Microeconomics Solve Economic Problems

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ASSIGNMENT MICROECONOMICS

MODULE CODE PEC2343

Tasks:

Question 1

Explain three (3) basic problems and how the difference economic systems solve the economic problems.

The economy is a mechanism that allocates scarce resources among alternatives uses. There are three basic problems such as How?, What?, and Who?.

First of the various problems of an economic is what to produce. It is a first basic problem of an economy. The economy is to be decided what type of goods should produce. The specific goods are should be produced in systematic way. The goods are very much capable to satisfy what consumer wants. The production is a priority of more success in the society. So, what to produce is most success in the economy. If a country produces goods in a way that maximises consumer satisfaction then the economy is allocate efficient.

Then, how will the various goods and services can be produced? It depends on the cheapest method of production. Just like techniques production, capital intensive or labour intensive. It’s also on how you want to produce the product. Will a supermarket operate with three check-out lines and clerks using laser scanner or six check-out lines and clerks keying in prices by hand? Will workers weld cars by hand or will robots do the jobs? Will farmers keep track of their livestock feeding schedules and inventories by using paper and pencil record or personal computers? This problem is how to combine production inputs to produce the goods decided in problem on what you want to produce as most efficiently as possible. An economy achieves productive efficiency if it produces goods using the least resources possible. A productively efficient economy is represented by an economy that is able to produce a combination of goods on the actual curve of the Production Possibilities Frontier (PPF).

Then, the third basic economy is who will consume the various goods and services? Should the economy produce goods targeted towards those who have high incomes or those who have low incomes? What sort of demographic group should the goods in the economy that are produced be targeted towards? If the economy is addresses this problem then it has reached efficiency or optimality. People with high incomes are able to consume move goods and services than people with low incomes. Who gets to consumer what thus depends on incomes.

First economic system solving the basic economic problem is market economy. Markets enable mutually beneficial exchange between producers and consumers, and systems that rely on markets to solve the economic problem are called market economies. In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers. Market economies work by allowing the direct interaction of consumers and producers who are pursuing their own self-interest. The pursuit of self-interest is at the heart of free market economics.

The second solution to the economic problem is command economy where the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways. For example, governments can force citizens to pay taxes and decide how many roads or hospitals are built. Command economies have certain advantages over free market economies, especially in terms of the coordination of scarce resources at times of crisis, such as a war or following a natural disaster. Free markets also fail at times to allocate resources efficiently, so remedies often involve the allocation of resources by government to compensate for these failures. Command economies have certain advantages over free market economies, especially in terms of the coordination of scarce resources at times of crisis, such as a war or natural disaster. Free markets alsofailat times to allocate resources efficiently, so remedies often involve the allocation of resources by government to compensate for these failures. There is a third type of economy involving a combination of market forces and central planning, called mixed economies.

Then, mixed economies also one of the economic system that may have a distinct private sector, where resources are allocated primarily by market forces, such as the grocery sector of all the economy. Mixed economies may also have a distinctpublic sector, where resources are allocated mainly by government, such as defence, police, and fire services. In many sectors, resources are allocated by a combination of markets and panning, such ashealthcare and, which have both public and private provision. In reality, all economies are mixed, though there are wide variations in the amount of mix and the balance between public and private sectors. For example, inCubathe government allocates the vast majority of resources, while in Europe most economies have an even mix between markets and planning. Economic systems can be evaluated in terms of how efficient they are in achieving economic objectives.

Question 2

Explain the concept of scarcity, choice and opportunity cost. Give an example for each support your explanation.

There are three basic concepts of economics such as scarcity, choice, and opportunity cost. All economic questions arise from a single and inescapable fact that you can never get everything you want. The answer is the presence of scarcity.

Scarcity means that wants exceed the resources available to satisfy them or the condition in which resources available are not enough to meet all wants. On the other hand, scarcity also limited resources to produce these goods and services just like society wants. For an example, there are not enough car factories to provide cars to everybody on earth. Scarcity is not poverty. The poor and rich both face scarcity. For example a child wants a RM 0.77 cent can of soft drink and RM 0.66 cent chocolate bar but has only RM 1 in her pocket. She experience scarcity. We are always uncovering of new wants and needs which producers attempt to supply by using factors of production. Scarcity is simply the concept that human wants exceed the resources available that are necessary to produce the goods used to satisfy those wants. Everything on this planet has some limits except for our wants. When unlimited wants meet limited resources, it is known as scarcity.

Faced with scarcity, people must make choices. When we cannot have everything we want, we choose among the available alternatives. The concepts of scarcity and choice make up a definition of economics. Choices mean decisions to choose from many alternative that you have. Its also comparison of alternative which compare the costs and benefits for each alternative. Economic is the study of the choices people to make to cope with scarcity. It is science that explains that choices that people make and predicts how choices change as circumstances change. If you choose more of one thing, that means having less of something else. Whatever we choose to do, we could have chosen to do something else instead.

