Introduction To Microeconomics

This document provides an introduction to microeconomics, covering topics such as production possibility frontier, demand and supply, and market equilibrium. It also discusses the concept of price elasticity of demand and cross price elasticity of demand. The document includes tables, figures, and explanations to help understand the concepts better.

Runnning head: INTRODUCTION TO MICROECONOMICS
Introduction To Microeconomics
Name of the Student
Name of the University
Course ID

1INTRODUCTION TO MICROECONOMICS
Table of Contents
Question 1..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................2
Question c...............................................................................................................................4
Question 2..................................................................................................................................5
Question a...............................................................................................................................5
Question b..............................................................................................................................5
Question c...............................................................................................................................5
Question d..............................................................................................................................6
Question e...............................................................................................................................7
Question f...............................................................................................................................9
Question 3..................................................................................................................................9
Question a...............................................................................................................................9
Question b............................................................................................................................10
Question c.............................................................................................................................11
References................................................................................................................................13

2INTRODUCTION TO MICROECONOMICS
Question 1
Question a
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
0
1000
2000
3000
4000
5000
6000
Production Possibility Frontier
Cars
Bicycle
Figure 1: Production Possibility Frontier
Question b
Production Possibility Frontier
The curve or frontier showing different combinations of two goods or services that an
economy can produce using all of its resources in the most efficient manner and a given
technology of production is called production possibility curve. Alternatively, it is also
known termed as production possibility frontier (Baumol and Blinder 2015). The key
assumptions and properties of PPF are discussed below.
Assumptions of PPF
Two goods: The simplest assumption of PPF analysis is that economy can produce only two
goods or services. Following this assumption, PPF can be drawn in a two dimensional
framework.

3INTRODUCTION TO MICROECONOMICS
Fixed resources: The next important assumption of PPF is that resources are fixed and hence,
available in limited quantities to the economy. This assumption addresses the economic
problem of scarcity and therefore is important for analysis (Sloman and Jones 2017). The
assumption of fixed and limited resources helps to understand effect of any possible change
especially its effect on economic growth.
Fixed technology: Another assumption based on which PPF is drawn is that the economy
has fixed technology. Technology refers to the knowledge of the society regarding production
of the goods or services. The assumption is as useful as the assumption of fixed resources. At
a given time, economy possesses a certain level of technology. Therefore, it is reasonable to
make such assumption.
Technical efficiency: The fourth and final assumption is that in the economy, resources are
used in a technically efficient way. Technical efficiency implies that in the production
process there is no waste of resources in the production process and therefore, maximum
output is obtained with the fixed resources.
Properties of PPF
Concave to the origin: Production possibility frontier is of concave shape. The reason behind
concave shape of PPF is the nature of increasing opportunity cost. All the resources in the
economy are not perfect substitutes for each other (McKenzie and Lee 2016). As resources
are moved from one industry to another inefficiency increases resulting in a higher
opportunity cost.
Increasing marginal rate of Transformation: The slope of PPF curve shows the marginal
rate of transformation. In order to produce every additional unit of one good, the economy
needs to sacrifice more and more units of the other good. This is to say, with moving from
right to left along the PPF, marginal rate of transformation or slope of PPF increases.

4INTRODUCTION TO MICROECONOMICS
Downward sloping: With limited availability of resources, additional unit of production of
one good requires a decline in unit production of other. This means PPF slopes downward
from left to right.
Optimum resource utilization: Every point on the production possibility curve indicates a
point of efficient production point (Jain and Ohri 2015). Corresponding to these points, all the
resources in the economy are fully employed and available technology is efficiently used.
Question c
Newland has a demand of 3000 bicycles and 18,000 cars. Suddenly, the demand for
cars increase to 4000 bicycles while the demand for bicycles increases to 20,000. It is useful
to note that the demand for both bicycles and cars increases simultaneously here. This
indicates points outside the production possibility curve. With the limited resources, the
economy is unable to attain such a point (Hill and Schiller 2015). Newland can be able to
increase production of both bicycles and cars by shifting its production possibility curve
outward. There are some possible ways to make such a point feasible for the economy.
First, Newland need to explore new resources. With new resources it is possible to
allocate more resource in order to produce both cars and bicycles. Instead of increasing
production of one good in exchange of reducing production of other the new resources
increase both production simultaneously. Secondly, the economy may employ new and
efficient production technology. The new efficient technology helps to allocate resources in a
better way and hence increase output with the given amount of resources (Cowell 2018).
Third, another way to increase output of both the industries, the economy can engage in
specialization of resources. Specialization of inputs increases output from the given input.
Any of the three ways can proved to be a useful way to meet the increase demand of both
cars and bicycles.

5INTRODUCTION TO MICROECONOMICS
Question 2
Question a
When price falls from $400 to $350, total revenue increases from $12000 to $12250.
If price falls from $350 to $300, total revenue decreases from $12250 to $12000.
Question b
Price
Quantity
demanded
Total
Revenue
200 50 10000
250 45 11250
300 40 12000
350 35 12250
400 30 12000
As indicated from above table a decline is price from $300 to $250 reduces total revenue
from $12000 to $11250. The increase in price from $300 to $350 increase revenue from
$12000 to $12250. As revenue moves as same direction as price, demand is relatively
inelastic at the average price pf $300.
Question c
The demand function for widgets is
QD=100−5 P
The supply function for widgets is
QS =5 P
At the market equilibrium position, demand equals supply (Cowen and Tabarrok 2015).
Demnad=Supply

