Microeconomics

This article covers the concepts of demand and supply curve, equilibrium, elasticity of demand and supply, consumer and producer surplus in the chicken market. It includes solved assignments, essays, and dissertations on Desklib.

Running Head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Author note

1MICROECONOMICS
Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................3
Answer 4....................................................................................................................................4
Answer 5....................................................................................................................................4
Answer 6....................................................................................................................................7
Answer 7....................................................................................................................................7
Answer 8....................................................................................................................................8
Answer 9....................................................................................................................................9
Answer 10................................................................................................................................10
Elasticity of demand.............................................................................................................10
Elasticity of supply...............................................................................................................11
Consumer surplus.................................................................................................................12
Producer surplus...................................................................................................................13
References................................................................................................................................15

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Answer 1
20 40 60 80 100 120 140
0
20
40
60
80
100
120
f(x) = − x + 120
Demand Curve
Quantity
Price
Figure 1: Demand curve of chicken
Answer 2
20 40 60 80 100 120 140
0
20
40
60
80
100
120
f(x) = x − 20
Supply Curve
Quantity
Price
Figure 2: Supply curve of chicken
Answer 3
The demand curve equation for Chicken

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Y =a+bX
Y: dependent variable
a: intercept
b: slope
The estimated demand equation is
Y =120−X
Answer 4
The supply curve equation for Chicken
Y =a+bX
Y: dependent variable
a: intercept
b: slope
The estimated supply equation is
Y =20+ X
Answer 5
The equilibrium is obtained at a point where the demand and supply curve intersects.
In order words, equilibrium point is determined where quantity demanded matches with
quantity supply (Fine 2016).
The demand curve equation is obtained as Y = 120 – X
The supply curve equation is obtained as Y = 20 + X

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At equilibrium,
Demand=Supply
¿ , 120− X=20+ X
¿ , X + X =120−20
¿ , 2 X=100
¿ , X =100
2
¿ 50
Y =120−X
¿ 120−50
¿ 70
Figure 3: Equilibrium in the Chicken market

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E is the equilibrium point in the Chicken market. At this point demand and supply
curve intersects and equilibrium price and quantity are determined.
Excess Supply
Figure 4: Area of Excess Supply
Excess supply is a situation where supply exceeds its demand. For every price greater
than the equilibrium price, there exist an excess supply. At price greater than equilibrium
price, sellers willing to supply more because of high profitability (Baumol and Blinder 2015).
There are two reasons for increased supply. First, the existing suppliers supply more and
second, new supplier find this market profitable and enter. As suggested by the law of
demand, high price causes buyers to demand less. Consequently, demand fell short of supply
leading to excess supply in the market. For the chicken market, the area of the triangle DES
indicates excess supply situation.

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Answer 6
Opportunity cost is the cost of sacrificing unit of one good to have one additional unit
of some other good (McKenzie and Lee 2016). The opportunity cost of one additional
chicken is the additional dollar that needs to be spend on chicken. This additional dollar can
be spent on some other goods.
For example,
100 units of chicken is obtained for 20
Therefore, 1 unit of chicken is obtained for 20/100 = 0.2
For 1 unit of chicken people need to sacrifice 0.2. This is the opportunity cost of
consuming additional one chicken. Different quantity and demand involves different
opportunity cost. This is shown is the table below.
Opportunity cost of one additional Chicken
Quantity 0 20 40 60 80 100
Demand 120 100 80 60 40 20
Opportunity cost 0 0.2 0.5 1 2 5
Answer 7
The opportunity cost of paying one additional dollar of chicken is the amount of
chicken obtained with one additional dollar unit (Moulin 2014).
At 20 unit of dollar demand is 100
Therefore, at 1 unit of dollar demand is 100/20 = 5. This is the opportunity cost of paying
additional one dollar for chicken. The table shows opportunity cost of paying additional one
dollar for chicken at different points of demand.

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Opportunity cost of one additional one dollar for Chicken
Quantity 20 40 60 80 100
Demand 100 80 60 40 20
Opportunity cost 5 2 1 0.5 0.2
Answer 8
Beef meat is a substitute good for chicken. Law of demand suggests an inverse
relation between price and quantity demanded of a good. When price of beef meat goes up
then demand for beef meet goes down. Because of increased cost, people now looks for
alternative of beef meet. One available substitute of beef meat is chicken. Therefore, people
will now increase their chicken demand. This will cause a rightward shift of the demand
curve (Rader 2014). As demand increases, the chicken market will expand. This in turn
increases both the equilibrium price and quantity. This is described in the figure below.
Figure 5: Effect of a rise in price of beef meat
DD curve shows the initial demand curve. The corresponding supply curve in the
market is SS. E is the point of equilibrium obtained at the intersection of demand (DD) and
supply (SS) curve. The initial equilibrium price is $50 and equilibrium quantity is 70. Now,
when price of beef meat goes up, then people will demand more chicken. This will cause the
chicken demand curve to shift outward to D1D1. The new equilibrium point is E1. -
Corresponding to E1, there is an increase in both price and quantity in the market.

