Comprehensive Microeconomics and Macroeconomics Assignment - BUECO1509

This assignment is a combined exploration of microeconomics and macroeconomics, addressing key concepts from both branches of economics. Part A delves into microeconomic principles, including the concept of 'no free lunch,' the classification of goods, and the calculation of various cost curves (TFC, TVC, TC, AFC, AVC, AC, MC) alongside the identification of diminishing marginal returns. It also examines price, income, and cross-price elasticity of demand, explaining their significance for businesses and differentiating between normal and inferior goods, as well as substitute and complementary goods. Part B shifts to macroeconomics, exploring the business cycle, its phases, and causes, alongside types of unemployment and the demand for money. The assignment also analyzes demand-pull and cost-push inflation, their causes, and graphical representations of these phenomena. The assignment adheres to the course's instructions, relying solely on textbook material and referencing all definitions, diagrams, and direct quotations as per the specified method.

MICRO ECONOMICS AND
MACROECONOMICS
COMBINED ASSIGNMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Question: 3.......................................................................................................................................3
Question: 5.......................................................................................................................................4
a) Calculation of TFC, TVC, TC, AFC, AVC, AC and MC.......................................................4
b) Identification of output level at which diminishing marginal returns set in...........................4
Question: 6.......................................................................................................................................5
PART B...........................................................................................................................................7
Question: 10.....................................................................................................................................7
Question: 11.....................................................................................................................................8
Question: 12...................................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Microeconomics and Macroeconomics are two branches of economics where the former
is concerned with the study of single unit of the economy like a single business entity or an
individual while the latter is concerned with the study of economy as a whole like aggregate
demand and supply in the country, Income level and employment level in the country. The
present is report is based on the concepts of microeconomics and macroeconomics.
PART A
Question: 3
(a) Yes, I agree with the economic saying that there is no such thing as a free lunch because
everything has some value attached to it whether it is paid in monetary terms or not. As if
someone got something for free then also some kind of must be paid for it in a wider economic
system Massidda, Piras & Seetaram (2020). Cost associated with consumption and decision making
are always present and cause hidden / implicit cost to another person and also an opportunity cost
for what has not been taken. Thus the meaning of this economic phrase is nothing is truly free as
somebody must have paid something in respect of that particular thing.
(b)
(i) It is a public good as no one can be excluded or restricted to paid for it and utilize it.
(ii) It is a private good as one can be excluded from buying it if he is not ready to pay for it and
one cannot get the good if there is less availability of this good in the market for others. Also,
this good can be rejected by consumer if they don’t like it., Boardman & et.al. (2018).
(iii) It is a public good as it is available for all the citizens of a nation for their safety and security
and no one can be deprived of the same.
(iv) If the good is freely available then it is public good and no one can restrict others from using
it.
(v) It is a part of health system of a nation and can be used by anyone who wish to get it and thus
is a public good.

Question: 5
a) Calculation of TFC, TVC, TC, AFC, AVC, AC and MC
Q TFC TVC TC AFC AVC AC MC
0 10 0 10 10 0 10
1 10 8 18 10.00 8.00 18.0 8
2 10 12 22 5.00 6.00 11.0 4
3 10 15 25 3.33 5.00 8.3 3
4 10 17 27 2.50 4.25 6.8 2
5 10 20 30 2.00 4.00 6.0 3
6 10 24 34 1.67 4.00 5.7 4
7 10 29 39 1.43 4.14 5.6 5
8 10 36 46 1.25 4.50 5.75 7
9 10 48 58.0 1.11 5.33 6.44 12
10 10 70 80 1.00 7.00 8 22
b) Identification of output level at which diminishing marginal returns set in
The output level at which diminishing returns will set in is that level where producing an
additional unit of output leads to increase in per unit cost of the product Curtis (2018). By keeping
all other factors constant, if there is increase in the marginal cost of the product due to the
production of additional unit of a product, then it is the output level at which diminishing returns
would be set in. In the above table indicating the movement or change in various costs at
different level of output, the diminishing returns can be said to be set in with the production of 8th
unit of a product, where it can be seen that average cost (AC) or per unit cost is increasing at this
level of output indicating inefficiency in the process of production.

