Economic (MicroEconomics)-Demand, Supply, Market Equilibrium, and etc

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Economic (MicroEconomics)-Demand, Supply, Market Equilibrium, and etc Powered By Docstoc
					                                    MTC 099
  Introduction to Economic Issues and
               Problems

Prepared by;

                                      LWP02J

Lyyana Bt Jamal Damanhoori                     (2010655416)

Nazlin Bt Mohd Riduan                          (2010653414)

Nur Armiza Bt Baharudin                        (2010666354)

Nur Farahna Fateen Bt Mohd Fadzil              (2010660056)

Nur Hidayahtul Nabihah Bt Manas                (2010651674)

Zain Zulqarnain Bin Zain Azly                  (2010664258)



Prepared for;

Miss Rahana Bt Abdul Rahman

Due Date: 23rd December 2010



                                                          1
                               TABLE OF CONTENT




1) Chapter 1, Part C, Question no. 1:
    Explain how the capitalism system solves economic problems……………………….3


2) Chapter 1, Section C, Question 8:
   Differentiate between microeconomics and macroeconomics…………………………6


3) Chapter 2, Part C, Question no. 5:
   Explain with examples what is meant by exceptional demand………………………..8


4) Chapter 2. Part C, Question no. 8:
   With aid of a diagram and example, explain the exceptional supply curve…………...11



5) Chapter 3. Part C, Question 1
   Show with the help of a diagram, how an advertisement designed to promote a
   product would affect both the equilibrium price and the equilibrium quantity sold....13




                                                                                             2
Chapter 1, Part C, Question no. 1:

Explain how the capitalism system solves economic problems.

By Nur Armiza Bt Baharudin (2010666354)



       Capitalism is an economic system where individuals make all the main economic
decisions without any government intervention. It may also be known as free market economy.
The main mechanism for any economic activity capitalist system is the price system. Instead of
that, this system also known as laissez-faire, market economy or free market.

       The basic economics problems can be referred to a basic economy questions. The basic
economy problems also may be known as choices made by any society to decide on what to
produce, how to produce and for whom to produce. Since there are limited resources, a nation or
society has to decide how to allocate its limited resources efficiently to produce the goods and
services to specify the needs of the people. To do this, three fundamental economics questions
needs to be answer.

           1. What to produce: Every nation have to take a fundamental decision of what to
              produce due to the limited economic resources. Every society has to choose the
              type and the quantity of the goods and services that it will produce.


           2. How to produce: This refers to the cheapest method of production.


           3. For whom to produce: This refers to the distribution. The distribution of economic
              benefits depends on the distribution income.




                                                                                              3
Problem 1: What to produce                     Solution by capitalism system :
   -   How many cars should be produces?          -   This problem can be solve through the
                                                      price   mechanism,       which   reflects
                                                      consumer’s taste and preferences. The
                                                      price system is used to make economic
                                                      decisions. The price mechanism means
                                                      the free operation of demand and
                                                      supply forces without any intervention.
                                                      The entrepreneur will only produce
                                                      goods and services for which there is a
                                                      demand from customer. Hence, the
                                                      higher the demand, the higher the
                                                      production of the car.
Problem 2: How to produce                      Solution by capitalism system :
   -   Should cars be produced by automatic       -   Firms can produce any product and
       machines or assembly line workers?             provide any service using method
                                                      depends on the relative price of the
                                                      resources involved. Only the cheapest
                                                      and most effective production will be
                                                      adopted in this situation. If the cost of
                                                      the automatic machines is RM 100000,
                                                      while the cost of the assembly workers
                                                      is RM 7000, then the firms may choose
                                                      to used the labour force to produce the
                                                      car.
Problem 3: For whom to produce                 Solution by capitalism system :
   -   Who will drive the latest model of an      -   Who will be receiving goods and
       imported car?                                  services in the capitalism system is
                                                      answered through the price system.
                                                      Goods and services are obtained by
                                                      anyone who can afford them. The car

                                                                                             4
will be purchased by the consumer who
are willing to buy them.




                                   5
Chapter 1, Section C, Question 8

Differentiate between microeconomics and macroeconomics.

