BBA 2002

PRINCIPLE OF MICROECONOMIC

TAN WAH TIONG

940928-14-5531
201565

CHONG KAR YUN

JULY 2013
NO

DETAIL

PAGE

1.0

Contents

2.0

Introduction

2
Page 0 of 17

3.0

Task 1

3-4

4.0

Task 2

5-6

5.0

Task 3

7-11

6.0
7.0

Reference
Coursework

12
13-15

2.0 Introduction
Microeconomics (from Greek prefix micro- meaning "small" and economics) is a
branch of economics that studies the behaviour of individual households and firms in

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making decisions on the allocation of limited resources (see scarcity).[1] Typically, it

applies to markets where goods or services are bought and sold. Microeconomics
examines how these decisions and behaviours affect the supply and demand for goods
and services, which determines prices, and how prices, in turn, determine the quantity
supplied and quantity demanded of goods and services.[2][3]
This is in contrast to macroeconomics, which involves the "sum total of economic
activity, dealing with the issues of growth, inflation, and unemployment."[2]
Microeconomics also deals with the effects of national economic policies (such as
changing taxation levels) on the aforementioned aspects of the economy.[4] Particularly
in the wake of the Lucas critique, much of modern macroeconomic theory has been
built upon 'micro foundations'i.e. based upon basic assumptions about micro-level
behaviour.
One of the goals of microeconomics is to analyse market mechanisms that establish
relative prices amongst goods and services and allocation of limited resources amongst
many alternative uses. Microeconomics analyses market failure, where markets fail to
produce efficient results, and describes the theoretical conditions needed for perfect
competition. Significant fields of study in microeconomics include general equilibrium,
markets under asymmetric information, choice under uncertainty and economic
applications of game theory. Also considered is the elasticity of products within the
market system.

3.0 Task 1
To discover whether expanding to program make economic sense, we must compare
marginal cost and marginal benefit. However, Professor just tell us about the average
cost and the average benefit of the program which are respectively the total cost of the
program divided by the number of launches and the total benefit divides by the number

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of average benefit and average cost per launch for all shuttles launched thus far I simply
not useful for deciding whether to expand the program.
The average cost of the launches undertaken so far might be the same as the cost of
adding another cost of the launch. But it is also might be either higher or lower than the
marginal cost of a launch. The same statement holds true regarding average and
marginal benefits.
Table 1.1
Number of launches
Total cost ($ billions)
Average cost ($ billion / launch)
0
0
0
1
3
3
2
7
3.5
3
12
4
4
20
5
5
32
6.4
For the sake of discussion, that the benefit of an additional launch is the same as the
average benefit per launch, $6 billion. The average cost per launch (third column) when
there are four launches would then be $20 billion/ 4 = 45 billion per launch, just as
Professor Banifoot testified. But note in the second column of the table that adding a
fifth launch would raise costs from $ 20 billion to $32 billion, making the marginal cost
of the fifth launch $12 billion. So if the benefit of an additional launch is $ 6 billion,
increasing the number of launchers from four to five would make absolutely no
economic sense.
Table 1.2
Number of launches
0
1
2
3
4
5

Total cost ($ billions)

0
3
7
12
20
32

Marginal Cost ($ billion / launch)

0
3
4
5
8
12

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4.0 Task 2
2.1
The quantity of pizza sold is 10,000 slices per day when marginal buyers reservation
price is $2.50. For the same demand curve, the quantity of pizza demanded is14, 000
slices per days when it is at a price of $2.50 per slice
2.2
The quantity of pizza sold is 10,000 slices per day when the marginal cost of a slice of
pizza is $2.50. For the same supply curve, the quantity of pizza sold is 14,000 slices per
day when the quantity of pizza supplied.
2.3
The effect of a law that prevents rents from rising above $1,200 per month is the
quantity of apartments being rent will not increase.
2.4
When the decline in airfares is decrease, the intercity bus fares will decrease and the
price of hotel rooms in resort communities will also increase. As a conclusion, increase
or decrease in decline in air fares will affect the intercity bus fares and the price of hotel
rooms in resort communities

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2.5
The large pay increase for federal employees will not affect the rents for apartments
located far away from Washington Metro station because it will take longer time to
reach the Washington Metro station and no need to waste this expense to reach a far
distance area.
2.6
The conclusion regarding the researchers discovered that the benefit of the corn which
contain vitamin can helps protect against cancer and heart decease. It will cause demand
curve shift to the right. The situation that a swarm of locusts destroy the part of the corn
crop will cause demand curve shift to the left, as the people will think that the
healthiness of the chip will affect by the locusts.
As a conclusion, the equilibrium quantity will be increase while the demand curve
shifting to right but the equilibrium quantity will be decrease whiles the demand curve
shifting to left.

