Microeconomic Theories

This document discusses opportunity cost, normal goods, supply and demand for beef and heroin, price ceiling, and loss-minimizing quantity in microeconomics.

Running head: MICROECONOMIC THEORIES 1
Microeconomic Theories
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MICROECONOMIC THEORIES 2
Question 1
Opportunity cost is the worth of the next most desired product to get an extra unit of
another product. Usually, when we select to deploy resources to generate one thing, we must
surrender the resources meant for another product (Frank, 2015). Recently, I had to choose
between coaching my young brother, who is struggling with mathematics or going to help my
friend with some duties in his shop and earn a wage at the end of the day. Since I decided to
coach my brother, the opportunity cost of coaching is the foregone wage.
Question 2
a.
A normal good is a product whose demand rises when the income increases and declines
when the income fall. This means the demand for a normal good is positively related to income
(Gillespie, 2014). Since beef is a normal good, the demand for this product will fall following a
sharp decrease in wages. On the diagram one below, a decline in demand for beef is exhibited by
the leftward change in the demand curve from D1 to D. Therefore, the equilibrium price of beef
declines from P* to P and the quantity from Q* to Q.

MICROECONOMIC THEORIES 3
Supply
Price
P*
P
D1
D
Q Q* Beef
Figure 1: Decline in Demand for Beef
b.
The availability of high-quality feed that speeds up the maturity of cattle will cause the
supply of beef in the market to surge. On the figure one below, a surge in the supply of beef is
expressed by the change in the supply curve to the right from S to S1. Consequently, the
equilibrium price of beef declines from P* to P, while the equilibrium quantity of beef rises from
Q* to Q.

MICROECONOMIC THEORIES 4
S
Price
S1
P*
P
Demand
Q* Q Beef
Figure 2: Increase in Supply of Beef
c.
Ordering mass slaughter of cattle will increase the supply of beef. On the figure below, a
surge in the supply of meat due to this order is given by the switch in the supply curve from S1
to S2. At the same time, the government has warned the consumers about the dangers of
consuming beef following mad cow disease. This directive will reduce the demand for beef, as
shown by the leftward switch in the demand curve from D1 to D2. From these events, we are
certain that the equilibrium price of beef will decline as shown by the change from P* to P. Since
we don’t have information concerning the magnitude of change in supply and demand, the effect
on equilibrium quantity cannot be determined. If we assume that the increase in supply is
identical to the drop in demand, then the equilibrium quantity will remain the same as shown in
figure two above. If the increase in supply is greater than a decline in demand, then the

MICROECONOMIC THEORIES 5
equilibrium quantity will decline. Finally, if the increase in supply is less than a drop in demand,
the equilibrium quantity will rise.
Figure 3: Increase in Supply and
Decline in Demand for Beef.
Question 3
S
Price
S1
P*
P
Demand
Q* Q Heroin
Figure 4: Supply of Heroin.
S1
Price
S2
P*
P
D1
D2
Q* Beef

MICROECONOMIC THEORIES 6
The arresting of major heroin suppliers will cause the supply of heroin to drop. The
decline in supply of heroin will culminate in an increase in the equilibrium price and a fall in the
equilibrium quantity. This scenario is illustrated in figure four above by the leftward switch in
supply curve from S1 to S. The price hikes from P to P* and quantity decreases from Q to Q*.
Since the price of heroin has increased, the impact on total revenue will be different depending
on whether the heroine is price inelastic or price elastic. Inelastic demand is when a considerable
percentage variation in price triggers a small percentage change in quantity demanded (Sexton,
2015). When the demand is inelastic, the total revenue is directly correlated to the price. Hence, a
surge in the price of heroin will cause a growth in total revenue if the demand for heroin is
inelastic. On the contrary, elastic demand is a situation in which a small percentage deviation in
price culminates in a significant deviation in quantity demanded. When the demand is elastic,
total revenue is inversely correlated to price (Mankiw, Taylor, & Ncwadi, 2018). Therefore, a
surge in the price of heroin will lead to a fall in the total revenue if the demand for heroin is
elastic.
Question 4
The maximum price imposed on the super chicken is referred to as a price ceiling. The
price ceiling is also known as a price cap and is a policy that makes it unlawful to retail a good or
service at a higher price than stipulated (Mankiw & Cosgrove, 2014). One of the issues that arise
from price ceiling is the shortage of goods. On figure four below, the market for super chicken is
in equilibrium at point E where the equilibrium quantity is Q* and the equilibrium price is P*.
When a price ceiling P is enacted, the quantity demanded of chicken shifts to Qd while the
quantity supplied drops to Qs. Since the quantity demanded Qd surpasses the quantity supplied
Qs, the market for chicken will experience a shortage.

