Demand and supply, elasticity, and business structures are also examples of microeconomic principles.

The consumer’s wealth has a commendable influence on their purchasing choices. The amount of a good that an individual is expected to buy is determined by their disposable income. An rise in disposable income helps to increase the customer’s buying power, while a decrease in disposable income leaves the consumer with relatively little, resulting in a decrease in purchasing power (McEachern, 2009). When a customer receives a set salary, he or she has a fixed spending constraint. Any deviations in their income that’s, an increase or decrease in their income creates adjustments in their budget line. If a consumer’s disposable income $200, a 0.4% increase in their income increases the income available for spending to $200.8. This means that if all factors remain constant, expenditure on consumption would increase by $0.8, thus leading to an increase in the quantity of commodities consumed, followed by an equal adjustment in the budget line from A to B as demonstrated in the graph below.

1.1 Figure 1 showing a 0.4% increase in income.

Income

$200.8

$200

A B

Units of

0 5 7 a commodity

(b) Effect of a 6% decrease in the Pizza Price

If other factors are held constant, a decrease in the price of pizza leads to an increase in the quantity that a consumer will purchase. If the original price of pizza is $40, a 6% decrease implies that the price reduces to $37.6. If the disposable income of the consumer remains constant at $200, there will be a $2.4 increase in the amount available for expenditure on pizza. The consumer will therefore increase the units of pizza demanded as illustrated in the graph below.

Income

$200

B

A

$37.6 $40

Pizza price

Decrease in pizza price

The graph above shows that a decrease in the price of pizza from $40 to $37.6 shifts the consumer’s indifference curve from B to A.

(c) Impact of increase in the prices of hamburgers (related to pizzas by 6.1%

An increase in the price of a related commodity leads to a decrease in the quantity demanded of that commodity and an increase in quantity demanded of the other (for substitutes), while an increase in the price of the commodity in question results into a subsequent increase in the price of the other, thus affecting their demand. If the price of pizza is $40, when other factors are held constant, a 6.1% increase in the price of a complementary commodity increases the price of Hamburgers by $2.44. If the income of the consumer remains fixed, a $2.44 price increase shifts the budget line inwards, thus, the consumer is forced to reduce on the units of the commodities to suit the budget line. However, a 6.1% increase in the price of Hamburgers would lead to an increase in its price (by $2.44) to $42.44, awhile that of pizza remains fixed. The consumer shifts their demand to pizza as their income is fixed, shown in figure 2 below.

Figure 2: Effect of a 6.1% increase in a substitute

Units of Hamburgers

Units of pizza consumed

4e1

3 e0 I1

I0

2 3 6

Initially, the consumer demands 4 units of commodity XHamburgers and 3 units of pizza. When the price of Hamburgers increases by 6.1% ($2.44), the price of pizza remains constant. Given a fixed budget line, the consumer shifts his preference to consuming pizzas whose price is relatively lower.

Question 2

In monopolistic markets, the entry of new firms is restricted while in competitive markets, there is freedom of entry and exit into the market; therefore, it gives room for many firms to join the market.

The second difference is that in monopolistic markets, there are very few or one form that dictates prices of commodities in the market. This is opposed to perfect competition markets where consumers (and the market forces of demand and supply) play a central role in determining the prices, while producers are simply price takers who can only influence how of a commodity to produce.

The four principles of economic decision making are;

People always face trade-offs, the element of giving up one item in favour of the other. This implies that for an individual to obtain what they want, they must first give up another item (opportunity cost) because of scarcity of resources. Giving up the item that you would wish to have in favour of the other is related as trade-offs.

The second is that the cost of a commodity or something is what you give up to get it. This posts a task of choosing how an individual should allocate the scarce resources amongst the alternatives before them. A student may face a challenge of allocating their reading time. The challenge comes when he/she must choose whether to read more of philosophy than economics. Choosing to spend more time on philosophy must be accompanied with giving up some hours meant for economics or else, he/she must apportion equal time. However, each time he chooses to read economics, he sacrifices philosophy, thus, the cost of reading economics is giving up philosophy.

The third principle is that rational people think at the margin. Economists and policy makers employ the term margin to refer to the small increments in consumption. The principle requires that marginal people make decisions after evaluating the marginal benefits of the available alternatives. The willingness of an individual to pay for a commodity depends on the marginal or extra benefit of the other commodity.

The fourth principle is that people respond and or react to incentives. In this principle, people make decisions based on benefits and costs.

Question 3

When firm under perfect competition increases output, the total revenue increases steadily at a given rate depending on the price of the market price of the commodity in the market. Equilibrium is reached at a point where market cost equals marginal revenue. However, profits are at the verge when total revenue exceeds total costs by a very big magnitude. In the long-run, due to increased supply of the commodity in question, the demand becomes low which results into a decline in the prices according to the law of demand.

The main characteristics of public goods and resources include the following;

Non excludability. This implies that there are no restrictions on the consumption of public goods and resources. The consumption of one individual does not stop another for consuming or using them. For example, public roads. All citizens of a country have the freedom and liberty to use public roads.

Non-rivalry. This implies that an individual consumption of a public good does not affect the consumption of another. For example, a public hospital. When a person seeks medical attention in a public healthcare, their medication does not affect the medical attention given to other patients.

Public goods and resources are freely provided by the state or government and all nationals are entitled to use them freely.

Question 4

It is price elasticity of demand

Elasticity = Change in quantity demanded of a commodity divided by change in its price

Total revenue after price change is -3.0 x 900 = $2700

Total revenue before price change is -3 x 1200 = $3600

5% price increase = 0.05 x $300

= $15

Final price = $315

Assume Qi = Quantity demanded

The quantity demanded after the 5% price increase is 855 units.

Percentage change in price = {(1200 – 855)/(1200)}*100%

Percentage change in price = (345/1200)*100%

Percentage change in price = 28.75

25% increase in price = (25/100)* 300

= $75

Final price = $375

Change in quantity = 675-1200

= 525

Percentage change in quantity = (525/1200)*100

= 43.75%

References

McEachern, W. A., 2009. Economics: A Contemporary Introduction. 2nd ed. Singapore: MacMillan.