Microeconomics Questions And Answers

Perfectly elastic demand and why a change in price will eliminate all the demand from the market

When the value of the crops increases $80 to $100 per hectare while adding 1kg of fertiliser per hectare, the farmer can only have profit when the price of the fertilizer will be less than $20 per kilogram (Azevedo & Gottlieb, 2017). The marginal analysis will be calculated as $100-$80= $20. Therefore, there will be again for the farmers and he will produce the fertilizers only when the price of the fertilizers will be less than $20.

With $10 Bill has decided to buy the action figure of the Superman. However, the opportunity cost of buying the Superman action figure is the Graphic novel of the Batman. This is because opportunity cost is the next best alternative that is not chosen (Chodorow-Reich & Karabarbounis, 2016). Here the graphic novel of the Batman was second best choice for Bill after the Superman action figure. Therefore, when Bill decides to pay$10 on an action figure of Superman, a graphic novel of Batman or a T-shirt of X men, the opportunity cost of buying the action figure of Superman will be the Batman Graphic Novel as that is the close second choice of Bill. The X men T shirt could not be the opportunity cost of the action figure as the former was not the second choice of Bill.

 Fig 1: Perfeclty elastic demand

(Source: Kolmar, 2017)

Australian farmers have to produce wheat at a fixed price. Therefore, whatever be the quantity of wheat supplied the farmers cannot alter the price of the wheat and they have sell the wheat at the same price. This is because other farmers are selling the wheat at a particular price, so the Australian farmers will also have to sell wheat at the same price. However, when the farmers will change alter the price of wheat it will lose all it buyers when the price of wheat will be increased. This is a situation of perfectly elastic demand curve where price will not alter along with the change in the quantity supplied (Nagle & Müller, 2017).  This states that a change in price will eliminate all the demand from the market. When there is a perfectly elastic demand consumers can switch to other alternatives.

In a market which is perfectly competitive there is a presence of lots of firms. Therefore, in order to succeed and in order to stay in competition firms will have to innovate and work hard to do something new so that customers are attracted to it. In the modern world developing and producing better services is very necessary. Therefore, a firm in a competitive market need to innovate to perform well in market (Azevedo & Gottlieb, 2017). Had the firm been in a monopolistic market, it could have skipped innovation as it would have been the sole seller of the products. Due to inefficiencies a firm may face huge losses, so firms must innovate new ideas so that it can increase their efficiencies and are not left behind. However, competitive markets can hinder innovation like when there is huge competition in the market and the firms may not earn high profits at that time it is not possible to spend enough money for innovation.

Price elasticity of demand and how it is calculated using the midpoint formula

There are many differences between a monopolistic market and a perfect competition market. The first one is the entrance of new firms in the market. In case of perfect competition there is no restrictions on the entrance of new firms in the market. New firms may enter and exit whenever they want ( Zeuthen, 2018). However, in case of monopoly there is a presence of strong barriers on both the entry and exit of the firms in the market. Firms cannot enter or exit in the monopoly market according to their will.

The second one is the output and the price. In case of perfect competition the marginal cost of the product will be equal to the price at the equilibrium output. However, in case of monopoly the price of the product will be always greater than the average cost.

Total revenue is the product of price and quantity. When the firm increases its sale of a product there will be increase in revenue also. When there is double the amount of output sold by the firm the total revenue of the firm also tends to doubles provided the price does not changes (Kolmar, 2017). When a frim sells greater quantity the revenue earn will also increase simultaneously. Therefore, when a firm in the perfectly competitive market doubles the quantity of a product is sells, price remains the same and the total revenue earned also increases twice. Total   revenue consists of the product of the price and the quantity sold therefore, doubling total revenue will result from doubling of the quantity produced.

P ($)	Qd
16 14	25 35

 When price falls from $16 to $14 the change in price is $10. The proportionate change in the quantity demanded will be change in quantity divided by the midpoint of Q

35-25/30 =10/30= 0.33

Therefore, the proportionate change in the quantity demanded will be 0.33

The price will have a proportionate change when it falls down from $16 to $14. The % age change in price when price of the product falls down will be change in the price divided by the midpoint of P

14-16/15= -2/15= -0.13

Therefore, the proportionate change in the price will be -0.13

The price elasticity of demand is calculated by dividing percentage change in quantity demanded by percentage change in price.

