6.1%

NAME 3
D2
D1
Hamburgers are substitutes to Pizzas, increase in price of hamburgers will lead to an increase in the
demand for Pizzas. This will shift the demand curve outward leading to an increase in the market
equilibrium and an increase in the equilibrium quantity
d. Increase in prices of flours by 13.99%
S2
S1
Increase in the price of flours may affect the factor prices during production and therefore the
supply may decrease in response to the increase in factor prices. The supply curve shifts outwards
which leads to an increase in equilibrium price while the equilibrium quantity decreases.
e. Increase in petrol prices by 78%
S2
S1

NAME 4
Increase in petrol prices may increase the cost of factors used in the manufacture of pizzas. The
supply curve therefore contracts in response, this leads to an increase in the equilibrium price and a
decrease in the equilibrium quantity
f. Shortage of tomatoes due to poor growing season
S2
S1
Shortage of tomatoes affects the number of pizzas that can be produced. The supply curve contracts
which increases the equilibrium price and decreases the equilibrium quantity.
g. Australia decided to sign the Convention on Climate change
S2
S1

NAME 5
The new convention may increase the cost of doing business in order for businesses to be compliant
to the new regulations. This decreases the supply and shifts the supply curve to the right. The
equilibrium price increases and the equilibrium quantity decreases.
h. Australian government decided to increase immigration intake
S1
S2
Increase in the number of immigrants may make labor cheaper which may positively affect supply.
The supply curve shifts leftwards and the equilibrium price decreases and the equilibrium quantity
increases.
i. Italian manufacturer of pizzas oven invented much more efficient one
S1
S2

NAME 6
The increase in efficiency, increase the amount of pizzas supplied in the market. The supply curve
shifts to S2 and the equilibrium price reduces while the equilibrium quantity increases.
j. Decrease in price of Cokes by 10%
D2
D1
Coke is a complementary product to pizzas, therefore if the price of coke decreases, the consumers
are given sufficient capacity to buy more pizzas. The demand curve shifts outwards, the equilibrium
price increases and the equilibrium quantity increases.
Question 2: [2.5 marks for each sub section; Total 5 marks]
a. What are the two main differences between monopoly and competition?
First, the difference is that in a monopoly there is one major player and many buyers while in a
competition there are many buyers and many sellers.
Second, in a monopoly, the firm is a price setter while in a competition, the firms are price takers.
b. What are the four principles of economic decision making?
People face tradeoffs that is they are first to meet their needs before they consider non-necessary
needs.

NAME 7
People respond to incentives, people are bound to respond to more value for their money.
Rational People think at the margin, that is they consider the rational benefit they receive from a
certain good.
The cost of something is what you give up to get it.
Question 3 [a. 2 marks; b. 6 marks; Total 8 marks]
a. If a firm in a competitive market doubles the amount of output it sells, what is the
impact on the firm's price and revenue?
The firms price may remain the same but the revenue will increase. The marginal revenue therefore
increases.
b. Explain characteristics of public goods and common resources with examples.
The main characteristics of public goods are non-excludability and non-rivalry.
Non-excludability is the aspect of the usage of the good does not exclude any other person using
that good.
Non-rivalry is the aspect that the consumption of the good does not affect the consumption of other
users of the good
Examples of public goods are roads, railways and street lights.
Question 4: [3 marks for each sub sections; Total 12 marks]
Calculate elasticity if the price of a DVD player rises from $200 to $300, while the quantity
demanded falls from 1200 to 900.

NAME 8
Elasticity = Change in Quantity/ Change in Price
1200−900
200−300
300
−100
−3
a. classify the demand;
The demand is price elastic, there is a more than proportionate decrease in the quantity
demanded in response to a price change.
b. calculate the total revenue before and after the price change
Total Revenue Before – 200 * 1200
= $24000
Total Revenue After – 300 * 900
= $27000
c. calculate the percentage change in quantity demanded if price was to rise another 5% (using
the price elasticity of demand calculated)
Initial Change in price = 200−300
200 ∗100 %
= 50%
Increase to 55%
−3 P ED =%change ∈quantity
55 %
%change ∈quantity= 55 %∗−3
❑

NAME 9
= 165% percentage decrease
d. calculate the percentage change in price needed to increase quantity demanded by
25% (using the price elasticity of demand calculated).
−3 P ED =25 %
? %
= - 3* 25
= -75%
A 75% decrease in price.