Assignment ECON 260

Course: Fundamentals of Microeconomics
ASSIGNMENT
Question1:
a) Change in demand and change in quantity demand.
Change in demand:
When we say change in demand we mean a change in demand brought by any
variable other than price (income, fashion, taste etc) the graph of a change in demand
is depicted as a shift in the demand curve.
Change in demand' means changes in demand due to the change in the factors other
than price. Those other factors are income, taste and preference, population, future
expectation, prices of other related commodities etc. Price remaining constant these
factors bring about a change in demand, which is called "Change in demand". The
change in demand involves "increase" and "decrease" of the demand for a
commodity.
change in quantity demand:
when we say a change in quantity demanded we mean a change in demand brought
by a change in price. the graph is depicted with a movement along the same curve.
Change in quantity demanded refers to the change for commodity as a result of
change in the price of it. Amount demanded rises or falls according to the fall or rise
in price. In such a case other factors influencing demand are held constant. The fall
and rise in amount demanded due to the change in price is technically called
"contraction" and "extension" of demand.
b) Firm demand and industry demand
Industry’s demand curve as a whole is downward sloping indicating an inverse

price quantity relationship. In the case of monopoly, the firm itself is industry, so its
demand is identical with industry demand. Above figure-1 illustrates different demand
conditions of industry and firm. A business economist or a business manager has to see
the share of firm demand in the industry demand. For undertaking sales forecasting,
therefore, it is essential to project industry demand first and then give projection
c) Floor pricing and ceiling price:
Price ceiling: it is the upper price limit put by the government legally on any product.
It is a way by the government to control the price of any product. The price ceiling
leads to shortage.
Price ceilings are limits on the Maximum amount a thing has to be charged.
Example: The rented house or apartments, where the landlord can’t charge rent more
than a specific limit.
Price floor: it is the lower price limit put by the government legally on any product.
It is a way by the government to control the price of any product. The price floor
leads to surplus.
Price floors are limits on the Minimum amount a thing has to be priced.
Example: The minimum wage set by the government. That is the wage paid by
employer to employee has minimum limit set by the government. The federal
minimum wage as of 2015 is $7.25 per hour which is the floor applied by federal
government in United States

d) Relationship between total revenue and elasticity of demand
Relationship can be explained with help of following diagram:
it is the elasticity of demand upon which the TR and MR depends
Demand curve helps to know the elasticity of demand.
When the elasticity of demand is unity the MR is zero.
When MR is zero, the TR is maximum
When MR enters the negative zone the TR starts declining.

e) Externality and market failure :
Externalities and market failure will result from the difficulty of enforcing property
rights.
Property Rights are any economic transaction implies mutual recognition of the parties'
property rights. Property rights may be de facto (a dog will bite you if you try to take his
bone away) or de jure (legally formalized). Private property rights are fundamental
preconditions for the existence of market economies. Obviously, no real-world property
rights system can satisfy all four of these criteria perfectly. We address several cases
where one or more of these assumptions is violated.
A market failure involves either a failure of property rights, or a violation of one or more
assumptions of the perfect market model.
An externality occurs when one party's economic activity creates incidental economic
harm (or sometimes benefit) for some other party. A positive externality generates an
inadvertent benefit for someone else, A negative externality generates an inadvertent cost
for other people:
Question 2:
The following equations describe monthly demand and supply relations of a firm
Qd = 500 – 5 P
Qs = - 100 + 2 P
a) At what price level would demand equal zero?
For demand to be zero :Qd = 0 Qd = 500 – 5 P=0 500 – 5 P=0 , 500=5 P
P=100
Therefore the demand is equal to 0 for an average monthly fee of 100 .
b) At what price level would supply equal zero?
For supply to be zero: Qs = 0 Qs = - 100 + 2 P= 0 - 100 + 2 P=0 , p=50
Therefore the supply is equal to 0 for an average monthly fee of 50.
c) Determine the market clearing price and output level and graphically show it.
p 50 40 30
Qd 250 300 350
Qd (0,100),(500,0)
Qs (0,50),(-100,0).
Equilibrium price output level :
Qd= Qs 500 – 5 P= - 100 + 2 P 600=7 P P=85.71 Q=500- 5 * 85.71= 71.45

d) Find elasticity of demand and comment whether it is elastic or inelastic.
p 50 40 30
Qd 250 300 350
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
PEoD = 0.8 which is less than 1 and this means that the demand is
inelastic so not sensitive to price change
e) Find elasticity of supply and comment whether it is elastic or inelastic:

p 60 70 80
Qs 20 40 60
PEoS = (% Change in Quantity Supplied)/(% Change in Price)