From the above answers the percentage change in quantity demanded is 0.33 and the percentage change in price is -0.13. Therefore, by dividing them 0.33/-0.13 the answer is -2.53.

The price elasticity of demand therefore is 2.53.

The mid- point formula of price elasticity of demand is

(Q_2-Q₁)/[( Q₂₊ Q₁)/2] divided by (P₂-P₁)/[( P₂ + P₁ )/2]

=35-25/[(35+25)/2] divided by (16-14)/[(16+14)/2]

=10/30 divided by 10/15

=0.33/0.13

=2.53

The price elasticity of demand by mid -point method id 2.53

1. When the refining petrol will be expensive the equilibrium point X will move to h. As price of the petrol increases the supply curve will move from S0 to S2. The supply curve shifts up and the new equilibrium point is at h where the quantity demanded also falls and the price of the petrol increases.
2. When there is decrease in fares of train and buses the equilibrium point X shifts to The price of the trains and buses that runs on petrol must have gone down because the petrol might have gone cheap. As petrol prices have got cheaper the equilibrium point moves from point X to point f.

• The equilibrium point will move from point X to point e when crude oil prices will go down and there will be an increase in the price of cars. The fall in prices of the crude oil makes petrol cheap and as result the demand for crude oil moves from D0 to D2 and supply curve shifts from S0 to S1

1. When petrol becomes expensive along with a decrease in tax for cars, the equilibrium point will move from X to point As petrol becomes expensive the price of petrol increases and the supply curve shifts up.

Fig2: Price floor

(Source: Horton, 2017).

The minimum price that the government fixed in order to protect the producers is called the price floor. The market price of cheese is p* whereas the government will charge higher price PF which is the price floor (Horton, 2017). The buyers usually buy Q* unit of cheese initially at the equilibrium price.

1. ii)  There will be an excess supply of the cheese sold of Q(d) Q(s). Due to the price floor the farmers end up supplying excess quantity of cheese.

iii) Yes, it is in some case possible that the price floor has reduced the total revenue received by the farmer from selling cheese. As the government usually charges high price when the market price if cheese is itself low. However, the price may not be very remunerative and the farmers might demand more rise in the price.

1. iv) When the government buys all the excess cheese at the price floor the producer or the farmer will gain where the buyers will face loss (Horton, 2017). The farmers will receive a huge revenue of which part of the revenue will be provided by the buyers. Both the buyers and the taxpayers will add to the farmers revenue.

References

Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse selection. Econometrica, 85(1), 67-105.

Chodorow-Reich, G., & Karabarbounis, L. (2016). The cyclicality of the opportunity cost of employment. Journal of Political Economy, 124(6), 1563-1618.

Herings, P. J. J. (2018). Equilibrium and matching under price controls. Journal of Economic Theory.

Horton, J. J. (2017). Price floors and employer preferences: Evidence from a minimum wage experiment.

Kolmar, M. (2017). Principles of Microeconomics. Springer International Publishing.

Low, P. (2016). International trade and the environment. UNISIA, (30), 95-99.

Mahoney, N., & Weyl, E. G. (2017). Imperfect competition in selection markets. Review of Economics and Statistics, 99(4), 637-651.

Microeconomics, E. E. (2015). KELVIN WONG. Cell, 808, 386-8406.

Nagle, T. T., & Müller, G. (2017). The strategy and tactics of pricing: A guide to growing more profitably. Routledge.

Oladosu, G. A., Leiby, P. N., Bowman, D. C., Uría-Martínez, R., & Johnson, M. M. (2018). Impacts of oil price shocks on the United States economy: A meta-analysis of the oil price elasticity of GDP for net oil-importing economies. Energy Policy, 115, 523-544.

Pigou, A. (2017). The economics of welfare. Routledge.

Plantinga, A., Krijnen, J. M., Zeelenberg, M., & Breugelmans, S. M. (2018). Evidence for opportunity cost neglect in the poor. Journal of behavioral decision making, 31(1), 65-73.

Zeuthen, F. (2018). Problems of monopoly and economic warfare. Routledge