6INTRODUCTION TO MICROECONOMICS
¿ , 100−5 P=5 P
¿ , 5 P+ 5 P=100
¿ , 10 P=100
¿ , P= 100
10
¿ , P=10
The equilibrium quantity in the market is obtained as
Q=5 P
¿ ( 5 ×10 )
¿ 50
Question d
The maximum price that consumers are willing to pay is 100. The consumer surplus is
Consumer Surplus ( CS )= 1
2 × ( 20−10 ) × 50
¿ 1
2 ×10 ×50
¿ 250
The minimum supply price in the market is 0
Producer Surplus ( PS ) =1
2 ×10 ×50
¿ 250

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Total surplus=Consumer surplus+ Producer Surplus
¿ 250+250
¿ 500
Question e
Figure 2: Market equilibrium after government restriction
If government restricts the maximum quantity sold at 25 units and market price is at $15, then
consumer surplus is equal to the area A only.
Cosumer surplus= 1
2 × ( 20−15 ) ×25
¿ 1
2 ×5 ×25
¿ 62.5
Producer surplus is given by the area B+C+D
B+C= ( 15−5 ) × 25

8INTRODUCTION TO MICROECONOMICS
¿ 10 ×25
¿ 250
D= 1
2 × 5× 25
¿ 62.5
Producer surplus=250+62.5
¿ 312.5
Deadweight loss is the lost in total surplus and is given by the area F + G.
Deadweight loss=2 × ( 1
2 ×5 ×25 )
¿ 25 ×5
¿ 125
Now if market price is at $5, then CS is the area A+B+C
B+C=250
A=62.5
CS=250+62.5
¿ 312.5
PS now reduces to the area D only
D=62.5
Deadweight loss remains the same and is given by F + G.

9INTRODUCTION TO MICROECONOMICS
Deadweight loss=2 × ( 1
2 ×5 ×25 )
¿ 25 ×5
¿ 125
Question f
Figure 3: Supply, demand and equilibrium
Question 3
Question a
Online video rentals and streaming are substitutes of in store movie. When people has
the opportunity to watch movies and videos online the tendency to rent in store movie DVDs
falls. There is a decline in demand in the in store movie industry. With decline in demand of
in the in store movie industry, the associated demand curve shifts inward (Mochrie 2015).

10INTRODUCTION TO MICROECONOMICS
The contraction in demand reduces both price and equilibrium quantity in the in store movie
industry.
Figure 4: The market scenario of in store movie industry
The original demand and supply curve of in store movie industry is given as the
respective curve of DD and SS. The demand and supply forces determine equilibrium at the
point E. Equilibrium price and quantity in the online movie industry is obtained as P* and Q*
respectively. Now, the introduction of online video rental and streaming reduces the demand
in the in store movie industry. The demand curve in the in store movie industry shifts inward
to D1D1. The new equilibrium is attained from the intersection of new demand curve and
existing supply (Maurice and Thomas 2015). The fall in demand with the given supply
creates an excess supply in the market reducing equilibrium price to P1. The contraction of
demand discourages suppliers to produce in the industry and hence, there is a decline in
equilibrium quantity to Q1.
Question b

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The demand for Optus’ online movie rentals tends to be more price elastic compared
to the demand for online movie rentals in general. Price elasticity of demand measures the
relative responsiveness of quantity demanded of a commodity corresponding to a change in
price. Several factors influence the price elasticity of demand for a good. Number of
substitutes in one factor determining price elasticity of demand. Large the number of
available substitute higher is the price elasticity of demand (Kolmar 2017). As there are other
companies similar to Optus who rent online movie, a small increase in price of Optus’ movie
rental induces people to shift their demand to some other companies’ movie largely reducing
demand for Optus’ movie rental. Because of presence of competitors’, Optus’ online movie
rental faces a higher price elasticity of demand compared to online movie rentals in general.
Question c
The sign of cross price elasticity of demand depends on relation between two goods.
The sign varies depending on whether the products are substitutes or complementary. In case
where two goods are substitutes, an increase in price of one good reduces the demand of that
good while increase demand for the substitute good. Hence, cross price elasticity is positive.
Reverse is the case for complementary good. For complementary goods, an increase in price
of one good not only reduces its own demand but also reduces demand for the
complementary good (Mankiw 2015). The cross price elasticity is negative. The online movie
rentals and in store movie rentals are substitutes to each other. Hence, cross price elasticity of
demand is positive.
Now an increase in price of in-store movie rentals encourages people to shift their
demand towards online movie rentals. This raises demand for online movie rentals. As
demand of online movie rental increase equilibrium price and quantity of online movie
rentals increases as well.

12INTRODUCTION TO MICROECONOMICS
Figure 5: Market of online movie rentals
An increase in price of in-store movie rentals increases the demand for online movie
rentals. Accordingly, the demand curve shifts right to D’’D”. For online movie rentals, the
new equilibrium is attained at a higher price and higher quantity (Varian 2014). With demand
expansion of online movie rentals price increase to P2 and equilibrium quantity of online
movie rental increases to Q2.

13INTRODUCTION TO MICROECONOMICS
References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.
Jain, T.R. and Ohri, V.K., 2015. Principal of Microeconomics. FK Publications.
Kolmar, M., 2017. Principles of Microeconomics. Springer International Publishing.
Mankiw, N.G., 2015. Principles of Microeconomics, Cengage Learning. Stamford, CT, p.213.
Maurice, S.C. and Thomas, C., 2015. Managerial Economics. McGraw-Hill Higher
Education.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Mochrie, R., 2015. Intermediate microeconomics. Macmillan International Higher Education.
Sloman, J. and Jones, E., 2017. Essential Economics for Business. Pearson.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.