Microeconomics and Macroeconomics

Running head: MICROECONOMICS AND MACROECONOMICS
MICROECONOMICS AND MACROECONOMICS
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Name of the University
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MICROECONOMICS AND MACROECONOMICS1
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Part A.....................................................................................................................................3
Response to question 2...........................................................................................................3
Consumption of bread rises................................................................................................3
Cheaper technique of grinding flour..................................................................................4
Rise of price of other grains...............................................................................................5
Price of potato and rice increases.......................................................................................6
Response to question 3...........................................................................................................7
Comparison of Returns to Scale and Law of diminishing marginal returns......................7
Firms are price takers in perfect competition.........................................................................9
Response to question 5.........................................................................................................10
Difference between income elasticity of demand and price elasticity of demand...........10
Cross Price Elasticity of demand.....................................................................................11
Firms knowledge about the three models.........................................................................12
Part B....................................................................................................................................12
Response to question 7.........................................................................................................12
Business Cycle.................................................................................................................12
Four stages of the Business Cycle....................................................................................13
Types of Unemployment..................................................................................................13
Money market..................................................................................................................14

MICROECONOMICS AND MACROECONOMICS2
Response to question 8.........................................................................................................15
GDP measured on quarterly basis....................................................................................15
Recession..........................................................................................................................15
Expansionary Fiscal Policy..............................................................................................16
Response to question 9.........................................................................................................17
Difference between demand-pull and cost-push inflation...............................................17
Causes of demand-pull and cost-push inflation...............................................................18
Interaction of Cost-Push and Demand-Pull inflation.......................................................18
Conclusion................................................................................................................................19
Reference..................................................................................................................................20

MICROECONOMICS AND MACROECONOMICS3
Introduction
The report is prepared to understand the microeconomic and macroeconomic
concepts. The response to the question related to microeconomics will provide a clear view
on the theories of change in demand and supply when the market price of wheat flour
changes, the difference between returns to scale and diminishing marginal returns, firms
being a price-taker. Whereas, the macroeconomic answers will clear the idea of the business
cycle, money market, a measure of GDP quarterly, recession and difference between
demand-pull and cost-push inflation.
Discussion
Part A
Response to question 2
Consumption of bread rises
Assuming the market is in equilibrium, suppose, when the inhabitants of the country
start to consume more bread, then the demand for the product will rise (Varian, 2014).
Therefore, this results in increase in the market price of wheat flour. The diagram illustrated
below will provide a clear view.

S
S D
D D1
D1
E
E1
Price
QuantityQ Q1
P
MICROECONOMICS AND MACROECONOMICS4
Figure 2(a): Demand curve shift due to high consumption of bread
(Source: As created by author)
Figure 2(a) represents the demand curve shift because of more use of bread. P and Q
determine the initial price and quantity equilibrium. When the bread consumption rose, the
demand for the quantity also rises. Hence, the market demand for wheat flour rises, which is
shown by D1D1. Thus, now the wheat flour market price rises and changes to P1, the changed
equilibrium of the market is at E1, and the quantity supplied and demanded is at Q1.
Cheaper technique of grinding flour
When a new more affordable method of grinding flour is found, then the price of
wheat flour gradually decreases and resulting in the rise in production of the quantity.
P1

S
S D
D
S1
S1
E
E1
Price
QuantityQ Q1
P
P1
MICROECONOMICS AND MACROECONOMICS5
Figure 2(b): Equilibrium change due to fall in the market price of wheat flour
(Source: As created by author)
From the above figure, it is seen that the market was at equilibrium at E with
equilibrium quantity and price at Q and P. Now, when the new technique is introduced the
market price is falling to P1, which is leading to a rise in quantity demand. Hence, the market
does not remain in equilibrium (Karl et al., 2019). Therefore, to bring back the market into
equilibrium, the supplier should now produce more that changes the supply curve to shift
rightwards. Hence, equilibrium is achieved at E1 with equilibrium quantity at Q1.
Rise of price of other grains
If the price of other grains rises, the product demand for those products will fall.
Therefore, now the consumers will prefer to buy more products that are produced from wheat
flour at their original price. Hence, the producer will increase their supply.