Microeconomics Study: Market Equilibrium, Deadweight Loss, and Demand-Supply Shifts

This study provides an overview of economic principles such as market equilibrium, conditions affecting market equilibrium, consumer surplus, producer surplus, deadweight loss, efficient allocation of resources, and how demand and supply determine market equilibrium price and quantity. It also covers topics such as deadweight loss, market demand, and demand-supply shifts with relevant diagrams and examples.

Running head: MICROECONOMICS
MICROECONOMICS
Name of the Student
Name of the University
Author’s Note

1MICROECONOMICS
Table of Contents
Introduction......................................................................................................................................2
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................5
Answer 4..........................................................................................................................................6
Answer 5..........................................................................................................................................8
Answer 6........................................................................................................................................10
Answer 7........................................................................................................................................12
Conclusion.....................................................................................................................................13
References......................................................................................................................................15

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Introduction
The purpose of this assignment is to provide an overview on the economic principles
such as market equilibrium, conditions affecting market equilibrium, consumer surplus, producer
surplus, deadweight loss, efficient allocation of resources. 1This study mainly focuses on how
demand and supply determine market equilibrium price and quantity. It elucidates on the factors
that causes shift in demand and supply of goods. Increase or decrease in demand and supply
creates change in price and quantity of commodities. This assignment also highlights on the
market demand and marginal benefit. The market demand curve is attained by the horizontal
summation of individual demand curves.
Answer 1
Which of the following would cause the equilibrium price of bread to decrease and the
equilibrium quantity of bread to increase?
a) An increase in price of butter, a complement for bread.
b) A decrease in the price of flour
c) An increase in the price of cake, a substitute for bread
d) An increase in the price of flour
(b) is the correct answer. A decrease in price of flour would cause the equilibrium price of bread
to decrease and the equilibrium quantity of bread to increase. This is shown in the diagram given
below-
1 J Gans, S King & G Mankiw, Principles of microeconomics, in , Australia, Cengage Learning, 2012.

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D
D
S
S
S1
S1
P
Q
P1
Q1
Price of bread
Quantity of bread
E
E1
Figure 1: Decrease in price of bread and increase in quantity of bread
Source: (As created by author)
The above figure reflects that the equilibrium occurs at the point E where the demand
curve (DD) and supply curve (SS) of bread intersects each other. Corresponding to this point, the
equilibrium price is P and the equilibrium quantity is Q. As the price of flour decreases, the
supply of bread increases. This in turn shifts the supply curve to the right from SS to S1S1. 2The
new equilibrium point occurs at E1 where the demand curve (DD) intersects the new supply
curve (S1S1). The corresponding equilibrium price is P1 and equilibrium quantity is Q1. This
reflects that the price of bread decreases from P to P1 and quantity of bread increases from Q to
Q1.
2 N Mankiw, Principles of microeconomics, in , Mason, Ohio, South-Western Cengage Learning, 2012.

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Quantity of bread
Price of bread S1
S1
S
S D
D
P*
Q*
P1
Q1
E*
E1
Answer 2
Which of the following would cause the equilibrium price of bread to increase and the
equilibrium quantity of bread to decrease?
a) An increase in price of butter, a complement for bread.
b) A decrease in the price of flour
c) An increase in the price of cake, a substitute for bread
d) An increase in the price of flour
The answer will be (d). Increase in price of flour would cause the equilibrium price of bread
to increase and the equilibrium quantity of bread to decrease. This is illustrated with the help of
diagram given below:
Figure 2: Increase in price of bread and decrease in quantity of bread
Source: (As created by author)

