Microeconomics Assignment: Demand, Supply, and Pricing

This microeconomics assignment analyzes various economic concepts through problem-solving and graphical representations. It explores opportunity cost, positive and normative statements, and the impact of changes in demand and supply on market equilibrium. The assignment delves into specific scenarios, such as the impact of COVID-19 on face mask prices, the yoga service market in Malaysia, and the effects of emission trading schemes. It also examines government interventions like maximum price controls and their impact on market shortages. Furthermore, the assignment addresses the heroin market's price inelasticity and discusses the relationship between price elasticity of demand and revenue generation. The solutions are supported by figures and references, offering a comprehensive understanding of microeconomic principles.

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..........................................................................................................................................2
Answer 3..........................................................................................................................................2
Answer 4..........................................................................................................................................3
Answer 5..........................................................................................................................................4
Answer 6..........................................................................................................................................5
Answer 7..........................................................................................................................................6
Answer 8..........................................................................................................................................7
Reference.........................................................................................................................................8

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Answer 1
(a) All the three things are available at the same time of the year and since time is a limited
resource, Tom cannot do all the three things at the same time.
(b) Between various alternatives, when one alternative is chosen and others are not then the cost
accrued for not choosing the other alternatives then the cost is called opportunity cost. The
opportunity cost of Tom’s decision to go to university in this case is benefits lost for not
choosing working full time.
(c) A choice of either have a dinner in restaurant or watch a football match in stadium. Both the
choices are opportunity cost of each other.
Answer 2
Positive statement are qualitative as they are made on value judgments which cannot be
tested. On the other hand, normative statement are made based on quantitative and logical facts
and thus can be tested.
Example of positive statement: With rise in price of goods, inflation would go up.
Example of normative statement: After rise in income by 20%, there is a 15% increase in
consumption.
Answer 3
In case of buying, one extra pair of NIKE shoes has nothing to do with price change but
self-pleasure. The demand curve here shifts to D1 in figure 1and is called change in demand. On
the other hand, Mike consumed more beer due to fall in price of beer by 30 percent. Here, the
change occurred along the demand curve D, which is known as change in quantity demanded.

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The change in quantity demanded is shown in figure 1 as Q1 to Q2 due to fall in price from P1 to
P2.
Figure 1: Change in
quantity demanded and change in demand
Source: (Created by the Author)
Answer 4
Price of products increase even with increased supply only when the increases in demand
of the product is higher than the increase in supply of the product. Due to advent of COVID 19
virus, the demand for face masks increased rapidly causing the price to rise10 times the price of
mask before the entry of virus. To save themselves from getting affected by the virus which is
found to be aerosol borne all the people started to buy face masks causing its demand to increase
significantly (Becker 2017). As a result, the supply curve moved to S* and demand curve to D*
causing equilibrium price and quantity to increase to P2 and Q2 respectively as shown in figure
2.

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Figure 2: Change in price and demand of
face masks due to COVID 19
Source: (Created by the Author)
Answer 5
Figure 3: Yoga service market
in Malaysia
Source: (Created by the Author)

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The demand for the yoga service in Malaysia has increased and that is why demand curve
moved to D* as shown in figure 3. Due to this reason, the price of yoga service has increased to
P2 from P1. This would have increased the equilibrium demand above Q1 but due to
government regulation the number of yoga service providers get reduced and as a result the
supply curve moved to left to S*. Hence, fall I supply even after rise in demand caused the price
of the service to remain high. Hence, in this case if the demand falls to its previous level then the
equilibrium price and quantity will be P2 and Q2 respectively. Alternatively, if the demand
remained increased at D* then the equilibrium price would further increase to P* and equilibrium
quantity remains at the initial equilibrium position of Q1.
Answer 6
Figure 4: Effect of emission trading
scheme
Source: (Created by the Author)
(a) Under emission trading scheme the government fixed the amount of emission to the level of
social marginal cost which is Q2 as shown in figure 4. Due to that, firms cannot produce at

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private marginal cost level and thus there is no loss in welfare. Thus, emission trading scheme
successfully reduce the cost of pollution.
(b) Australia and Britain have introduced carbon and price charged on per metric ton of carbon in
these two countries are $10 and $25 respectively (Plumer and Popovich 2019).
Answer 7
Figure 5: Effect of maximum price set
by government
Source: (Created by the Author)
The government has put a maximum price for eggs such that no egg producers cannot
charge price above that price to make eggs affordable for consumers. The maximum price is set
at PMAX as shown in figure 5, which is lower than the free market price P. At PMAX, quantity
demand for eggs increased to QD since price has decreased after setting maximum price for eggs
by the government (Hutchinson 2017). Conversely, due to fall in price the producers of eggs has
reduced quantity supplied to QS. Hence, after maximum price rule has caused shortage in the

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market given by difference between QD & QS. Additionally, setting maximum price has caused
loss in social welfare shown as deadweight loss in the figure.

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Answer 8
(a)
Figure 6: Effect of fall in supply in
heroin drug market
Source: (Created by the Author)
Heroin is a demerit goods and thus the demand for it is relatively price inelastic and that
is why the demand curve of the heroin market is steeper (Leonardi 2018). With the arrest of drug
dealers there is a 50% fall in drug supply causing the supply curve to move to left to S*. Because
of the inelastic demand, the price increases more than proportionate change in quantity. Thus
revenue generated after fall in supply P*Q* is greater than initial revenue of PQ.
(b) Suppose, the demand for product of the business is relatively price elastic that is with 1% rise
in price demand decreases by 1.5% Then, increasing price would decreases revenue. Similarly,
with unit price elastic product there will be no change in revenue with change in price. Again, if
demand is relatively price inelastic that with 1% rise in price demand falls by 0.5% then it is best

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to increase price. Thus, depending on the price elasticity of demand of the product price strategy
should be set.

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Reference
Becker, G.S., 2017. Economic theory. Routledge.
Hutchinson, E., 2017. 4.5 Price Controls. Principles of Microeconomics.
Leonardi, G., 2018. Italian government intervention over conventional and innovative tobacco
products.
Plumer, B. and Popovich, N. (2019). These Countries Have Prices on Carbon. Are They
Working?. Nytimes.com. Available at:
https://www.nytimes.com/interactive/2019/04/02/climate/pricing-carbon-emissions.html.