Individual Assignment

MicroEconomics

Topic: The Economic Problem

Concepts:
I.

Scarcity

II.

Opportunity Cost

III. Changes in Price

IV. Monopoly

Written by Shamiha K Saan

Instructor: Ms Marina Mustapha

Individual Assignment

MicroEconomics

Scarcity
All resources in the world are scarce by definition. Scarcity leads to choices depending on the
preferences and availability of resources. Details of how scarcity affects different stakeholders are
as follows.

Individual
When a resource is said to be scarce the price of it and its complements exceeds depending on the
demand. A product being rare can also increase its appeal among individuals. This affects
individuals to pay higher price for a product due to its scarcity.
Example: During the early 19th century alcohol was prohibited for a period in USA, pushing the
price to a high level and reserved for wealthy. Whereas at todays time the alcohol is available
widely making it cheaper than before. Luxury items manufacturers milk this concept of desire and
want by using this method often to rationalising its products.

Families
Scarcity will cause an epidemic in families since the requirement may exceed the availability.
Moreover the price of the product increases due to lack in supply and increased demand. Families
will face tough times and would have to find substitutes. Migration to a country with availability of
needed resource at a cheaper price is also a common factor.
Example: Malaysias cost of living is fairly lower than Singapore so Malaysia have many
Singaporean families moving to Malaysia due to economical problems.

Individual Assignment

MicroEconomics

Firms
Firms who are facing scarcity in their production materials will have to look for substitutes and use
the scarce resource optimally while charging the goods in high price due to it. This will affect firms
demand as the price will be high. Firms would use Limiting factor analysis to produce those
products thats yields most favourable returns per scarce resource.

Example: A garment fabric named Grey Fabric in Bangladesh was low in supply in local market
since most was being exported. The scarcity of the fabric raised its price forcing firms to limit or
discontinue producing products using that fabric.

Government
Government has a power decide on allocation of resources at the national level to deal with scarcity.
The government allocates its funds and resources to the sectors that benefit the economy such as
education and security. Government may use the concept of Opportunity Cost to find the most
suitable substitutes. Sometime this may lead a society to aim for a more command economy.
Example: In Bangladesh gas is in short supply hence government puts limitation on the usage of
gas in firms to reserve a share for individuals.

Society
When there is a scarcity in society it may lead to poverty and irregularity in lifestyle. Societys
outcomes will result by what the government does when there is a scarcity of a certain product.
Example:
Syria is lacking in common necessity and is in scarce of standard necessities to live with that the
government has abandoned the country during this hard time. The society will now perish in
poverty or migrate to a more greener pasture as here the scarcity will correspond with the countrys
standard of living rather than cost of living.

Individual Assignment

MicroEconomics

Opportunity Costs
An Opportunity cost is the benefit forgone from the next best alternative. All decisions require a
tradeoff hence different groups may be affected by it variably as mentioned below.

Individual
The concept of want being unlimited and our income being limited correlates with each other in
opportunity cost. So in order to satisfy individual wants; an individual will use this concept to
decide what they can achieve with their limited income. In another way to say that opportunity cost
is the price of the choice that the individual decided not to purchase.
For example: A high school graduate has two choices either to work and earn minimum wage or
attend college and earn higher salary. If the graduate chooses to attend college then working and
earning money is his opportunity cost.

Families

Individual Assignment

MicroEconomics

Opportunity of cost will be affect families in decision making in what to choose what to do with
their limited finance/resources. Opportunity costs affect a familys lifestyle.
Example:
If a family of three have an account with 50,000 USD they could either spend it to buy a new house
or send their child to college. The family chooses to send their child to college . The new house was
their opportunity cost.

Firms
In firms, Opportunity Cost concept will be used as a decision maker to choose between alternate
products and services that will earn them the maximum profit. This affects firms positively by
helping them to allocate their resources efficiently and profitably.
Example:
If a factory can make product A and B but they have the capacity to produce only one. The firm will
choose the profitable product. One product will be the opportunity cost of the other.
Product(A)1 unit: 20mins to Produce, Sold for 30rm, easy to produce.
Product(B )1 unit: 40mins to Produce, Sold for 100rm, tough to produce.

Government
A government have limited fund so they cant spend above the budget. Opportunity cost will affect
the governments choices. Opportunity cost concept will motivate governments to specialise in a
product that has a lower opportunity cost and import the products that has a higher opportunity
costs to produce.
Example: Bangladesh government can build a new road or a railway with the the given money they
are required to choose wisely. So if the government chooses to build a road then the railway will be
opportunity cost.