By Nur Farahna Fateen bt Mohd Fadzil (2010660056)




There are several differences between microeconomics and macroeconomics. These are shown in
the table below:

                            Microeconomics                      Macroeconomics
     Definition         Microeconomics is the study         Macroeconomics is the study
                         of the of the individual             of the aggregate behavior of
                         economics units in detail.           the entire economy.
      Example           Example: Household.                 Example: Inflation.
                         Household is the basic               Inflation is a rise in the
                         residential unit in which            general level of prices of
                         economic production,                 goods and services in an
                         consumption, inheritance,            economy over a period of
                         child rearing, and shelter are       time.
                         organized and carried out. In
                         economics, a household is a
                         person or a group of people
                         living in the same residence.
    Application         Microeconomics is the               Macroeconomics are applied
                         concept that can be applied in       as a whole. Examples of
                         our daily lives. For example,        macroeconomics trades are
                         when an individual ask what          like what is the
                         do I want for my upcoming            unemployment rate in
                         birthday? Where should I go          Malaysia? Why did Bank
                         for the holidays?                    Negara Malaysia cut interest
                                                              rates by 2%


                                                                                             6
Analyzation         Analyzes demand for and         Analyzes total employment in
                     supply of labour                 the economy.
                    Analyzes demand and supply      Analyzes aggregate demand
                     of goods.                        and aggregate supply.
      Study         Studies individual prices.      Studies overall price level
     What it        Deals with households’ and      Deals with aggregate
    deals with       firms’ decisions.                decisions.




                                                                                    7
Chapter 2, Part C, Question no. 5

Explain with examples what is meant by exceptional demand

By Zain Zulqarnain Bin Zain Azly (2010664258)




        Demand is defined as the ability and willingness to buy specific quantities of goods in a
given period of time at a particular price, cetiris paribus. Cetiris Paribus is a Latin phrase that
means holding other factors constant while some of other factor change. It also differs from
desire, wish, want and the like.

          Exceptional Demand is meant by whereas the price of a product increases , the demand

for it will also increase. Exceptional demand are against the law of demand where as the

price increase , the quantity demanded will also increase.




           Price

                                          DD




                                                       Quantity




        The exceptional demand occurs in the giffen goods which are normally consumed by

those in the lower income group. This scenario was discovered by Sir Robert Giffen. The

example of giffen goods , a person from the lower income group spends a major portion of

his income on giffen goods like a vegetables and smaller portion on other stuff such as fish.


                                                                                                 8
When the price of vegetable increase while the price of other stuff and income remain

same, his or she real income will fall. The monthly income allocated for vegetables will be

smaller than before. So, to avoid starvation , he will readjust his expenditure pattern by reducing his

consumption of fish and increasing the quantity of vegetables.




                               Ppotatoes       Real Income             Q fish


         Then, when the price of vegetables decreases, the poor man, instead of buying more vegetables,
will buy more superior or quality products such as fish since his real income has increased and reduces
the demand for potatoes.

         Other than that, status symbol of goods also the occur of the exceptional demand where are the
products are purchased by the people in the higher income groups, it is not for satisfaction but for

their ostentation ( trying to impress people with their things ). With such status symbol of goods, the

price is not important as possession of the stuff or product. Such an example, diamond world

famous paintings, when the price of the diamond and painting falls, the lower income group can

purchase it. So, the diamond and paintings are no longer known as any prestige or social distinction.

The rich may stop buying them, and considered paintings as a cheap product.

       Exceptional demand also cause by emergencies, during emergencies time like war and during

natural disasters, people will buy more goods even though the prices of these goods are high. These

goods usually basic and important necessities such as salt , rice, sugar and oil.




     Highly-priced goods are can also be the occur of exceptional demand where the stuff thst the

consumer judges to be of a good quality stuff because consumer’s perception may be such that he


                                                                                                          9
views products at a high price as superior products and of high quality. So, the consumer will buy

more where the price high and buy less when the prices is low. For example, when a price a Nike t-

shirt is high , more people will purchase it because they are view and perception that it is of a high

quality and therefore a more superior product.




                                                                                                         10
Chapter 2. Part C, Question no. 8

With aid of a diagram and example, explain the exceptional supply curve.

By Nur Hidayahtul Nabihah bt Manas (2010651674)




       The law of supply stated that the higher the price of a product, the greater is the quantity
supplied of the product and vice versa, while the others remain constant.