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The above figure shows that the initial equilibrium occurs at the point E* where the
demand curve (DD) and supply curve (SS) of bread intersect each other. The corresponding
equilibrium price is P*and equilibrium quantity is Q*. As flour is one of the ingredient of bread,
increase in price of flour leads to decrease in supply of bread. This causes leftward shift of
supply curve from SS to S1S1. The new equilibrium now occurs at the point E1 where the
demand curve (DD) intersects new supply curve (S1S1). The corresponding equilibrium price is
P1 and equilibrium quantity is Q1. This highlights that the equilibrium price of bread increases
from P* to P1 and the equilibrium quantity of bread decreases from Q* to Q1.
Answer 3
When the price is fixed at -----------, there is always deadweight loss.
a) The equilibrium level
b) Higher than the equilibrium level
c) Lower than the equilibrium level
d) Higher or lower than the equilibrium level
(d) is the answer. However, deadweight loss always occurs when the price is fixed at higher or
lower than the equilibrium level. 3Deadweight loss refers to the loss of economic efficiency in
form of utility for producers or consumers such that allocative efficiency is not attained. Some of
the causes of deadweight loss are- price flooring, price ceiling, taxation. Price flooring means the
the government imposing price control on how low price (price below the equilibrium price)
might be charged for the good. On the other hand, price ceilings are the maximum prices (price
above the equilibrium price) that is set by government for specific product and services. Taxation
means the government charging above selling price for specific product or service.
3 K Tyagi, "Chapter 2 Principles of Microeconomics Part-1", in SSRN Electronic Journal, , 2013.

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S
DS
D
Quantity of good
Price of goods
Pm
Qe
Pb
Ps
Qt
Deadweight
loss
Figure 3: Deadweight loss
Source: (As created by author)
The shaded triangle shown above is the deadweight loss. Pm is the equilibrium prices
without taxes and Qe is the total quantity supplied without tax. Pb is the price that the buyers will
pay due to tax and Ps is the price that sellers will receive. The decrease in quantity supplied
owing to the tax is shown by Qt.
Answer 4
When people’s income increase, the demand for a good increases. The result in the market is
-----
a) Equilibrium price and quantity increase
b) Equilibrium price and quantity decrease
c) Equilibrium price increases and equilibrium quantity decreases

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Quantity
Price
D
D S
S
P
Q Q1
P1
E
E1
D1
D1
d) Equilibrium price decreases and equilibrium quantity increases
(a) is the answer to this question. Increase in demand for a product owing to increase in
consumer’s income results in the market equilibrium price and quantity to increase. This means
that a rise in demand results in excess demand for a good to develop at initial price. This excess
demand causes price of the good to increase. As price increases, the producers tend to sell more
product and thus leads to increase in its quantity. This is shown in the diagram below:
Figure 4: Increase in demand resulting in increase in price and quantity of goods
Source: (As created by author)
The above figure reflects that the equilibrium point occurs at E where the demand curve (DD)
intersects with the supply curve (SS). As the income of the consumer increases, the demand for
the product also increases. This shifts the demand curve to the right from DD to D1D1. The new
equilibrium now occurs at the point E1 where the new demand curve (D1D1) intersects with the
supply curve (SS). This causes the equilibrium price to increase from P to P1 and equilibrium

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quantity to increase from Q to Q1. This highlights that change in demand for a good cause
equilibrium quantity and price to change in the same direction.
Answer 5
Homer, Bart and Lisa are the only consumers in the market. Using the information in the table
below, what is the market demand for chocolate chip cookies at $ 4per box.
a) 21 boxes
b) 17 boxes
c) 11 boxes
d) 4 boxes
Price Barts quanity Lisa Quantity Homers quantity
2 9 5 7
3 7 4 6
4 4 2 5
5 1 0 3
4The market demand curve is attained by horizontal summation of the individual demand curve.
Horizontal summation relates to the adding up of quantity demanded for the consumers at all
price level. This shown in the figure below-
4 R Tresch, Principles of microeconomics, in , Mason, OH, Cengage Learning, 2012.

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P
Q
P
Q
P
Q
Individual
demand curve
Individual
demand curve
Market demand
curve
p
q
p1
q1
p
q
p1
q1
p
q1+q2
p1
q1+q2
Figure 5: Market demand curve
Source: (As created by author)
In this case, the market demand for chocolate chip cookies at $4 per box is 11 boxes. This is
obtained by summing up Bart’s, Homers and Lisa’s quantity, which is 4+2+5= 11 boxes.
Answer 6
a) As major components in the production of both mobile phones and phablets can be
shared. However, the phablets and mobile phones are substitute goods. As price of
phablet increases, the demand for mobile phone increases. This is shown in the diagram
given below-

