Microeconomics and Macroeconomics Answer 2022

Running head: Microeconomics and Macroeconomics
Microeconomics and Macroeconomics
Name of the Student
Name of the University
Student ID

1
Microeconomics and Macroeconomics
Table of Contents
Part A...............................................................................................................................................2
Answer 2......................................................................................................................................2
Answer 3......................................................................................................................................4
Answer 4......................................................................................................................................6
Part B...............................................................................................................................................8
Answer 8......................................................................................................................................8
Answer 9......................................................................................................................................9
Answer 11..................................................................................................................................11
References......................................................................................................................................13

2
Microeconomics and Macroeconomics
Part A
Answer 2
(a) Increase in consumption of bread increases the demand for bread. As a result the
manufacturers increased production of bread and thus demand for wheat flour increased and the
market demand curve for wheat flour moved right ward to D* in diagram 2 and to meet the
increased demand and thus the supply of wheat flour increases. The supply curve moved to S*
and the market for wheat flour expanded to Q* from Q.
Diagram 1: Increased consumption of bread
Source: (Created by the Author)

3
Microeconomics and Macroeconomics
(b)
Diagram 2: Discovery of cheaper way of milling
flour
Source: (Created by the Author)
Discovery of innovative and inexpensive way of flour milling process will increase the
productivity of the industry and thus with same amount of factors or production the firms will be
able to produce more amount of wheat flour (Knittel & Pindyck, 2016). As a result the supply
curve of the wheat flour market moves rightward to S* from S and the quantity supplied surges
from Q to Q* and price fell to P* from P.
(c)
Diagram 3: Price of grains rises
Source: (Created by the Author)
Increase in price of grains surges the cost of production of wheat flour milling and thus
the supply of the market reduces causing leftward movement of supply curve from S to S1.

4
Microeconomics and Macroeconomics
Consequently, the quantity supplied of wheat flour in the market fell to Q1 from Q and the price
increases to P1 from P.
(d)
Diagram 4: Decline in price of potatoes and rice
Source: (Created by the Author)
Rice and potatoes are substitutes of wheat. Therefore, decrease in price of potatoes and
rice will surge the demand for the products and reduce the wheat demand. As a result, the
demand curve of wheat flour market moves leftward from D to DE and perceiving the fall in
demand the sellers decrease the supply of wheat flour that causes the supply curve to move from
S to SE. Thus, the wheat flour market contracted to QE from Q.
Answer 3
(a) Diminishing marginal returns means where with every unit increase in a particular factor of
production the marginal product of that factor reduces (Mongeon et al., 2016). On the other
hand, returns to scale means the change in total output due to change unitary change in any factor
of production (Basu, 2016). It is said to increasing returns if with increase in input the output
increases more than that, if the change in output is same as change in input then it is called
constant returns and if the change in output is lower than the change in input then it said to be

5
Microeconomics and Macroeconomics
diminishing returns. Moreover, diminishing marginal returns is a short run factor and returns to
scale is a long run factor.
Diagram 5: Diminishing marginal
returns
Source: (Created by the Author)
Diagram 6:
Returns to scale
Source: (Created by the Author)
(b) The perfectly competitive firms are price takes because in perfect competition there are
numerous firms and numerous buyers and thus no firms enjoys market power (Boitier, 2019).

6
Microeconomics and Macroeconomics
Apart from that, the products that are sold in perfectly competitive market are not unique and can
be produced by any new entrant in the market. Thus, there is no exit and entry restriction to the
market. Therefore, the firms face a horizontal demand curve and they maximize profit by
equating price to demand, marginal cost and marginal revenue. For firms demand and marginal
revenue curve are same.
Diagram 7: Firm in perfect competition
Source: (Created by the Author)
Diagram 8: Industry in perfect competition
Source: (Created by the Author)
Answer 4
(a)

7
Microeconomics and Macroeconomics
Table 1: Cost calculations
Source: (Created by the Author)
(b) At output 8 diminishing marginal returns set in.
(c)

8
Microeconomics and Macroeconomics
Part
B
Answer 8
0 2 4 6 8 10 12
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
11
11.5
12
12.5
13
13.5
14
14.5
15
15.5
16
16.5
17
17.5
18
18.5
19
19.5
20
20.5
21
21.5
22
22.5
AFC AVC AC MC

9
Microeconomics and Macroeconomics
(a) Quarterly movement of a country’s GDP is important because it shows the business cycle of
the country and thus from it the boom and recession phase of the economy of a country can be
understood.
(b) Two consecutive negative quarters of economic growth of a country is called as recession
phase.
(c) The encounter and save an economy from going into recession the government of a country
uses expansionary fiscal policy (Ndou & Mokoena, 2019). Using which the government reduced
the tax rate and consequently the individuals’ disposable income rises and as a result the demand
of the economy increases and gives the economy a boost. The aggregate demand curve moves
rightward.
Diagram 9: Expansionary fiscal
policy
Source: (Created by the Author)
The central bank on the other hand uses expansionary monetary policy to save the
economy of country from entering the recession phase (Diamond, 2015). Under expansionary
monetary policy the central bank lessens the interest rate owing to which borrowings increased
and thereby investment. Consequently, the output of the economy rises along with employment.
As result, the aggregate supply curve moves rightward.

