Introduction To Micro-Economics

MOUNT KENYA UNIVERSITY
SCHOOL OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS
BED 1101: INTRODUCTION TO MICRO-ECONOMICS
NAME: SHALDON ONYANDO DIANA
ADM NO: BBM/2018/20942

1.
(i) Explain the concept of scarcity, choice and opportunity cost.
(a) Scarcity refers to the basic economic problem, the gap between limited – that is,
scarce resources and theoretically limitless wants. This situation requires people to make
decisions about how to allocate resources efficiently, in order to satisfy basic needs and
as many additional wants as possible
(b) Choice involves decision making. It can include judging the merits of multiple options
and selecting one or more of them. One can make a choice between imagined options or
between real options followed by the corresponding action.
(c) Opportunity cost is a key concept in economics, and has been described as expressing
"the basic relationship between scarcity and choice". The notion of opportunity cost plays
a crucial part in attempts to ensure that scarce resources are used efficiently.
(ii) Illustrate & explain the maximum and minimum price fixation by
government.
Maximum Price fixation

Government may find it wise to prevent rise in prices above the market equilibrium or to prevent
fall in prices below the market equilibrium. Such method of intervention is called price control.
Sometimes businessmen create an artificial scarcity of an essential commodity with the motive
of raising the price of the commodity. The basic motive is, of course, profit-maximization. In the
process, consumers are exploited since they are now forced to purchase commodity at a higher
price.
In order to protect the interest of the consumers the government imposes price ceiling or
maximum price above which no one will sell the commodity. This is called ‘price
ceiling’ or ‘maximum price legislation’.
Again, prices of commodities may tumble if there are surplus productions. This happens mainly
in the case of agricultural commodities when there is a bumper production. “Too low” prices of
such agricultural commodities cause hardship to farmers. To prevent prices from falling further,
the government may adopt “minimum price legislation” to protect the interests of farmers or
producers,
Minimum Price fixation
The government often passes law to fix the minimum price or floor price at which commodities
may be sold. This minimum price legislation is introduced by the government to protect the
interests of producers, mainly agriculturists.
Whenever there is a crash in prices, say of wheat, due to bumper production, the government
issues circular that no one would be allowed to sell wheat below the stipulated price. Such is
called the minimum price. Certainly, the legal floor price fixed by the government is kept above
the equilibrium price determined by the demand and supply curves.
(iii) Distinguish between a shift in demand and a movement along the demand
curve.
A shift in demand means at the same price, consumers wish to buy more. A movement along the
demand curve occurs following a change in price.
Movement along the demand curve

A change in price causes a movement along the demand curve. It can either be contraction (less
demand) or expansion/extension. (More demand)
Contraction in demand. An increase in price from $12 to $16 causes a movement along the
demand curve, and quantity demand falls from 80 to 60. We say this is a contraction in demand
Expansion in demand. A fall in price from $16 to $12 leads to an expansion (increase) in
demand. As price falls, there is a movement along the demand curve and more is bought.
A change in price doesn’t shift the demand curve – we merely move from one point of the
demand curve to another.
Shift in the Demand Curve
A shift in the demand curve occurs when the whole demand curve moves to the right or left. For
example, an increase in income would mean people can afford to buy more widgets even at the
same price.
The demand curve could shift to the right for the following reasons:
(i) The good became more popular (e.g. fashion changes or successful advertising
campaign)
(ii) The price of a substitute good increased.
(iii) The price of a complement good decreased.
(iv)A rise in incomes (assuming the good is a normal good, with positive YED)
(v) Seasonal factors.
2. (a) Explain clearly the determinants of demand for a commodity.
1. Income- When a consumer's income increases, he buys more of a product because he