PEoS = 2.9 greater than 1 means supple is elastic and sensitive t change
in price
f) If firm want to increase its sale by 100,000, what price will it charge?
g) If firm increases its price by AED 1, what will be the equilibrium output?
At equilibrium Qd = Qs
New equilibrium price = 71.45 + 1 = 72.45
Qd = 500 – 5 P
= 137.75
Qs = - 100 + 2 P
= 44.9
Question 3:
Analyze the link between a firm’s production process and its total costs. What are the
different types of costs a firm faces in the short run and long run.
Economic Cost is as the value of goods and services that could have been produced, but
have been sacrificed for the sake of the production of other commodities. Namely the
economic cost will sense the opportunity cost includes the cost will do so in economic
terms different from the normal cost concept. The economic profits differ from the
accounting profit is calculated in terms of economic profits by the difference between
total revenue and total costs, including the opportunity cost. If the total revenue is higher
than the total cost of (economic) firm check economically profitable. If your total income
is less than the total cost of the firm, verify economic loss. Finally, if equal to all of the
profits and the economic costs of the firm, verify normal profits Normal Profits.
Economic profit = Total revenue - Total costs
And divided the costs borne by the establishment to the three types:
1. The total cost:
A- Total Fixed Cost: It costs paid to the fixed elements of production and thus does not
vary with the volume of production.
B- Total Variable Cost: It costs paid to elements of changing production and therefore
vary with the volume of production and thus, if the quantity produced was equal to zero,
the total cost variable equal to zero as well.
C- overall Total Cost: It is a sum of the total cost of fixed and variable total cost. It
should be noted that the total cost is equal to the fixed total cost when the volume of
production of zero (where the variable cost zero) and increasing production volume
increased (due to higher variable) cost.
TFC + TVC = TC
2. marginal cost:
Which it is about the amount of change in total cost resulting from the increased quantity
produced by one unit.
3. The medium costs:
A- Total Average Cost: a fixed costs divided by the volume of production and therefore
decreases with increased production volume.
B- Total Average Cost: It is divided by the size of the variable costs of production.
C- Average Total Cost: It is a sum of the average fixed cost and average variable cost.
ATC = ATC + AVC
Short-Run:
The short term is the phase where one or more elements of productivity constant (not the
entity has the ability to change this productive element). The long-term it is the stage
where all the production elements are subject to change.
Costs in the Long-Run :
1. Long-Run Total Cost:
And it describes the total cost of the facility in the long term (LRTC) the total cost to
produce a certain amount of goods or services and so when the facility will be able to
change all the elements of production.
2. Long-Run Average Cost:
Which it is about the total cost in the long run divided by the number of units produced.
or: LRAC = LRTC \ Q
3. Long-Run Marginal Cost:
Which it is about the size of the change in the total cost in the long run due to changing
production volume of one unit. or:
LRMC = (Δ LRTC) \ ((Δ Q)
Questino4:
differences in perfectly competitive firm and monopoly? What criteria a firm will use to
produce certain quantity of output.
perfectly competitive monopoly

Large output fixed by MR=MC
output Small output fixed by the sole seller
Output and Price: price is equal to marginal cost at the the price is greater than average cost.
equilibrium output
Equilibrium: Equilibrium is possible only when MR equilibrium can be realized whether

= MC and MC cuts the MR curve marginal cost is rising, constant or
from below falling.
Entry there exist no restrictions on the entry There are strong barriers on the entry
or exit of firms into the industry and exit of firms.
Discrimination: it is absent by definition. a monopolist can charge different

prices from the different groups of
buyers.
Profits: Normal profit realized by price Excess profit monopoly again

completion.
Product Homogenous product Homogenous product
demand Demand is perfectly inelastic . Demand is inelastic. demand curve

demand curve is a horizontal straight slopes download.
line
The firm will make the most profits if it produces the quantity of output at which
marginal revenue equals marginal cost.
Question5:
Explain why a perfectly competitive firm earns profit in the short run but not in the long
run as compared to monopoly which earns profits both in the short and long run.
earns a profit in the short run and the long run.
A firm operating in a monopolistically competitive market can earn economic profits
in: both the short run and the long run, Like a monopoly, a monopolistic competitive
firm in short run will maximize its profits by producing goods to the point where its
marginal revenues equals its marginal costs.
MR=LMC.
References:
1) David Zilberman, 1999, Externalities, Market Failure, and Government Policy,
University of California at Berkeley.
2) http://www.cba.edu.kw/malomar/Micro_Notes/microch6.htm
3) http://www.economicsdiscussion.net/monopoly/monopoly-and-perfect-
competition-difference/7250

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Course: Fundamentals of Microeconomics

Industry’s demand curve as a whole is downward sloping indicating an inverse

than a specific limit.

government in United States

it is the elasticity of demand upon which the TR and MR depends

Demand curve helps to know the elasticity of demand.

When the elasticity of demand is unity the MR is zero.

When MR is zero, the TR is maximum

When MR enters the negative zone the TR starts declining.

Qd= Qs 500 – 5 P= - 100 + 2 P 600=7 P P=85.71 Q=500- 5 * 85.71= 71.45

e) Find elasticity of supply and comment whether it is elastic or inelastic:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

perfectly competitive monopoly

Equilibrium: Equilibrium is possible only when MR equilibrium can be realized whether

Discrimination: it is absent by definition. a monopolist can charge different

Profits: Normal profit realized by price Excess profit monopoly again

Product Homogenous product Homogenous product

demand Demand is perfectly inelastic . Demand is inelastic. demand curve

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