MICROECONOMIC THEORIES 7
The price ceiling in the market for super chicken will also cause a reduction in total
surplus. Total surplus consists of consumer surplus and producer surplus. Consumer surplus is
the disparity between the market price and the price that the buyers are prepared to pay
(McTaggart, Findlay, & Parkin, 2015). On the graph below, before the enactment of a price
ceiling, consumer surplus is shown by the triangle HP*E. After the enactment of the price
ceiling, the consumer surplus shrinks to the region painted purple. Conversely, before the
implementation of a price ceiling, producer surplus is shown by triangle SP*E. After the
implementation of a maximum price, the producer surplus reduces to region shaded blue.
The fall in producer and consumer surplus is caused by both search activity and the
deadweight loss (Sloman, Wride, & Garratt, 2015). Search activity entails time used in looking
for someone with whom to trade with. On the figure below, the potential loss from a super
chicken search is shown by region shaded yellow. On the other hand, the deadweight loss is
portrayed by the area shaded red.
Furthermore, the black market will emerge as a result of the price ceiling on the market
for super chicken. Black market refers to an illegitimate market that runs alongside a legitimate
market caused by market distortions such as price controls (Tucker, 2016). Illegal arrangements
will be made between sellers and buyers at prices above the price ceiling.

MICROECONOMIC THEORIES 8
H Supply
Price
P* E
P Price ceiling
Shortage Demand
S
Qs Q* Qd Super chicken
Figure 5: Price ceiling.
Question 5
It makes sense for a business which cannot trade its output at a profit to proceed with
production because by continuing with production, it can minimize loss. When deciding on what
a firm should do when incurring losses, the manager should consider the fixed costs. Usually, in
the short run, a business must pay its fixed costs irrespective of the level of output it is
generating. If a business decides to shut down, then it will incur a loss comparable to Total Fixed
Costs (TFC) because it will not make any revenue. On graph six below, the loss is shown by
region shaded red. However, if the firm can reduce its loss to less than Total Fixed Cost by
generating something, then the producer should keep producing. On the figure below, if the price
is between P and ATC, the firm makes quantity at which price is equivalent to the marginal cost.
The firm will meet all its variable costs and a section of its fixed cost.

MICROECONOMIC THEORIES 9
Marginal Cost
Price
and Average Total Cost
Cost
Average Variable Cost
ATC
MR
P
Q* Quantity
Loss-minimizing quantity
Figure 6: Loss-Minimizing.
LOSS

MICROECONOMIC THEORIES 10
References
Frank, R. H. (2015). Microeconomics and behavior. New York, NY : McGraw-Hill Education.
Gillespie, A. (2014). Foundations of economics. Oxford : Oxford Univ. Press.
Mankiw, N. G., & Cosgrove, S. (2014). Principles of microeconomics. Stamford, CT: Cengage
Learning.
Mankiw, N. G., Taylor, M. P., & Ncwadi, R. (2018). Microeconomics (Second ed.). Andover,
Hampshire: Centage Learning EMEA.
McTaggart, D., Findlay, C. C., & Parkin, M. (2015). Economics. Frenchs Forest, N.S.W:
Pearson.
Sexton, R. L. (2015). Exploring economics. Boston, MA, USA : Cengage Learning.
Sloman, J., Wride, A., & Garratt, D. (2015). Economics (9th ed.). Harlow : Pearson.
Tucker, I. (2016). Microeconomics For Today. Australia : South-Western: Cengage Learning.