10
Microeconomics and Macroeconomics
Diagram 10: Expansionary monetary
policy
Source: (Created by the Author)
(d) Both the above mentioned policies would prevent the onset of recession, especially the
expansionary fiscal policy because it will boost the consumption of the economy in short run and
it will be supported by the expansionary monetary policy as the increased demand due to
increased level of consumption gets the aid of increased supply (Newman, 2016). Thus, there
will be more output more income and more employment in the economy.
Answer 9
(a) The demand push inflation is the inflation that occurs due to change in demand of goods and
services available in an economy that cause the prices to rise and also moves aggregate demand
curve rightward.
The cost push inflation is the kind of inflation that occurs due to shortage of goods and
services of an economy such that supplied quantity is lower than the demanded quantity causing
the price aggregate supply curve to move left and surges the price level.

11
Microeconomics and Macroeconomics
Diagram 11: Demand pull inflation
Source: (Created by the Author)
Diagram 12: Cost push inflation
Source: (Created by the Author)
(b) Two causes of demand pull inflation are increased income of individuals and there by
consumption and festivals that pushes the demand so high that surges the price level of the
economy.
Two causes of cost push inflation are upsurge in price of factors of production that
pushes the price of products from the supply side and any natural calamities that destroys the
produce of the economy causing price level to rise.

12
Microeconomics and Macroeconomics
(c) In cost push and demand pull inflation does not occur simultaneously because if price rises
due to cost push inflation then demand falls and this no possibility of demand pull inflation
(Schwarzer, 2018). Similarly, if price rises due to rise in demand then supply does not fall as the
supplier would increase the supply to gain more and thereby no scope of occurrence of cost push
inflation.
Diagram 13: Demand pull and cost push inflation
Source: (Created by the Author)
Answer 11
(a) The lift of interest by the central bank will cause the borrowings to fall and thereby the
investments will fall and the supply decreases and consequently the aggregate supply will fall
and price level of the economy will rise.
(b) Increase is private investment domestic spending will increase the aggregate supply of the
economy and thus output will rise and price level will fall.
(c) Increase in GST will decrease the aggregate demand to fall and thus the output of the
economy falls along with fall in price level.

13
Microeconomics and Macroeconomics
(d) An appreciation of domestic currency will makes its exports expensive and thus the aggregate
demand for country’s product will fall and thereby output and price level falls.
(e) The fall in real estate will reduce the wealth of the individuals of the country and thus there
will be less demand and the aggregate demand will fall and output and price level of the
economy falls.

14
Microeconomics and Macroeconomics
References
Basu, S. (2016). Returns to scale measurement. The New Palgrave Dictionary of Economics, 1-5.
Boitier, V. (2019). Growth and ideas in a perfectly competitive world. Structural Change and
Economic Dynamics.
Diamond, L. (2015). Facing up to the democratic recession. Journal of Democracy, 26(1), 141-
155.
Knittel, C. R., & Pindyck, R. S. (2016). The simple economics of commodity price
speculation. American Economic Journal: Macroeconomics, 8(2), 85-110.
Mongeon, P., Brodeur, C., Beaudry, C., & Larivière, V. (2016). Concentration of research
funding leads to decreasing marginal returns. Research Evaluation, 25(4), 396-
404.
Ndou, E., & Mokoena, T. (2019). How Does Inflation Impact the Effects of Expansionary
Monetary Policy and Fiscal Policies on Real GDP Growth?. In Inequality,
Output-Inflation Trade-Off and Economic Policy Uncertainty (pp. 389-398).
Palgrave Macmillan, Cham.
Newman, P. (2016). Expansionary Monetary Policy at the Federal Reserve in the 1920s.
In Studies in Austrian Macroeconomics (pp. 105-134). Emerald Group Publishing
Limited.
Schwarzer, J. A. (2018). Retrospectives: Cost-Push and Demand-Pull Inflation: Milton Friedman
and the" Cruel Dilemma". Journal of Economic Perspectives, 32(1), 195-210.