Microeconomics

This document covers various topics in microeconomics such as demand and supply equilibrium, price ceiling in housing rental market, market structure of fast food industry, and relationship among microeconomic factors. It also includes tables and figures to support the analysis.

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................4
Answer 3....................................................................................................................................5
Answer 4....................................................................................................................................7
References..................................................................................................................................9

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Answer 1
Price Quantity Demanded Quantity Supplied
8 12 36
7 16 32
6 20 28
5 24 24
4 28 20
3 32 16
2 36 12
1 40 8
Table 1
(a)
Figure 1: Demand and supply equilibrium of Anna’s Pastry
Source: (Created by the Author)
(b)
The demand curve is the curve that shows the relation between the price and demand
of a product. The relationship is indirectly proportional, that means with increase in price
demand decreases, and the opposite happens if the price falls. The indirect relationship is the
reason for downward sloping demand curve. On the other hand, the relationship price and
supply shares is that with increase in price supply increases and the opposite happens if the
5 10 15 20 25 30 35 40 45
0
1
2
3
4
5
6
7
8
9
Demand and Supply Equilibrium
Quantity Demanded Quantity Supplied
Quantity (in thousand)
Price

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price falls. The direct relationship between price and supply gives the upward sloping supply
curve. The equilibrium occurs at the point where demand curve intersects the supply curve
and the price and quantity at the point is said to be equilibrium price and quantity (Schotter
2016). Thus, the equilibrium price and quantity traded by Anna Pastry as per the demand and
supply equilibrium are 5 and 24,000 respectively.
(c )
Price Quantity Demanded
(in thousand)
Quantity Supplied
(in thousand)
New Quantity Demanded (in
thousand)
8 12 36 16
7 16 32 20
6 20 28 24
5 24 24 28
4 28 20 32
3 32 16 36
2 36 12 40
1 40 8 44
Table 2

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Figure 2: New demand and supply
Source: (Created by the Author)
(d)
During winter, the demand for Anna’s pies increased by 4000 units. An increase in
demand given the supply of the product increases the price as per the microeconomic theory
of demand and supply (Pindyck and Rubinfeld 2018). Realizing the rise in demand and price
Anna would increase the supply to earn more revenue and thereby more profit. Increase in the
demand, shifted the demand curve to the rightward and a new equilibrium is formed (Xu, Yin
and Ye 2019). The newly formed equilibrium gives the new equilibrium price and quantity
traded as 5.5 (approx.) and 26, 000 units (approx.). Therefore, it is noticed that both
equilibrium price and quantity traded has increased due to the increase in demand for pies.
Answer 2
5 10 15 20 25 30 35 40 45 50
0
1
2
3
4
5
6
7
8
9
New Demand and Supply Equilibrium
Quantity Supplied Quantity Demanded
Quantity (in thousand)
Price

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Figure 3: Price ceiling in housing rental market
Source: (Created by the Author)
In Australia, interest rates have increased and on the other hand, shortages occur in
housing that generated rental crisis in the city of Melbourne. The rental dwelling industry
thus got affected and the equilibrium price and quantity after rise in interest rate is $1200 and
4000 respectively. The free market equilibrium price and quantity is plotted in the diagram
given above that are $1200 and 4000 respectively (Feldman, Gravin and Lucier 2016).
Subsequently, a price ceiling of $1000 per month is imposed on the rental price then the
demand for housing will rise from 4000 to QD, however, at rental price $1000 the supply for
houses on rental will reduce to QS. QD is a higher quantity from the free market equilibrium
quantity of 4000 and on the other hand, QS is the quantity lower than the free market
equilibrium quantity. Hence, it is observed that after price ceiling there is a gap between the
quantity supplied and quantity demanded for rental housing, where demand is much higher
than that of supply causing creation of economic inefficiency. Therefore, instead of increase
in social welfare it will decrease, as supply in rental housing is lower than demanded quantity
of housing. Thus, price ceiling creates an inefficiency in the housing market. Furthermore,
the quantity supplied after imposition of price ceiling is even lower than the amount of rental
housing available under free market (Bourne 2015). Thus, setting a price ceiling this case will
force many people to become homeless due to unavailability of sufficient amount of rental
housings (Gabrielsen and Johansen 2017). Therefore, the policy of imposition of price ceiling
of $1000 to control the rental housing market is not beneficial due to occurrence of market

