Microeconomics: Scarcity, Equilibrium, Price Controls and Elasticity

MICROECONOMICS
STUDENT ID:
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Question 1
(a) Scarcity refers to the condition the underlying resources are limited but those required to
fulfil the demands of the society and underlying individuals are potentially higher. This leads
to a scarcity of resources which can be used for economic production. Since, the resources
are limited and all the needs and wants cannot be satisfied, hence choices need to be made
with regards to which products or services need to be produced and in what quantities.
Opportunity cost comes into play since choices need to be made and refers to the payoff
associated with the next best alternative available for use of given resources.
(b) The various differences are highlighted as follows.
 The subject matter of microeconomics is limited to a single consumer or firm unlike
macroeconomics which tends to consider the whole industry or economy.
 The business application of microeconomics is primarily for internal issues related to
a firm while macroeconomics is applied to understand the external environment and
external issues.
 The focus of microeconomics in on an industry with regards to the economic
decisions made by firms. This is in contract with macroeconomics which tends to
focus on the economy as a whole and consider economic indicators.
(c) The economic way of thinking involves the following aspects.
1) Owing to limited resources, there is a trade off when choices are made.
2) Choices should be made rationally i.e. by comparing the underlying costs and benefits.
3) Benefits refers to the underlying utility derived and also can be measured by the maximum
price that consumer is willing to pay.
4) There are opportunity costs involved since there are alternative uses of the resources
possible.
5) Margin refers to the difference between benefits and costs.
6) Incentives need to be considered which tend to drive self-interest and influence economic
decisions made.