BBM102 Microeconomics Assignment: Equilibrium, Elasticity Analysis

This microeconomics assignment delves into fundamental concepts such as scarcity, choices, and opportunity costs, differentiating microeconomics from macroeconomics. It analyzes market equilibrium using demand and supply schedules, examining the impact of shifts in demand on equilibrium...Read More

MICROECONOMICS
STUDENT ID:
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Question 1
(a) Scarcity refers to the condition the underlying resources are limited but those required to
fulfil the demands of the society and underlying individuals are potentially higher. This leads
to a scarcity of resources which can be used for economic production. Since, the resources
are limited and all the needs and wants cannot be satisfied, hence choices need to be made
with regards to which products or services need to be produced and in what quantities.
Opportunity cost comes into play since choices need to be made and refers to the payoff
associated with the next best alternative available for use of given resources.
(b) The various differences are highlighted as follows.
 The subject matter of microeconomics is limited to a single consumer or firm unlike
macroeconomics which tends to consider the whole industry or economy.
 The business application of microeconomics is primarily for internal issues related to
a firm while macroeconomics is applied to understand the external environment and
external issues.
 The focus of microeconomics in on an industry with regards to the economic
decisions made by firms. This is in contract with macroeconomics which tends to
focus on the economy as a whole and consider economic indicators.
(c) The economic way of thinking involves the following aspects.
1) Owing to limited resources, there is a trade off when choices are made.
2) Choices should be made rationally i.e. by comparing the underlying costs and benefits.
3) Benefits refers to the underlying utility derived and also can be measured by the maximum
price that consumer is willing to pay.
4) There are opportunity costs involved since there are alternative uses of the resources
possible.
5) Margin refers to the difference between benefits and costs.
6) Incentives need to be considered which tend to drive self-interest and influence economic
decisions made.

Question 2
a) The price at which the demand and supply tend to assume the same value leads to
equilibrium creation. It is apparent based on the given data that at RM 9 price, there is equal
demand and supply.
Therefore, price at equilibrium = RM 9
Equilibrium quantity = 20 tonnes
Equilibrium Revenue = 20*9 = RM 180
b) Owing to rice demand decreasing by 7 tonnes for every price, the altered schedule of
demand and supply is exhibited as follows.
Price
(RM)
Quantity
Demanded
Quantity
Supplied
3 21 14
6 17 17
9 13 20
12 9 23
15 5 26
18 1 29
The new equilibrium is highlighted in red.
Therefore, price at equilibrium = RM 6
Equilibrium quantity = 17 tonnes
c) Equilibrium Revenue = 17*6 = RM 102
Clearly, there has been a decline in the revenue from the original equilibrium revenue of RM
180.

Question 3
a) Price controls are imposed during festivities as there is increased demand of certain
products and services whose price can increase owing to lower supply or hoarding. However,
considering that the consumption of products are services are to be done, the same may be
done at higher prices thereby causing loss to the consumer and high profits to the hoarders.
As a result, the Malaysian government imposes price controls thereby ensuring that certain
goods cannot be sold at a price higher than a pre-defined price. This is done in order to keep
the prices of the essential items required during festivities in check.
b) The price controls do not work as enforceability is a key issue. Also, when there is lack of
supply in the market, then black marketing of these goods is quite active where the prices are
significantly higher. In order to ensure price control, the government needs to take the
following measures.
 Check on the hoarding of the goods through adequate enforcement with the
cooperation of local people.
 Ensuring that the supply is ramped up as the expected demand during festivities can
be predicted before hand.
 Ensure that the stocks cannot be purchased in bulk by a single buyer therefore leading
to high market power and harm to consumers.
 Ensuring that supply chain constraints do not exist and essential goods are available
with many suppliers.
Question 4
Indocafe – Price Elasticity
Initial quantity= 200 units, Final quantity = 150 units
Quantity Change (%) = (150-200)/[(200+150)/2] = -28.57%
Initial Price= RM 2, Final Price= RM 3
Price Change (%) = (3-2)/((3+2)/2) = 40%
Price elasticity = -28.57/40 = -0.714

Nescafe - Price Elasticity
Initial Quantity= 50 units, Final Quantity= 100 units
Quantity Change (%) = (100-50)/[(50+100)/2] = 66.67%
Initial Price= RM 2, Final Price = RM 3
Price Change (%) = (3-2)/((3+2)/2) = 40%
Price elasticity = 66.67/40 = 1.67
b) From the Infocafe elasticity sign, it is apparent that the inverse law of demand holds for
this product. Also, considering the inelastic demand for Indocafe, it does not make sense to
bring down the price. This is because the corresponding increase in quantity demanded in
percentage terms would be lesser and hence an adverse effect on the revenue would be felt.
c) Cross elasticity formuls
Cross elasticity = (% change in quantity demanded of Indocafe)/% price change in Nescafe
Based on the given data, it is apparent that when the Nescafe price increases to RM 3 from
RM2, then the Indocafe demand tends to decrease to 150 from 200 initially.
% quantity change Indocafe = [(150-200)/200]*100 = -25%
% price change Nescafe = ((3-2)/2)*100= 50%
Cross elasticity = -25/50= -0.5
A negative value of cross elasticity would indicate that the given products are complements
and not substitutes.