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Quantity of mobile
phone
Price of mobile S
S
S1
S1 D
D
E
E1
P
Q
D1
D1
Q1
P1
Figure 6a): Change in market of mobile phones
Source; (As created by author)
The above figure reflects the impact of rise in price of phablet on market demand for
mobile phone. The point E is the market equilibrium point where the demand curve (DD)
cuts the supply curve (SS). The corresponding market price is P and quantity is Q. Increase in
demand for mobile phone shifts the demand curve to the right from DD to D1D1. At market
price P, market is not in equilibrium as quantity demanded for mobile exceeds its quantity
supplied. Thus, the price of mobile increases which in turn generates rise in quantity
supplied. A new equilibrium occurs at the point E1 with higher price P1 and quantity Q1.
b) As the consumers are increasingly concerned about the reports on mobile phones causing
brain tumors, the demand for mobile phones might decrease. As a result, the price of
mobile will fall and its quantity will also fall. This is shown in the figure below-

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Quantity of mobile
Price of mobile S
S D
D
D1
D1
E
E1
Q
P
P1
Q1
Figure 6b) Change in market of mobile
Source: (As created by author)
The above figure reflects that the equilibrium point occurs at E where the demand curve
(DD) cuts supply curve (SS). The corresponding market rice is P and quantity is Q. As the
demand for mobile decreases, the demand curve shifts to the leftward direction from DD to
D1D1. The new equilibrium occurs at E1 where the demand curve D1D1 cuts the supply
curve SS. The price decreases to P1 and quantity also falls to Q1.
Answer 7
a) Sugar being one of the key raw material of cupcakes, increase in cost of sugar leads to
decrease in supply of cupcakes. 5This leads to increase in price of cupcakes and decrease
in quantity of cupcakes. This is shown in the diagram below:
5 K Case, R Fair & S Oster, Principles of microeconomics, in , Harlow, Eng., Pearson, 2012.

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Quantity of cupcakes
Price of cupcakes
D
D S
S
S1
S1
P
Q
P1
Q1
Figure7a: increase in price of cupcakes and decrease in quantity of cupcakes.
Source: (As created by author)
The above figure reflects that equilibrium point occurs at point E where demand curve
(DD) intersects with the supply curve (SS). The corresponding equilibrium price is P and
equilibrium quantity is Q. Rise in cost of sugar will lead to decrease in supply of cupcakes. This
causes leftward shift of supply curve from SS to S1S1. The new equilibrium now occurs at E1
where demand curve (DD) cuts the supply curve (S1S1). The corresponding equilibrium price is
P1 and quantity is Q1.
b)As the income of the students ( important group of cupcake buyers) increases, the demand for
cupcakes also increases. This causes price and quantity of cupcakes to increase. This is shown in
the diagram below:

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Quantity of cupcakes
Price of cupcakes S
S D
D
D1
D1
P
Q
P1
Q1
Figure 7b: Increase in price and quantity of cupcakes due to increase in consumers income
Source: (As created by author)
The above figure shows that equilibrium point occurs at E where demand curve (DD) cuts
with the supply curve (SS) of cupcakes. As the income of consumers increases, the demand for
cupcakes also increases. This causes rightward shift of demand curve from DD to D1D1. The
new equilibrium point occurs at E1 where demand curve (D1D1) cuts with supply curve (SS).
The corresponding equilibrium price is P1 and equilibrium quantity is Q1. This shows that both
price and quantity of cupcakes increases owing to increase in income of students.
Conclusion
From the above discussion, it can be concluded that market equilibrium occurs at the
point where both the demand and supply curve of a product cuts each other. Moreover, changes
in demand and supply of good due to several factors causes change in the market equilibrium.
Besides this, deadweight loss is calculated by the difference between total surplus and tax

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revenue. Total surplus refers to the summation of consumer and producer surplus. Overall, this
study reflects on the principles of economics.

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References
Case, K, R Fair, & S Oster, Principles of microeconomics. in , Harlow, Eng., Pearson, 2012.
Gans, J, S King, & G Mankiw, Principles of microeconomics. in , Australia, Cengage Learning,
2012.
Mankiw, N, Principles of microeconomics. in , Mason, Ohio, South-Western Cengage Learning,
2012.
Tresch, R, Principles of microeconomics. in , Mason, OH, Cengage Learning, 2012.
Tyagi, K, "Chapter 2 Principles of Microeconomics Part-1.". in SSRN Electronic Journal, , 2013.