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5.0 Task 3
3.1

% change in quantity
% change in price
Elasticity =

20
5

: Elastic

12,000 10,000
10,000
*% change in quantity =

100%

2,000
10,000
=

100%

= 20%

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*% change in price =

400 380
400

20
400

100%

100%

= 5%
Yes, the demand for ski passes elastic with respect to price.

3.2
3.2.1

P
1
( )(
)
Q slope
Price elasticity =

8 1
( )( )
3 4

8
12

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2
3

vertical intercept
horizontal intercept
*slope =

20
5

=4

3.2.2

P
1
( )(
)
Q slope
Price elasticity =

4 1
( )( )
4 2

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1
2

vertical intercept
horizontal intercept
*slope =

12
6

=2

3.2.3

P
1
( )(
)
Q slope
Price elasticity =

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1 1
( )( )
10 1
2

1
5

vertical intercept
horizontal intercept
*slope =

6
12

1
2

5.3

% change in quantity demanded

% change in income
Income elasticity =

5
10

= 0.5

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3.4

P
1
( )(
)
Q slope
Price elasticity of supply =

6 1
( )( )
1 2

=3
64
1 0

*slope =

2
1

=2

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6.0 Reference
- www.google.com
- http://en.wikipedia.org/wiki/Microeconomics
-

http://mx.nthu.edu.tw/~cshwang/teaching-economics/econ1003/econ1003-01
introduction/econ1003-01-required/Taylor
Berneke=Thinking%20like%20an%20Economist.pdf

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7.0 Coursework
Different between microeconomics and macroeconomics
1. Microeconomics

Microeconomic analyses the specific economic units in detail such as household, firms
and government. Microeconomics is like looking through a microscope, which focuses
into small units and provides an outline for choices and decision making of individual,
business and public.

Microeconomics explains how scarce resources are allocated for the production
of various products. It also explains the pricing of the goods and services as well as the
distribution elements studied in microeconomics. The theory of product pricing involves
the relative prices of goods and services, which depend upon the forces of demand and
supply. The demand comes from consumer while the supply from firms.

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On the other part, microeconomics studies how pricing of facto services such as
wages, rents, interests and profits are determined in the market. The determination of
factor prices is analyzed through the demand and supply of factor of production.
Another area in microeconomics is analyzed through the demand and supply of factor of
production. Another area in microeconomics is the economics efficiency, which
involves efficiency in production, efficiency in distribution and overall efficiency.

2. Macroeconomics

Macroeconomics analyses the aggregate behavior of the entire economy.

Macroeconomics studies not only the individual economics units but the entire system
which deals with the aggregate such as gross domestic product, national income,
inflation, deflation, total employment, public finance, trade cycle, international trade
and others.

Basically, macroeconomics studies the theory of consumption function and

theory of investment function with the theory on business cycle that explains fluctuation
in output, income and employment. Theory of economic growth is employment, which
is essential for any country.

Let us look at the main differences between microeconomics and

macroeconomics that are summarized in Table 1.1

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Microeconomics

Macroeconomics

Studies on distribution of income and minimum wage

Studies on national income and total wages

rates.
Analyses demand for and supply labor such as number

Analyses total employment the economy and

of employees in an industry.

also unemployment problem.

Deals with household and firms decisions.

Deals with aggregate decisions.

Studies on individual prices of goods and services such

Studies on overall price level such as consumer

as price of petrol, sugar and others.

price index, which indicates the inflation rate.

Analyses demand and supply of individual.

Analyses aggregate demand and aggregate

supply.

Studies on the production and cost in an industry such

Studies on national output such as gross

as number of TVs produced in Sony company.

domestic product and also growth rate.

Disadvantages of planned economy

Lack of incentive and initiatives by individuals: there is absence of profit motive

in individuals. This will lead to economic inefficiency since jobs are provided by
the government and individuals are not motivated to work harder.

Loss of economic freedom of consumers: there is no choice given to consumer

and they accept whatever the public enterprises produce. There are limited

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variety of goods and services and restricted available choice. Limited private
organizations exist in socialist system.

Absence of competition: since there are limited private enterprises, less research
and development (R&D) activities are carried out. This result in low quality
products since there is no competition.

Waste of economic resources: government might produce goods and services

that are not required by the people such as military equipment. This will lead to
overproduction of certain goods and underproduction of others.

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