MICROECONOMICS

8 th Edition
Robert S. Pindyck

Chapter 1
Preliminaries

1. What is a market
2. Competitive versus Non competitive market

Chapter 2
The Basic of Supply and Demand

1. Define demand. Define supply

Ans: Demand: Demand is how much consumers are prepared to buy at the market price.
An economic principle that describes a consumer's desire and willingness to pay a price for a
specific good or service. Holding all other factors constant, the price of a good or service
increases as its demand increases and vice versa
Supply: Supply is what producers are prepared to sell at a certain price. The supply of a
good or service is defined as quantities of a good or service that people are ready to sell at
various prices within some given time period, other factors besides price held constant.
Demand is the total amount of demand at all possible prices; while quantity demanded is the
demand at a particular price.
Supply is the amount of a product offered for sale at all possible prices that can succeed in a
market; while quantity supplied is the amount that producers are willing and able to supply
are a certain price.

2. List non price factors that influence demand and supply

Ans: Non-price determinants of demand
• Tastes and preferences
• Income
• Prices of related products
• Future expectations
• Number of buyers
Non-price determinants of supply
• Costs and technology
• Prices of other goods or services offered by the seller
• Future expectations
• Number of sellers
• Weather conditions
Tambahan barang substitusi dan barang komplementer

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3. In defining demand and supply, why do you think
economists focus on price while holding constant other
factors that might have an impact on the behavior of
buyers and sellers?
Ans: The reason is that consumers are willing and able to buy more of a good the lower the
price of the good and will buy less of a good the higher the price of the good. Price and
quantity demanded are negatively (inversely) related because when the price of a good rises,
consumers tend to shift from that good to other goods that are now relatively cheaper.
Conversely, when the price of a good falls, consumers tend to purchase more of that good and
less of other goods that are now relatively more expensive. Price and quantity demanded are
inversely related when all other factors are held constant. This relation between price and
quantity demanded is so important that we discuss it in more detail later.

4. The law of demand and the law of supply

The law of supply

The higher the price, the more firms are able and willing
to produce and sell.

The law of demand

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 The demand curve is downward sloping; holding other
things equal, consumers will want to purchase more of a
good as its price goes down.

5. Movement along the demand and the supply

In other words, a movement occurs when a change in quantity supplied is caused

only by a change in price, and vice versa. Meanwhile, a shift in
a demand or supply curve occurs when a good's quantity demanded
or supplied changes even though price remains the same
6. Shift the demand curve and supply curve

7. What is the market mechanism and restriction of market

mechanism?

8. Advantages and disadvantages market mechanism

9. Effects of Government Intervention

Ceiling price : batas atas harga yang ditetapkan
pemerintah di bawah harga pasar untuk melindungi
konsumen.
Floor price : batas terendah yang ditetapkan pemerintah
untuk melindungi produsen
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Elasticity
1. Explain what an elasticity of demand represents and how it is measured
2. Identify what factors determine whether demand is elastic or inelastic
3. Factors affecting the own price elasticity of demand
4. Relation of elasticity and total revenue
5. Perfectly elastic demand
6. Perfectly inelastic of demand
7. Explain the meaning of cross price elasticity of demand
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 8. Explain the meaning of income elasticity of demand
9. Explain the meaning elasticity of supply
10. Understand the distinction between arc elasticity and point
elasticity

Short Problems for elasticity.

1. (a) Would you expect the price elasticity of demand to be higher for Chevrolet
automobiles or for automobiles in general ? Why ? (b) Would you expect the
price elasticity of demand for electricity for resindential use to be higher or lower than
for industrial use ? Why ? (c) Would you expect the price elasticity of demand for
electricity to be higher or lower in the short run as compared with the long run ?
Why ?

2. Agricultural commodities are known to have a price – inelastic demand and to be

necessities. How can this information allow us to explain why the income of farmers
falls (a) after a good harvest ? (b) In relation to the incomes in other sectors of the
economy ?

