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Microeconomics - Question 1

Scarcity and opportunity costs are two key terms that are frequently used in economics. This can be explained with the help of a Production Possibility curve. An economy faces a lot of problems in the manufacturing of goods and services as it has to decide between the productions of goods within an economy- For example as shown below the economy is facing a dilemma of what to produce between a consumer good butter and a capital good that is machine (Jhinghan, 2016). Below are two key problems that an economy faces:

  1. Problem of scarcity: It is inspired by all those combinations which lie outside the production possibility curve. These include the points D, E and F in the diagram above. Such combinations cannot be attained because of scarcity or insufficient resources (Jhinghan, 2016). Only the combination points which lie inside the production possibility curve are attainable which means A, B and C are the points that can be attained by the economy in production of goods.
  2. Problem of choice: Points A, B and C in the diagram above shows that there can be choice between production of two goods. The only way to raise the production is to lower the production of other goods. This can be also understood by opportunity cost. Opportunity cost can be defined as that cost of the other alternative opportunity which is surrendered (Marshall, 2013). If the economy decides to produce butter with all the resources then opportunity cost of producing butter is the quantity of machines which is given up by the economy.

Microeconomics - Question 2

In a competitive market and real world the supply and demand forces are in equilibrium when both the forces are equal or simply when both of economic forces are in equilibrium and they intersect each other. Equilibrium is a state of balance. It is a situation where the forces working in opposite directions are brought to balance. In context of demand and supply forces it is the place where quantity demanded equals to quantity supplied. In a competitive market a single consumer or producer has no influence over the market price and therefore, has no role to play in determination (Taylor et al., 2017). Instead, the price is determined through the interaction of market demand and market supply. Market demand has inverse function of price as price fall the demand for good increases and market supply has direct function of price. The producers are willing to supply at a higher price of goods. This can be depicted with the help of a diagram.

As shown in the diagram above point E is the point of equilibrium as here both the Supply and Demand forces are intersecting. Level Q is the equilibrium level of quantity where price P depicts the equilibrium level of price at which the goods and services are bought and sold in the market. Suppose an industry sells consumer goods with the demand and supply schedule as:

Price

Quantity
demanded

Quantity Supplied

Market Position

Effect on Price

500

100

500

Excess of Supply

Decrease

400

200

400

Excess of Supply

Decrease

300

300

300

Equilibrium

Constant

200

400

200

Excess of Demand

Increase

100

500

100

Excess of Demand

Increase

As shown in the diagram the equilibrium is at point P where Quantity demanded equals Quantity supplied which is at 300 units. When price increases to 400 it results in creating excess of supply in the economy. So to balance the economy the price comes back to equilibrium level of 300. When price decreases to 200 it results in creating excess of demand in the economy. So to balance the economy the price rises and comes back to equilibrium level of 300.

References for Principles of Economics

Jhinghan, M. L. (2016). Microeconomic Theory. New Delhi: Vrinda Publications

Marshall, A. (2013). Principles of Economics. United Kingdom: Palgrave Macmillan.

Taylor, T., Shapiro, D., Greenlaw & S. A. (2017). Principles of Economics 2e. United States: OpenStax.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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