Economists use the term opportunity cost to emphasize that making choices in the face of scarcity implies a cost. The opportunity cost is define as the second best alternative that has to forgo for another choice which give more satisfaction. The opportunity cost of any action is the best alternative forgone. The best thing that you can reject is the cost of the thing you choose. It is not the value of all the possible alternatives forgone. For an example, a person who invests RM 100,000 in a stock denies themselves the interest they could have earned by leaving the RM 100,000 in a bank account instead. The opportunity cost of the decision to invest in stock is the value of the interest. If a city decides to build a hospital on a vacant land it owns, the opportunity cost is the value of the benefits forgone of the next best thing which might have been done with the land and construction funds instead. In the building of the hospital, the city has forgone the opportunity to build a sports centre on that land or a parking lot.

Question 3

List the four (4) assumptions that each society has to make in order to draw a production possibilities curve (PPC). Discuss factors that can influence the PPC curve to shift.

Production Possibilities Curve (PPC) also known as Production Possibilities Frontier (PPF). Its mean that curve shows the various maximum of combination of the output which society can produce using all available resources and given technology within the specified time. There have four (4) assumption to draw Production Possibilities Curve (PPC).

First assumption is where the society can only produce two types of goods. In that the economy actually produces tens of thousands of different goods, this is one of these seemingly unrealistic assumptions. It is, however, a useful simplifying assumption. Limiting the analysis to two goods means that only two dimensions are needed to display graphs and curves. Two dimensions can be shown easily on paper or a computer screen. But, best of all, most conclusions reached for two goods and two dimensions apply, in principle, to tens of thousands of goods. And if necessary, more than two goods can be handled using advanced mathematics.

A second assumption is that the economy has limited and fixed quantities of resources. This is both a reasonable assumption, given thelimited resourcesaspect of the scarcity problem, and also one that makes for useful and interesting analyses. There is no question that the economy has limited amounts oflabour,capital,land, andentrepreneurshipat any given time. This is the reasonable aspect of this assumption. However, these quantities ofscarce resourcesare also bound to change, especially increase, over time. The initial assumption of fixed resources makes it possible to analyse the consequences of any changes, especially as it affects economic growth.

A third assumption is that the economy has a fixed level of technology. Technology is the informationand knowledge that society has about the production of goods and services. This assumption works much the same as the fixed resources assumption. At any given time, the economy has a certain level of technology. As such, it seems entirely reasonable to make this assumption. However, technology does increase over time. The analysis can then be used to see what happens when technology changes.

The last assumption is that resources are used in a technicallyefficientmanner. Technical efficiency means there is no waste in production, mean that the most physical output is obtained from the resource inputs. This can also be thought of as engineering efficiency. If, for example, 1 1/4 cups of flour, 3/4 cup of sugar, and 2 eggs are used to make two dozen cookies, and a baker uses 1 1/4 cups of flour, 3/4 cup of sugar, and 2 eggs, then two dozen cookies are produced. No waste. No mistakes. Note thattechnical efficiencydoes not mean consumers actually want the goods, only that the maximum quantity is produced.

  1. The concave PPC

Figure 1: The concave Production Possibilities Curve

  1. The Straight Line PPC

Figure 2: The Straight Line Production Possibilities Curve (PPC)

  1. The convex PPC

Figure 3: The Convex Production Possibilities Curve (PPC)

Question 4

A firm in monopoly market in short run will possibly enjoy three types of profit. With aid of diagrams, briefly explain the short run profit enjoyed by the firm.

Monopoly comes from Latin word which mono means single and poly means seller. Monopoly is a type of market in which there is a single seller and large number of buyers. A situation in which a single company or group owns all or nearly all of the marketfor a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products. According to a strict academic definition, a monopoly is a market containing a single firm. In such instances where a single firm holds monopoly power, the company will typically be forced todivestitsassets. Antimonopoly regulation protects free markets from being dominated by a single entity.

In a monopoly market, factors like government license, ownership of resources, copyright and patent and high starting cost make an entity a single seller of goods. All these factors restrict the entry of other sellers in the market. Monopolies also possess some information that is not known to other sellers. Characteristics associated with a monopoly market make the single seller the market controller as well as the price maker. He enjoys the power of setting the price for his goods. For an example of monopoly is in Malaysia have TNB and JBA.

Characteristics of monopoly where there only have one seller and large number of buyer. As there is only one seller in the market, it can influence the market price by its own production decisions and it’s known as a price maker. If the market demand curve is downward sloping then the monopoly firm faces the same demand curve, the price falls as the amount of output sold rises. So the firm can increase the market price by selling less. The monopoly market is where the monopoly firm operates thus there is no difference between the firm and the industry as there is only one firm in the industry.