c) Drawing cost curves
0 2 4 6 8 10 12
0
5
10
15
20
25
cost curves
Series2 Series4 Series6
Series8 Series10
Question: 6
(i) Price elasticity of demand: It can be defined as the relationship between changes in the
quantity demanded of a good due to change in price of that good. It is the measurement of
responsiveness of demand due to the corresponding change occurred in the price of the goods or
services. Thus, how the market will respond to the change in price is the concern of this concept.
It allows to make decisions regarding whether to increase or decrease the price of the good, so
that the objective of maximization of profit can be achieved easily, Borland (2020). The effect that
will be going to occur on the quantity demanded of a particular good can be determined through
this technique of economics.
The formula for calculating the elasticity = % change in quantity demanded / % change in price.
If the elasticity comes out is >1, then it is said to be elastic; if the elasticity is <1 then it is known
as inelastic demand and the last one is if the elasticity is =1 then it is called as unit elastic.
(ii) Income elasticity of demand: It can be defined as the relationship exists between the changes
in the demand for a good in relation to the change in income of an individual. In other words, it
measures the responsiveness of demand for a good with respect to change in the income of a
consumer.
Formula of income elasticity of demand = % change in quantity demanded / % change in
income.
AFC AVC AC Marginal cost

It helps in forecasting future demand for and therefore accordingly production level for a
particular good can be determined produced to meet the changing demand, Osborne, M. J., &
Rubinstein, A. (2020).
(iii) Cross price elasticity of demand: It can be defined as an economic measure for determining
the changes caused in the quantity demanded of one good due to the changes in the price of
another good. This another good can be both complementary and substitute goods which is also
known as related good.
Formula of cross price elasticity of demand = % change in quantity demanded of one good / %
change in the price of related good.
The cross price elasticity of demand is positive in case of substitute good and it is negative in
case of supplementary good.
(iv) Firm or a business entrepreneur need to understand the difference between these three
concepts because all these concepts are used in different situations, Lange (2018). Like price
elasticity of demand is useful in setting price of product or service, income elasticity of demand
is useful in determining quantity of particular good to be produced at particular point of time in
future while cross price elasticity of demand is useful in deciding for increasing and decreasing
the price of a commodity and substituting one good for another in order to get higher revenue
and profits.
(v) The first one is positive income elasticity of demand that is +0.9 which means the good is a
normal good because there is direct relationship between income and demand for normal good,
as income rises consumer can be able to buy more of normal good at a given price level.
In the second case there is negative income elasticity of demand that is -4.3 which means the
good is an inferior good as there is inverse relationship between demand for inferior goods and
income of consumer. The consumer prefer to buy less of inferior goods when there income rises.
(vi) The first cross price elasticity of demand is positive that is +0.85 which means the good is a
substitute good because when the price of one good rises then the demand for its substitutes
rises.

The second cross price elasticity of demand is negative that is -3.2 which means the good is a
complimentary one where the price of one good rises then its pair good’s demand falls.
PART B
Question: 10
(a)
The four phases of business cycle indicates how economic system expanded and contracted due
to up and down in economic activities.
Expansion: When GDP rises for consecutive years then economy moves from trough to peak
which is known as economic recovery due to rise in employment and confidence among
consumers.
Peak: The highest point indicating end of expansion and beginning of contraction of an economy
as after this point economic indicators start to fall, Dullien & et.al., (2017).
Contraction: Here the whole economy gets declined and it is the period where the economic
activities are coming down from peak but not reaches the trough phase.
Trough: The phase in the economic business cycle which indicates the end of business activity
declination and the beginning of movement towards expansion.
(b) Causes of turning point in business cycle are:
 Changes in climatic conditions leads to different mood in the economy.
 Psychological aspects such as optimism and pessimism among entrepreneurs and
consumers.
 Changes in monetary phenomenon such as interest rates and money supply.

 Changes in economic factors like savings, investment and consumption causes movement
in business cycle, Petrosky-Nadeau & Wasmer (2017).
(c) Different types of unemployment are:
 Demand deficient unemployment: When there is a low demand for company’s product
they go for cutting of production which results in considerable layoffs which leads to
unemployment in an economy.
 Frictional unemployment is a situation which is not an unfavorable one as individuals
finding best job are considered as unemployed during the period of job searching.
 Structural unemployment means people and job both are available but the worker is not
able to access the job due to lack of skills or geographical restrictions.
 Voluntary unemployment is that where the workers want to remain unemployed due to
poor wage rates.
Such situations can came both in terms of demand side and supply side, Rochon & Rossi (Eds.).
(2021). Financial crisis and global recession cause lower employment level while wage rates are
cause of supply side unemployment.
(d) Demand for money is the function of rate of interest. It is believed in economics that the
demand for money market instruments are negatively related to the rate of interest. When the
interest rates are lower than there will be higher demand for money market instruments for
holding money in a liquid form while when there is higher interest rates lower demand for
money market instruments arises because people are tend to invest in other interest bearing
instruments like bonds and other financial assets, Soylu, Çakmak & Okur (2018). In the diagram
below, it has been clearly indicated that more money market instruments are demanded at lower
rate of interests and vice versa.