       Exceptional supply is against the law of supply where as the price of the product
increases and the quantity supplied decreases. This type of supply curve is negatively sloped.
Supply of labour is the most example of exceptional supply curve. Supply of labour is defined as
the number of hours or days a particular type of labour is offered for hire at the different wage
rates. It known as ‘Backward Bending Labour Supply Curve’. This is because, the supply of
labour curve does not slope upward throughout its entire length but begins to bend back on itself
at one point.



                  Wage rate



                 20-                                                        Income effect

                 15-                                                (exceptional supply curve)

                 10-                                                        Substitution effect

                   5-

                   0            2           4        5          6      Labour (hours)



        According to this rule, the higher the rate of wage, the longer the supply of labour hours
will be. However, there may be exceptions to this rule, which known as exceptional supply.
There are two types of exceptions. First is the substitution effect where the higher the wage rate,
the more people will economize on their non-market activities and increase their work hours as

                                                                                                  11
to increase their income. For example, if Mason is given additional pay on extra hours he works,
he will reduce his leisure hours and substitute them with work.

       Second is the income effect. A higher income induces an increase in demand of leisure.
Thus, less time is spent on work and there is a decrease in the quantity of labour supplied. For
instance, if Mason has enough money, additional pay will not encourage him to increase his
work hours above the normal eight hours. He will wish to spend his money on leisure activities
like having holidays on an island. Therefore, an increase in income will reduce the labour
supplied.

       The supply of labour can be affected by these exceptions (work-leisure ratio) as shown in
the diagram above as it illustrated that an increasing wage rate may encourage substitution of
leisure for work and encourages the worker to put in additional hours as his wages are higher
now. This is called as substitution effect of an increase in wage rate. Supply of labour will shift
upwards to the right as shown in the diagram above.

       Mason will increase his hours of work if wage rates are high. However, after a certain
number of hours, he is unwilling to substitute his leisure for work. Although higher wage rates
may be offered, Mason views his leisure as important as he already has enough money. This is
called as the income effect of an increase in wage rate.

       In short, exceptional supply curve only happens when there are exceptions towards the
rule. It occurs when the price of a product increases and the supply is decreases.




                                                                                                12
Chapter 3. Part C, Question 1


Show with the help of a diagram, how an advertisement designed to promote a product
would affect both the equilibrium price and the equilibrium quantity sold.


By Nazlin bt Mohd Riduan (2010653414) and Lyyana bt Jamal Damanhoori (2010655416)



Definition of market equilibrium:

There is no tendency for price or quantity to change when quantity demanded and quantity
supplied are equal and this situation is called market equilibrium. Equilibrium can occur
regardless of the price and quantity involved.




                                                                                            13
   Price of Pens (RM)

                                           S

                       D0

        P0




                             Q0                   Quantity of Pens



                                            FIGURE 1

P0 = the original price of pens

Q0= the original quantity of pens

D0= the original demand curve

S= the original supply curve




        This graph shows the equilibrium price and the equilibrium quantity sold before the
advertisement is designed to promote the product which is pens. D0 is the initial demand curve
and S is the supply curve. The equilibrium price is at P0 and the equilibrium quantity is at Q0.




                                                                                                   14
      Price of Pens

                                      D1    S

                       D0                          S1

       Po




                          Q0               Q1           Quantity of Pens




                                                FIGURE 2



       Suppose there is an increase in demand for the pens after it was promoted as shown
above, the demand curve will shift to the right to D1. At the initial price of P0 there is a shortage,
so the price rises and quantity supply increases. D1 intersects the supply curve, S at the price, P1.
Thus, the equilibrium price increase from P0 to P1 and equilibrium quantity increases from Q0 to
Q1.




                                                                                                   15
          Price

                                             SS

                      D0                             S1

         Po

                                           Surplus

          P2




                            Q0    Q2                  Quantity



                                              FIGURE 3




        Suppose there is an increase in the supply of products after it was promoted as shown in
Figure 3. The supply curve will shift to the right to S1. At the initial price of P0, there is a surplus,
so the price falls and the quantity demanded increases. The new supply curve, S 1 intersects the
demand curve DD at the price of P2. The equilibrium price will decrease from P0 to P2 and the
equilibrium quantity will increase from Q0 to Q2.




                                                                                                      16
    ~THE END~



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