Societies
Opportunity Cost affected society by not choosing poverty over employment. The societies makes
the trade off that creates opportunity costs so without society there would be no wants hence
nothing would be required to let go.

Individual Assignment

MicroEconomics

Example:
If XYZ decides has the chance to vote for Donald Trump or Hilary Clinton and decides to choose
Hilary Clinton then she as a part of society decided on something.

Changes in Price
A change in price leads to increase or decrease in demand or supply as per the Law of Demand
and supply. Changes in price affects various groups as explained below.

Individuals
Changes in price would affect individuals demand as per the Law of Demand. The demand
increases as the price decreases and vice versa. Individuals look for a substitute when the price
increases and the compliment products demand also decreases with the increase in products price.
Example: In the early 60s Robert Kuok (Malaysias richest man) did a takeover by purchasing low
priced sugar from India before the prices hike. He could sell it at a competitive price that led to a
high demand.

Individual Assignment

MicroEconomics

Families
Depending on the rise or fall of price it will affect families with advantages or disadvantages. If the
price rises then families will need to find alternative or substitute good and use the method of
opportunity cost to decide.
Example
Granny Smith Apples were sold for RM 10 per unit in year 2000 which was quiet high priced
however in mid 2008 the apples were priced RM 2 per unit at Jusco supermarket which causes an
uproar among grocery shoppers. The demand was high due to the price dropping.

Firms
A change in price may affect firms on their purchases and sales. Change in prices for purchase
goods may affect the usage level and the ingredients of a product. Changes in price for sales are
subject to Price Elasticity of demand and supply. Firms tend to supply more when the price
increases and vice versa i.e. Law of supply.
Example
When Petrol prices are about to increase the next day, Petrol stations tend to limit supply to obtain
an advantage of a higher price the next day by increasing supply to earn a higher profit.

Government
Government revenue and reserves are affected by price changes. An increase in price of a product
will increase the indirect tax. Government would set price ceilings for necessary goods and price
floors for luxury goods.
Example
Malaysian Government has set a fixed price for cigarettes to limit its consumption. And it doesnt
charge GST for most basic necessary products like vegetables, rice, wheat and meat.

Individual Assignment

MicroEconomics

Society
Price changes affects the societys cycle of the economy and can hamper or fix the economy by the
fall and rise of price.
Example: Bangladesh is a third world country and the societys first demand would necessity
goods so if the price of these necessity goods rise exceedingly then people will limit purchasing
grocery.

Monopoly
A monopoly is a firm that rules the whole market either by its specialisation for the product or
imposition by a government.

Individuals
Monopoly affects individuals as they lack choice and the price charged can also tend to be more
than a fair market value. Individuals would have no substitute.
Example: In 1990s Bangladesh had only one cable TV company named XYZ. The company had
many criticisms about their service and glitches in the products but all complains would go unheard.
In 2014 Netflix and TATA sky was introduced so the company XYZ to compete they had to fix their
glitches and customer services.

Families

Individual Assignment

MicroEconomics

Monopoly affects families by price gauging since they are the only big players in the field which
gives them the advantage of controlling the price. This could affect individuals who are habitual to
certain product. If basic necessity goods were monopolised such as water and electricity by private
company they can easily hike up the price but usually monopolies owned by government lower the
price by economies of scale.
Example: Martin Shkreli is a good example of monopoly. Martins company Turing bought
Daraprim where he raised the price from US$13.50 to US$750 which is almost a 5500% increase in
price. Since his company was one of the biggest player in the field , he could control the price
easily. The medicine was crucial to many patient and was needed readily so they were bound to pay
the abnormal price.

Firms
New Firms would have barriers to entry as they cant compete with the monopoly. Monopolys
biggest advantage is economies of scale. Firm acting as a monopoly is a price maker rather than a
price taker.
Example
Microsoft back in the days monopolised the computer software market even though its a private
company. It was tough for other software companies to compete.

Government
Government usually gets affected by privately owned monopolies even though in most cases
monopolies are owned by government. The private monopolies can determine their own price and
can throw a price to the public. Private companies usually seek profit so they might use technology
advance instead of human labor which will cause unemployment. Unemployment leads indirectly to
crimes.
Example
Armed forces of a country is an example of a monopoly which is owned and governed by
government. No other firm is allowed to intervene.

Society

Individual Assignment

MicroEconomics

10

Monopoly affects society having full control of a communitys market and this may tighten the
consumers liberty when it comes to that monopolised good or services.
Example:
ABC is a poor country and they decided to sell their only Power Plant in the country to a private
owner. The new owner decides that he wants to raise the price by n(initial price) + 5%. The society
will be bound to pay the price the new owner asks for as electricity is a necessity nowadays.

Reference