BACHELOR IN BUSINESS ADMINISTRATION

PRINCIPLES OF MICROECONOMICS

(BBCE1013)

ASSIGNMENT 2

PREPARED FOR

AIN FARHA BINTI SALAHUDDIN

PREPARED BY

[NAZIRUL HAZIQ BIN MOHD RIZAL]

[202305D0025]

SUBMISSION DATE

5 AUGUST 2023
MANUAL OF ASSIGNMENT

BBCE1013 – ASSIGNMENT 2
WRITING FORMAT;
1. This assignment is to be completed INDIVIDUALLY.
2. This assignment is accordingly by chapters in the syllabus.
3. Answer ALL questions accordingly.
4. Please note that those questions are to be answered after accomplishment of every
chapters. Reading and revising of slides, books and internet will help you to answer
those questions.
5. Turnitin must be scored less than 25%.
Submission: upload in LMS

REMINDER : 1% per day will be deducted for the late submission after due date.
CHAPTER 1 & 2 (20 MARKS)
STRUCTURED QUESTIONS

1. Define opportunity cost and provide an example.

Answer : Opportunity cost is defined as the second best alternative that has to be forgone
for another choice which gives more satisfaction.

For example A farmer chooses to plant wheat; the opportunity cost is planting a different
crop, or an alternate use of the resources (land and farm equipment).

(3 marks)

2. Discuss the concept of market equilibrium and the role of supply and demand in
determining prices and quantities.

Answer : Equilibrium is a state of balance where all the aspects are equal. In the case of
economics, the equilibrium is decided where the quantity demanded, and quantity supplied
are equal.

Demand depicts the quantity of a good that a consumer is willing and able to buy at a given
price. The quantity demanded is inversely related to the price of the own commodity; hence,
the demand curve is downward sloping.

Supply depicts the quantity of a good that a producer is willing and able to sell at a given
price. The quantity supplied is directly related to the price of the commodity; hence, the
supply curve is upward sloping.

Market equilibrium is decided where both the demand and supply are equal. There is no
excess and shortage of any commodity.

The demand curve shifts due to other factors apart from the price of the commodity itself. It
can be shift due to taste and preferences, the expectation of change in future price.

(3 marks)
3. Explain each of the following concepts with the help of a diagram
a. Ceiling price
The ceiling price is to fix the maximum price of the product below the equilibrium price. Let
us explain this by considering the commodity "wheat" and price determination in Figure 1. In
the figure, the demand curve for rice DD and the supply curve SS intersect at point E, deter
mining the equilibrium price of OP. Suppose OP's equilibrium price is so high that many poor
people cannot afford rice at that price.

Since rice is a necessary good, the government intervenes and fixes a maximum price
(called the ceiling price) at OP1, below the equilibrium price of OP.

b. Floor price

Price floor is a situation when the price charged is more than or less than the equilibrium
price determined by market forces of demand and supply. By observation, it has been found
that lower price floors are ineffective. Price floor has been found to be of great importance in
the labour-wage market.

Minimum wage laws have been passed in various countries to determine the minimum
wages to be paid to the worker. Minimum wages are formulated from the demand-supply
curve of labour. This helps the government ensure higher wages and a good standard of
living for the workers. But this has a flip side too. Price floor leads to a lesser number of
workers than in case of equilibrium wage. This is shown by the diagram below.
Equilibrium wage rate is Rs. 3. The price floor is determined at Rs.4, which is good for
workers, who will earn more than before. But the flip side is that while at equilibrium there
were 30 workers, after the price floor there are only 20 workers. Thus 10 workers have been
laid off. At a wage of Rs. 4 we see a gap of 20 workers (40 workers are willing to work but
only 20 workers get work), thus giving rise to a surplus of workers.
(4 marks)

4. Explain and give examples:

(a) Free goods

Free goods are goods that have no production cost. For example air. Oxygen is something
we need and we can simply breathe it in. There is no element of rivalry (e.g. if I breathe,
there is still enough air for you to breath too.)

(b) Economic goods

Public goods are goods that are for common use and will benefit everyone. For example :
food and drink. Food and drink can also be included in economic goods. The reason behide
this is that humans have to exert some effort to get food or drink. Humans, for example have
to buy and spend money to get food and drink. Humans must also cultivate and seek food or
drink which is a form of sacrifice.

(c) Public goods

Economic goods are goods of value that can be seen and touched. Economic services are
intangible things (with value) that cannot been seen or touched. For example information:
One of the most global public goods is information. The free flow of information is available
to anyone with an Internet connection and a sense of curiosity. Generally speaking, anyone
with access to the open Internet can access a webpage, and multiple people can access the
same web page at the same time.
(3marks)

5. What variables influence the demand for a normal good? Explain why a reduction
in the price of a normal good does not increase the demand for that good.

The demand for a good increases or decreases depending on several factors. This
includes the product’s price, perceived quality, advertising spend,consumer income,
consumer confidence, and changes in taste and fashion.
 If consumer income increases, the demand curve for a normal good shifts to the right. If
consumer income decreases, the demand curve for the normal good shifts to the left. A
reduction in the price of a normal good causes a movement along the demand curve, an
increase in quantity demanded, not an increases in demand.

(2marks)

6. Popeye’s income declines and as a result, he buys more spinach. Is spinach an inferior
or normal good? Illustrate what happens to Popeye’s demand curve for spinach.