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inefficiency and thus it is better to leave the determination of demand and supply of the rental
market to the free forces of the market.
Answer 3
The fast food restaurant industry is an industry in which if a firm wants to enter
require huge amount of investment that attracts high risk and thus the market has entry and
exit barrier (Yang, Zhang and Wang 2017). However, limited number of brands such as KFC,
Hungry Jacks, McDonalds and Dominos pizza dominates the market. Thus, the market could
be either oligopoly or monopolistic in structure. Thus, taking the case of KFC and
McDonalds it is seen that both the companies serve similar kind of products that comes under
the fast food category, however they are not substitutes. The industry demands huge
investment as to cater a large size of market several branches are required in various places
because the product the companies deal in cannot be supplied to place at long distance.
Therefore opening several branches in many places and making promotion and advertisement
attracts huge amount of investment. Hence, it is difficult to make entry in the market and thus
firms that can make that amount of investment only participate in the industry. Hence, the
numbers of firms are limited. Thus, the firms have market power and can set price, but in this
market structure, the market power is not as effective as in monopoly and oligopoly because
the products might come under same category that is fast food but are differentiated (Baumol
and Blinder 2015). For example, KFC serves food mostly based on chicken preparations
whereas McDonald serves burger based products. Therefore, price of ones products affects
the business of the other moderately or in some cases marginally. Thus, considering these
characteristics of the market the previous inference of entry and exit barriers can be nullified
and hence it is clear that the markets structure is not an oligopoly one. The entry to the
market may be difficult but is open, as the existing players of the market create no significant
barrier. The customers that are brand loyal or have food or brand preference would consume

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the food of the favourite brand only and are least affect to the change in price. Alternatively,
in the case of customer without any brand preference will be affected by the price change of
the products of one brans and move to other brands’ product. Thus, the market is
heterogeneous in nature as far as customers demand is concerned. Hence, no significant
change can be brought to the market by changing the price of the products if they were not
perfect substitutes. Furthermore, the firms do not have enough information about the products
of the other companies (Parenti, Ushchev and Thisse 2017). The number of firms may be
limited but are many in number. Hence, market structure of the industry is neither oligopoly
nor monopoly and thus the market structure of the fast food industry is monopolistic
competition and not an oligopoly. This is because the market structure characteristics the fast
food industry is showing does not match with the structure found in oligopoly market, and is
more like the monopolistic competition, especially the heterogeneity of product presence of
low market power and imperfect information across the market of the industry.
Answer 4
Total
Outpu
t
Total
Fixed
Cost
Total
Variable
Cost
Tota
l
Cost
Average
Fixed
Cost
Average
Variable
Cost
Average
Total
Cost
Marginal
Cost
0 $210 $0 $210
1 $20.00 $230 210 20 230 20
2 $30.00 $240 105 15 120 10
3 $50.00 $260 70 16.67 86.67 20
4 $90.00 $300 52.50 22.50 75 40
5 $170.00 $380 42 34 76 80
6 $330.00 $540 35 55 90 160
7 $650.00 $860 30 92.86 122.86 320
Table 3
.

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Figure 4:
Average
total cost and
marginal
cost
Source: (Created by the Author)
The above table, show the relationship among all the given microeconomic factors.
Total cost is the summation of total fixed cost and total average cost and average of all the
given cost are calculated by dividing them by the corresponding amount of the quantity. On
the other hand, marginal cost is calculated by considering the change in cost due to unit
increase in output. After plotting the average variable and marginal cost curve in the graph, it
is observed that the shape of the average total cost is U-shaped and that of marginal cost is
upward sloping (Frank and Shen 2016). It has also been observed that at the minimum point
of the average total cost curve, marginal cost curve cuts it from the below. Therefore, until
this point of equilibrium is reached, average total cost is decreasing with increasing marginal
cost. The relation of average total cost and marginal cost signifies that beyond the point of
intersection of the two cost curves it is not feasible for a firm to operate as both the cost
1 2 3 4 5 6 7
0
50
100
150
200
250
300
350
Average
Total Cost Marginal Cost

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increases after that. The average variable cost also behaves like the average total cost,
decreases initially and increases in the latter.

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Bourne, R., 2015. 5 THE FLAWS IN RENT CEILINGS. CEILINGS, p.72.
Feldman, M., Gravin, N. and Lucier, B., 2016. Combinatorial walrasian equilibrium. SIAM
Journal on Computing, 45(1), pp.29-48
Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal
of Financial Economics, 119(2), pp.300-315.
Gabrielsen, T.S. and Johansen, B.O., 2017. Resale price maintenance with secret contracts
and retail service externalities. American Economic Journal: Microeconomics, 9(1), pp.63-
87.
Parenti, M., Ushchev, P. and Thisse, J.F., 2017. Toward a theory of monopolistic
competition. Journal of Economic Theory, 167, pp.86-115.
Pindyck, R.S. and Rubinfeld, D.L., 2018. Microeconomics (Global ed., The Pearson series in
economics). Harlow: Pearson.
Schotter, A., 2016. Free market economics: a critical appraisal. Macmillan International
Higher Education.
Xu, Z., Yin, Y. and Ye, J., 2019. On the supply curve of ride-hailing systems. Transportation
Research Part B: Methodological.
Yang, Q., Zhang, L. and Wang, X., 2017. Dynamic analysis on market structure of China's
coal industry. Energy Policy, 106, pp.498-504.