No new firm can enter the market mean that the monopoly firm faces no threat of entry from potential rivals. When you have a market that has only one firm producing, but the firm is producing at a lower price than you would expect it to, this could suggest that it is fearful of rivals entering and so is trying to deter entry through keeping the price down. Sometimes you will have a situation where there appears to be only one firm in the market, but it is not really a monopoly – the threat of entry will erode its market power.

Advertising in monopoly market depends on the types of product sold. On the other hand, if the products are luxury goods such as imported car, then monopoly firm will needs some advertisement to inform the consumers on the goods’ existence. Buyers have to be aware of the price and the characteristics of the monopolist’s product in order to make decisions of whether to buy it at the asking price. Local public utilities such as water, electricity and home phone services do not need advertisement since consumers know where to obtain the products.

For example in Figure 1: Monopolist Profit Maximization

http://i.investopedia.com/inv/articles/site/micro3.12.gif

As shown in the graph above, a monopolist facing demand curved will produce quantity and the price will be equal to. What happens if the monopolist later faces a demand curve such as ? In that case, the monopolist cannot cover costs and will go out of business.

Task:

  1. The market for newspaper in your town

Case 1:

Price

S

D

Quantity

  • Supply goes down. Prices will be increase while equilibrium quantity will be decrease. It is because, when salaries of journalist go up, the price for newspaper will be increase too. That why, seller will be less. Journalist is a cost of production.

Price= (-)

Quantity demand= (-)

Case 2:

Price

S

D

Quantity

  • Demand goes up. The curve shift to the right (). Equilibrium price will be increase () and equilibrium quantity of newspaper will be increase too (). Buyers will be increase because all people want to read about the news event in their town. That why, people will buy more in the market.
  1. The market for St. Louis Rams cotton T-shirts

Case 1:

Price

S

D

Quantity

  • Demand goes up. The curve shift to the right (). Equilibrium price will be increase () and equilibrium quantity of T-shirts will be increase too (). Buyers will be increase because all people want to buy the St. Louis Rams cotton T-Shirts. That why, people will buy more in the T-Shirts as they know The Rams win the Super Bowl.

Case 2:

Price

S

D

Quantity

  • Supply goes down. The curve shift to the left ( ). Equilibrium price will be increase ( ) while equilibrium quantity will be decrease ( ). When the price of cotton increase, the price of the T-Shirts will be increase too. It is because, the owner of the factory have to buy the expensive cotton to make the T-Shirts. The market of the St. Louis Rams cotton T-shirts will increasing the price and the seller become less.
  1. The market for bagels

Case 1:

Price

S

D

Quantity

  • Demand goes down. The curve shift to the left ( ). Equilibrium price will be decrease ( ) and equilibrium quantity decrease too ( ). When people realize how fattening bagels are, buyers will be less because they afraid to be fat. The price and quantity decrease because there are no people want to buy the bagel.

Case 2:

Price

S

D

Quantity

  • Demand goes up. People will buy more of the bagels because they have no time to make themselves a cooked breakfast. So that, they can save their time if they buy the bagel. When the demand goes up, automatically the supply also goes up. It is because, equilibrium also increase. More people buy the bagels will shift the supply curve to the right.

Demand= ( )

Equilibrium price= ( )

Equilibrium quantity= ( )

  1. The market for the Krugman and wells economics textbook

Case 1:

Price

S

D

Quantity

  • Demand goes up. If it positive increase, the demand curve will shift to the right. His or her students will buy the Krugman and wells economics textbook because their professor ask to read that book. When demand curve to right, the supplier wants to gain a higher profit with buy more Krugman and wells textbook.

Demand= ( )

Equilibrium price= ( )

Equilibrium quantity= ( )

Case 2:

Price

S

D

Quantity

  • Supply goes up. The supply curve shift to the right. If the curve shift to right, its mean increasing in supply. When the cost of production decrease (printing costs), quantity supplied will be increase. Decreasing in printing costs for the textbooks are lowered by the use of synthetic paper and the production process will decrease the cost of production and thus increase the supply curve. So, cost of production decrease, will shift supply curve to the right.

Supply= ( )

References:

  1. Taib, J., et al, (2009), Understanding Economics – Theory and application, 2nd edition. McGraw Hill Education
  2. Vengedasalam, D., et al (2008), Microeconomics. Oxford Fajar.
  3. Frank, B. H., & Bernanke B. S., (2011), Principle of Economics, Brief edition, 2nd edition. McGraw Hill International Edition
  4. Karl E.Case & Ray C., (2007), Principles of Economics, 7th edition, Prentice Hall international Inc
  5. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,+characteristics
  6. http://mnmeconomics.wordpress.com/2011/08/14/monopoly-market/
  7. http://www.businessdictionary.com/definition/monopoly.html
  8. http://www.economicsonline.co.uk/Competitive_markets/Economic_systems.html
  9. http://www.answers.com/Q/What_assumption_are_made_while_drawing_production_possibility_frontier

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