Principles of Economics Assignment: Microeconomics Analysis (BB106)

This document presents a comprehensive solution to a microeconomics assignment, addressing core economic principles. The assignment explores the concept of scarcity in the mining industry and the fundamental economic questions of what, how, and for whom to produce, using the example of an economics textbook. It further analyzes the production possibility frontier (PPF) and factors that cause shifts. The assignment then delves into demand and supply dynamics, including factors influencing demand, the impact of supply shifts on market equilibrium, and the concept of market failure and externalities. The analysis extends to price elasticity of demand, calculating elasticity values and identifying factors affecting it. Finally, the solution examines cost and revenue concepts, including average total cost, marginal cost, diminishing marginal returns, and diseconomies of scale. The assignment is thoroughly referenced, providing a strong understanding of microeconomic principles.

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

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

2Microeconomics
Answer 1
(a) The mining industry in Australia faces scarcity of available mines and thus to increase yield
the mining industry have two choice options one is using of more advanced technology that
improves extraction of current mines and the other is discovery of new mines (1). Thus, to
choose the best option the mining industry needs to compare the opportunity cost of the choices
and opts the choice with lower opportunity cost.
(b) Fundamental economics questions are what to produce, how to produce and for whom to
produce. These questions are valid for production of any good including an economics textbook.
Before starting production of economics textbook it is important to find what type of economics
textbook is required to produce that is if its macroeconomics or microeconomics, how to produce
that book means which writer is to be contacted and how will be quality of the books (2). All
these question are further based on the target reader of the books if it’s for high school students
or graduate school students. Putting up answers of all the three questions together will solve the
problem of production of economics textbook.
(c) Production possibility frontier represents the trade-off between opportunity costs of two
alternative choices. It is downward sloping because by making one choice one has to sacrifice
the other possible choice and thus a gain and loss trade-off is associated (3). A PPF is concave to
the origin because an increase in consumption or production of a good increases its opportunity
cost.
(d) Two reasons that shift the PPF inward are (i) decline in skill and (ii) fall in available factors
of production.

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Answer 2
(a) Two possible reasons that increase demand for avocados are export of avocados to new trade
partners or countries and increase in demand due to increase in number of buyers in the
domestic market.
(b) Favourable weather condition for avocado production leads to more production that increases
supply of avocado in the market that shift the supply curve to the right due to which the
equilibrium price will fall and quantity will rise (4). The effect of this is illustrated in the graph
below.
Figure 1: Increase in supply (rightward
shift in supply curve)
Source: (Created by the Author)
(c) The market equilibrium in avocado industry occurs when the supply of avocado equals the
demand in the market and gives an equilibrium price at which the consumers are willing to buy
the supplied avocados. However, if the supply is more than demand then by reduction of price

4Microeconomics
the state of disequilibrium is adjusted and market equilibrium occurs. On the other hand, the
price rises to prevent disequilibrium if demand is higher than supply in the market.
(d) Inefficiency in allocation of goods and services in a market is termed as market failure.
Market failure often leads to externality. Any occurrence of negative externality due to
consumption or production of the good affecting a third party and causing it loss in welfare is
result of inefficient allocation (5). This inefficiency in allocation of negative effect of
consumption or production caused due to market failure. For example, pollution caused by petrol
car users is a negative externality due to market failure.
Answer 3
(a) Price elasticity of demand for Kiwi fruits when price rises from $8 to $10 is -0.5 that means
the Kiwi fruit at this point is relatively price inelastic. With unit change in price the quantity
demanded for changes by 0.5, which is less than proportionate.
(b) Price elasticity of demand for Kiwi fruits when price rises from $10 to $12 is -1.9 that means
the Kiwi fruit at this point is relatively highly price elastic. With unit change in price the quantity
demanded for changes by 1.9, which is much more than proportionate.
(c) For price change from $8 to $10 the quantity demanded for Kiwi changes by 0.5 per unit of
price change, which is less than proportionate. For price change from $10 to $12 the quantity
demanded for Kiwi changes by 1.9 per unit of price change, which is more than proportionate.
(d) Three reasons that affect price elasticity of demand are

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 Price level: If price level of a good is high like in case of luxury product then slight
change in price changes quantity demand of that good.
 Nature of commodity: For normal goods price elasticity of demand is unit elastic, for
necessary goods it is inelastic and for demerits goods it is highly inelastic
 Complementarity: The price elasticity of demand also depends on the complementarity of
product that means if the good is used with any other good like in case of bread and
butter.
(e) Price elasticity of demand generally negative relationship between price and quantity
demanded, that is rise in price decreases quantity demanded or vice versa. However, price
elasticity of demand can be inelastic or elastic (6). For inelastic values increase in price increase
total revenue whereas for relatively elastic values increase in price decreases total revenue.
Answer 4
(a)
(b) Level of output is 3 when the Average Total Cost is at minimum.

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(c) At the initial phase of production ATC remains higher than MC and as the production
increases due to increasing and diminishing returns to scale MC in the later phase of production
surpasses the ATC (7).
(d) Law of diminishing marginal returns states that with increase in production productivity of
factors of production decreases. On the other hand, diseconomies of scale means that a firm
becomes so big in size that with increase in production marginal cost of a firm rises (8). Thus
diminishing marginal returns indicates productivity of input and diseconomies of scale indicates
cost inefficiency of firm that increases production.

7Microeconomics
References
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2016.
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economy, 47(suppl_1), pp.174-198, 2015.
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Informatics, 12(3), pp.952-961, 2016.
7. R.E. Hall. New evidence on the markup of prices over marginal costs and the role of mega-
firms in the US economy (No. w24574). National Bureau of Economic Research, 2018.
8. M.M. Chiu. Family inequality, school inequalities, and mathematics achievement in 65
countries: Microeconomic mechanisms of rent seeking and diminishing marginal
returns. Teachers College Record, 117(1), pp.1-32, 2015.