3. . Suppose that the cross-price elasticity of demand between McIntosh and Golden
Delicious apples is 0,8, between apples and apple juice is 0,5, between apples
and cheese is 0,4, and between apples and beer is 0,1. What can you say about the
relationship between each set of commodities ?

4. .A researcher estimated that the price elasticity of demand for automobiles in the
United States is – 1.2, while the income elasticity of demand is 3.0. Next year, U.S.
automakers intend to increase the average price of automobiles by 5 percent, and
they expect consumers; disposable income to rise by 3 percent. (a) If sales
domestically produced automobiles are 8 million this year, how many automobiles
do you expect U.S. automakers to sell next year ? (b). By how much should
domestic automakers increase the price of automobiles if they wish to increase sales
by 5 percent next year ?

5. .The management of the Mini Mill Steel Company estimated the following elasticities
for a special type of steel : Ep = - 2, EI= 1, and Exy = 1,5, where X refers to steel and
Y to aluminum. Next year, the firm would like to increase the price of the steel it sells
by 6 percent. The management forecasted that income will rise by 4 percent next
year and that the price of aluminum will fall by 2 percent. (a) If the sales this year are
1,200 tons of the steel, how many tons can the firm expect to sell next year ?
(b) By what percentage must the firm change the price of steel to keep its sales at
1,200 tons next year ?

6. Suppose the own price elasticity of demand for good X is - 2, its income elasticity is
3, its advertising elasticity is 4, and its cross price elasticity of demand between it
and good Y is – 6. Determine how much the consumption of this good will change if:
a. The price of good X increases by 5%
b. The price of good Y increases by 10%
c. Advertising decreases by 2 %
d. Income falls by 3%
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7. The ACME Corporation determines that at current prices, the demand for its computer
chips has a price elasticity of - 2 in the short run. The price elasticity of its disc drivers is
– 1. a). If ACME decides to raise the price of both products by 10%, what will
happen to its sales? To its sales revenue? b) Can you tell from the above information
which product will generate more revenue? If yes, which one?

8. Integrating Problem
The research depertment of the Corn Flakes Corporation (CFC) estimated the following
regression for the demand of the cornflakes it sells :
Qx = 1.0 – 2.0 Px + 1.5I + 0.8Py – 3.0 Pm + 1.0A

Where Qx = sales of CFC cornflakes, in millions of 1- ounce

boxes per year
Px = the price of CFC cornflakes, in dollars per 10 ounce box
I = personal disposable income, in trillions of dollars per year
Py = price of competitive brand of cornflakes, in dollars per 10 ounce box
Pm = price of milk, in dollars per quart
A = advertising expenditures of CFC cornflakes, in hundreds of thousands
of dollars per year

This year, Px = $2, I=$4, Py = $2,50, Pm= $1, and A =$2. (a) Calculate the sales of CFC
cornflakes this year; (b) calculate the elasticity of sales with respect to each variable in the
demand function; (c) estimate the level of sales next year if CFC reduces Px by 10 percent,
increase advertising by 20 percent, I rises by 5 percent, Py is reduced by 10 percent, and
Pm remains unchanged. (d) By how much should CFC change its advertising if it wants its
sales to be 30 percent higher than this year ?

Chapter 3
Consumer Behavior
1. Explain four basic assumptions about preferences
2. What is indifference curves
3. Suppose that a set of indifference curves was not negatively sloped.
What could you say about the desirability of the two goods?
4. Explain why two indifference curves cannot intersect.
5. Ordinal versus cardinal utility
6. Can money buy happiness?
7. Explain why MRS between two goods must equal the ratio of the
price of the goods for the consumer to achieve maximum
satisfaction

Chapter 4
Individual and Market Demand
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 1. Prices changes
2. Income changes
3. Income and Substitution effects
4. Distinguish between the income and substitution effects when
price change
5. Distinguish between the inferior and normal goods when
income change
6. Explain the difference between each of the following term:
a. Price consumption curve and demand curve
b. An individual demand curve and a market demand curve
c. An Engel curve and demand curve
d. An income effect and substitution effect
e. Engel curves always slope upward

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