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Answer 9
If the IT technology is applied to nurture chickens in aviculture, then this will increase
efficiency of chicken production. Technological advancement is an exogenous factor that
causes a change in supply. Following the application of IT technology supply of chicken will
increase. Given the demand an increase in supply will create an excess supply in the market.
this will pull down the equilibrium price (Cowen and Tabarrok 2015). The figure below
described the situation under this scenario.
Figure 6: Effect of application of IT technology
DD and SS are the respective demand and supply curve in the chicken market settling
equilibrium at point E. The application of IT technology to nurture chicken in aviculture will
increase chicken supply at the given price. This is shown by the rightward shift of the supply
curve from SS to S1S1. The equilibrium now shifted to E2. Corresponding to new equilibrium
price will fall while quantity will increase.

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Answer 10
Elasticity of demand
Price elasticity of demand is defined as proportionate change in quantity demanded in
response to a proportionate change in price (Fine 2016).
Elasticity of demand= Percentage change∈demand
Percentage change∈ price
¿ Δ Q
Δ P × P
Q
¿ Q2−Q1
P2 −P!
× P1
Q1
At point B price is 20 and corresponding demand is 100
When price moves from point B to point C, then demand reduced to 80
Now demand elasticity at point C
¿ Δ Q
Δ P × P
Q
¿ Q2−Q1
P2 −P!
× P1
Q1
¿ 80−100
40−20 × 20
100
¿−1× 0.2
¿−0.2
Total expenditure at point B = (100*20) = 2000
Total expenditure at point C = (80*40) = 3200

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As price increases from $20 to $40, because of a relatively inelastic demand total expenditure
increases from $2000 to $3000.
Elasticity of supply
Like elasticity of demand, elasticity of supply captures the percentage change in
quantity supplied following a percentage change in price (Hill and Schiller 2015).
Elasticity of demand= Percentage change∈supply
Percentage change∈ price
¿ Δ Q
Δ P × P
Q
¿ Q2−Q1
P2 −P!
× P1
Q1
At point L, supply is 80
When price moves from point L to point M, supply increases to 80 to 100.
Therefore, elasticity of supply at point M
Δ Q
Δ P × P
Q
¿ Q2−Q1
P2 −P!
× P1
Q1
¿ 100−80
80−60 × 60
80
¿ 1 ×0.75
¿ 0.75
Total expenditure at point L, (60 *80) = $4800
Total expenditure at point M, (80 * 100) = $8000

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At price moves from L to M, total expenditure increases from $4800 to $8000.
Consumer surplus
The concept of consumer surplus becomes important when there exists a difference
between what buyers willing to pay and what they actually pay. It is a measure of consumer
welfare from participating in market transaction. It is defined as the difference between
equilibrium price and price that the consumers are able and willing to pay (Nicholson and
Snyder 2014). Consumer surplus is obtained at the area of the triangle above the equilibrium
price and below the demand curve
Figure 7: Consumer surplus in the Chicken market
The maximum price that consumers willing to pay for chicken is $100. The
equilibrium price is $50. Therefore, there exist some surplus to the consumers in the Chicken
market. The consumer surplus is given as the area of the triangle DP*E.
Consumer Surplus= 1
2 × DP∗× EP∗¿

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¿ 1
2 × ( 100−50 ) × 70
¿ 1
2 ×50 ×70
¿ 25 ×70
¿ 1750
Producer surplus
Producer surplus is the difference between actual selling price of a good and
minimum price in which the seller would be willing to sell it. Higher the difference, greater is
the benefit to producers (Cowen and Tabarrok 2015). As like consumer surplus measures the
gain to consumers, producer surplus measures the gain to producers. Producer Surplus is the
area above the supply curve and below the equilibrium price.
Figure 8: Producer surplus in the Chicken market

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The minimum amount at which suppliers would sold the product is 0. The equilibrium
price is $50. Therefore, suppliers must enjoy a surplus. Producer surplus is captured by the
area of the triangle SP*E.
Producer Surplus= 1
2 × SP∗× P∗E
¿ 1
2 ×50 ×70
¿ 25 ×70
¿ 1750
The surplus to producer is same as that to the consumer. This implies the total surplus,
which is the aggregate measure of consumer and producer surplus are distributed equally
between consumers and producers.

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave
Macmillan.
Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.
Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs. Cambridge University
Press.
Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction. Princeton
University Press.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Cengage Learning.
Rader, T., 2014. Theory of microeconomics. Academic Press.