has more money to spend. This drives the demand for products which increase
accordingly. If income decreases, demand decreases for normal products such as
clothing, food, vacations, cars and household appliances. A rise in income also
increases the demand for luxury goods. Examples of luxury items are sports cars, gym
memberships, fine dining and expensive vacations.
2. Prices- The law of supply and demand states that as the price for a particular
commodity goes up, demand will decline. Consumers will usually react to an increase
in prices by purchasing fewer products. For example, if prices for oil rise, it leads to an
increase in the price of gasoline at retail. Consumers adjust their driving habits to
reduce their consumption of gasoline. This effect is seen during long-weekends when
people drive shorter distances to visit relatives or take vacations.
3. Prices of Related Goods- Changes in the price of some products can affect the demand
for related products. An example is a substitution of one product for another, or when a
group of products is complementary to each other and used together. Coke and Pepsi
are examples of substitute products. A rise in the price of Coke will increase the
demand for Pepsi as consumers switch to the lower-priced product. On the other hand,
if Coke cuts its price, people will start buying more Coke, reducing the demand for
Pepsi.
4. Expectations of Future Prices- When consumers think that product prices will
increase in future, they demand more of the product in the present. For instance, when
drivers expect gasoline prices to rise next week, they rush out to fill their tanks today.
5. Tastes and Preferences- Consumers' tastes and preferences are constantly changing.
An aggressive celebrity-fueled advertising campaign may increase the demand for
products. A new scientific health study may conclude that a product is bad for your
health, resulting in a decline in demand.
6. Number of Consumers- An increase in consumers who want to purchase a product will
increase the demand for that product. A rise in population will increase the demand for
products, but other influences increase the number of potential buyers. For instance, a
manufacturer may conduct an effective advertising campaign that expands the market
for his products to new groups of consumers.
7. Propensity to Consume- The perceptions of consumers affect their desire to purchase
products. For example, if economic conditions are good and consumers expect to keep
their jobs and get consistent wage increases, they are more inclined to spend and
demand more products. When consumer confidence is high, people feel more
comfortable buying because they have a reasonable expectation that their income will
continue into the future.
(b) Calculate the price elasticity of demand for the product X & Y
Price of product/Unit Quantity Demanded of X

of X
100 100
120 20
∆Q x P
∆P Q
100 x -80
20 100
= -8000
2000
= -4
PED for product X is -4
Price of product/Unit Quantity Demanded of Y

of Y
100 20
200 15
∆Q x P
∆P Q
100 x -5
100 20
= -500
2000
= -0.25
PED for product Y is -0.25
(c) The demand and supply functions are given as follows;
Qd=1000-60P and Qs=600+40P
Determine the Equilibrium price and quantity.
Qd = 1000-60P
Qs = 600+40P
Solve to find P and Q
In equilibrium Qd = Qs
1000-60P = 600+40P
1000- 600 = 40p + 60p
400 = 100p
100 100
P= 4
Equilibrium price = 4
Substitute for Q
Qd = Qs
1000- 60(4) = 1000- 240
Quantity = 760
References
Kurniawati, T. (2019). Improving students’ higher order-thinking skills through problem-based

learning in Introduction to Microeconomics course. KnE Social Sciences, 9-20.
Morgan, W. (2017). Introduction to microeconomics.

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MOUNT KENYA UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

BED 1101: INTRODUCTION TO MICRO-ECONOMICS

NAME: SHALDON ONYANDO DIANA

ADM NO: BBM/2018/20942

Maximum Price fixation

Movement along the demand curve

1. Income- When a consumer's income increases, he buys more of a product because he

Price of product/Unit Quantity Demanded of X

Price of product/Unit Quantity Demanded of Y

(c) The demand and supply functions are given as follows;

Qd=1000-60P and Qs=600+40P

Determine the Equilibrium price and quantity.

Solve to find P and Q

1000- 600 = 40p + 60p

1000- 60(4) = 1000- 240

Kurniawati, T. (2019). Improving students’ higher order-thinking skills through problem-based

Morgan, W. (2017). Introduction to microeconomics.

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