Question: 11
Demand pull inflation Cost push inflation
It is situation of too much money spend results
in buying too few goods as the aggregate
demand in the economy set aside the aggregate
supply which results in price rise. There is a
rise in GDP and fall in unemployment.
In the diagram, it can be seen how higher
demand and lower supply leads to rise in
prices.
The inflation caused from the supply side
due to reduction in the aggregate supply with
the reduced production as the price of factors
of production rise very much. Again
mismatch between aggregate demand and
supply occur.
In the diagram, it can be seen that lower
supply and higher demand leads to rise in
price.
(b) Causes of demand pull and cost push inflation
Demand pull inflation caused due to increase in the government spending which leads to more
money in the hands of people and thus prices go up. Another cause is when economy grows,
people feel more confident which leads more demand for debt and accordingly for goods and
services which leads to increase in prices, Łaski (2019).

Cost push inflation caused due to higher wages which raises cost of production which reduced
supply due to lower production at higher cost and another cause could be imposition of higher
taxes on producers which again leads to higher costs and both of these conditions leads to lower
supply against the given level of aggregate demand and therefore prices go up.
(c) Interaction between these two inflation occurs when there is an increase in aggregate demand
due to factors like more government spending and economic growth along with the
corresponding fall in the aggregate supply due to rise in cost of factors of production, then this
leads to interaction between demand pull and cost push inflation, Rochon & Rossi, (Eds.). (2021).
Like if wages go up then there would be cost push inflation but simultaneously there are more
disposable income in the hands of people which results in more aggregate demand and therefore
prices go up. The following diagram proves the simultaneous occurrence of these two inflation.
Interaction between demand pull and cost push inflation
Question: 12
(a)
Particulars $m $m
Bank receive 100 Hold 20
Lend 80
Second round deposit rise by 80 Hold 16
Lend 64

Third round deposit rise by 64 Hold 12.8
Lend 51.2
Fourth round deposit rise by 51.2 Hold 10.24
Lend 40.96
Fifth round deposit rise by 40.96 Hold 8.2
Lend 32.76
Total deposits after five
rounds
336.16
(b) Credit creation after five rounds = 80+64+51.2+40.96+32.76 = 268.92 or 269.
(c) Increase in total deposit = 1 / LRR = 1 /20% = 5 * 1000 = 5000.
(d) Bank multiplier or deposit multiplier is the amount of money that has been created by banks
for each of the unit of reserves it held. It is the percentage of the deposited amounted in the bank.
It is very necessary for maintaining sufficient money supply in the economy.
(e) Bank multiplier = 1 / required ratio of liquidity = 1 / 20% = 5.
(f) Bank multiplier is inversely related to the liquidity ratio which indicates the ratio of checkable
deposits to the liquidity amount reserved. Bank multiplier determines how much amount need to
be reserved for maintaining liquidity and how much amount is available for loaning out, so that
more deposits can be created.

REFERENCES
Massidda, C., Piras, R., & Seetaram, N. (2020). A Microeconomics Analysis of the Per Diem Expenditure
of British Travellers. Annals of Tourism Research, 82, 102877.
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2018). Cost-benefit
analysis. Cambridge Books.
Curtis Jr, J. (2018). Economics: A Student Textbook and Professor Manual for University Instruction of
Microeconomics Courses. Scholars' Press.
Borland, J. (2020). Microeconomics: Case Studies and Applications. Cengage AU.
Osborne, M. J., & Rubinstein, A. (2020). Models in Microeconomic Theory ('He'Edition) (p. 362). Open
Book Publishers.
Lange, S. (2018). Macroeconomics without growth. Metropolis Verlag.
Dullien, S., & et.al., (2017). Macroeconomics in context: a European perspective. Routledge.
Petrosky-Nadeau, N., & Wasmer, E. (2017). Labor, Credit, and Goods Markets: The macroeconomics of
search and unemployment. MIT Press.
Rochon, L. P., & Rossi, S. (Eds.). (2021). An introduction to macroeconomics: a heterodox approach to
economic analysis. Edward Elgar Publishing.
Soylu, Ö. B., Çakmak, İ., & Okur, F. (2018). Economic growth and unemployment issue: Panel data
analysis in Eastern European Countries.
Łaski, K. (2019). Lectures in Macroeconomics: A Capitalist Economy Without Unemployment. Oxford
University Press.