Popeye buys more spinach when his income declines. As such, spinach is an inferior good
for him. His demand curve for spinach shifts out to the right as a result of the decrease in his
income.
(2 marks)
7. Using supply and demand curves, show the effect of each of the following events on the
market for cigarettes.
a. A cure for lung career cancer is found.

Due to the new cure lung cancer, the smoker will demand more cigarettes because there is
a cure of the lung cancer now. This will shift the demand curve to the right.

b. The price of cigarette increases.

Do to increase in the price of cigars, the demand curve of cigarettes will shift to the right
because cigars are subtitute of the cigarettes.

c. Wage increases substantially in states that grow tobacco.

Due to increase in the wage, the demand curve of the cigarettes will shift to the right
because people now have more money to spend
(3 marks)
CHAPTER 3 (20 MARKS)
ESSAY QUESTIONS
1. Explain how seller can determine whether the demand for his or her good is inelastic,
elastic or unit elastic between two prices.

Demand elasticity is defined as the demand responsiveness to the changes that occur in
price levels. Demand is referred to as elastic when tiny changes and variations in the prices
of commodities trigger the consumers of the commodity to demand more or lessen their
demand for the product.

Demand is referred to as elastic when demand changes with changes in price levels while
on the other hand inelastic demand occurs when the quantity demanded does not change
with the change in prices. A unitary elastic demand is experienced when the percentage
change in price is equal to the quantity demanded.

If the quantity demanded does not change with the price change, entrepreneurs can then
declare that the demand is inelastic. A lower percentage change in price than that of quantity
demanded is a clear indication that the demand is elastic. When the quantity demanded is
equal to the percentage change, then the demand is unit elastic.

(4 marks)

2. Discuss the concept of market equilibrium and the role of supply and demand in
determining prices and quantities.

The equilibrium price is the price at which the quantity demanded equals he quantity
supplied. It is determined by the intersection of the demand and supply curves.A surplus
exists if the quantity of a good of service supplied exceeds the quantity demanded at the
current price; it causes downward pressure on price.

(3marks)
3. List 4 determinants of price elasticity of demand with explanation

1] Price of the Product

People use price as a parameter to make decisions if all other factors remain constant or equal.
According to the law of demand, this implies an increase in demand follows a reduction in price
and a decrease in demand follows an increase in the price of similar goods.
The demand curve and the demand schedule help determine the demand quantity at a price
level. An elastic demand implies a robust change quantity accompanied by a change in price.
Similarly, an inelastic demand implies that volume does not change much even when there is a
change in price.

2] Income of the Consumers

Rising incomes lead to a rise in the number of goods demanded by consumers. Similarly, a
drop in income is accompanied by reduced consumption levels. This relationship between
income and demand is not linear in nature. Marginal utility determines the proportion of change
in the demand levels.

3] Consumer Expectations

Expectations of a higher income or expecting an increase in prices of goods will lead to an

increase the quantity demanded. Similarly, expectations of a reduced income or a lowering in
prices of goods will decrease the quantity demanded.

4] Number of Buyers in the Market

The number of buyers has a major effect on the total or net demand. As the number increases,
the demand rises. Furthermore, this is true irrespective of changes in the price of commodities.

(8 marks)
2. Name some types of goods and services that consumers will respond to in event of a
price change which may be elastic or inelastic. Explain how the response towards price
can be elastic or inelastic.

Let’s consider some of the factors that can help us predict whether demand for a product is
likely to be elastic or inelastic. The following are important considerations:

 Substitutes: Price elasticity of demand is fundamentally about substitutes. If it’s easy

to find a substitute product when the price of a product increases, the demand will be
more elastic. If there are few or no alternatives, demand will be less elastic.

 Necessities vs. luxuries: A necessity is something you absolutely must have, almost
regardless of the price. A luxury is something that would be nice to have, but it’s not
absolutely necessary. Consider the elasticity of demand for cookies. A buyer may
enjoy a cookie, but it doesn’t fulfill a critical need the way a snow shovel after a
blizzard or a life-saving drug does. In general, the greater the necessity of the
 product, the less elastic, or more inelastic, the demand will be, because substitutes
are limited. The more luxurious the product is, the more elastic demand will be.
 Share of the consumer’s budget: If a product takes up a large share of a consumer’s
budget, even a small percentage increase in price may make it prohibitively
expensive to many buyers. Take rental housing that’s located close to downtown.
Such housing might cost half of one’s budget. A small percentage increase in rent
could cause renters to relocate to cheaper housing in the suburbs, rather than reduce
their spending on food, utilities, and other necessities. Therefore the larger the share
of an item in one’s budget, the more price elastic demand is likely to be. By contrast,
suppose the local grocery store increased the price of toothpicks by 50 percent.
Since toothpicks represent such a small part of a consumer’s budget, even a
significant increase in price is likely to have only a small effect on demand. Thus, the
smaller the share of an item in one’s budget, the more price inelastic demand is likely
to be.

 Short run versus long run: Price elasticity of demand is usually lower in the short run,
before consumers have much time to react, than in the long run, when they have
greater opportunity to find substitute goods. Thus, demand is more price elastic in the
long run than in the short run.

 Competitive dynamics: Goods that can only be produced by one supplier generally
have inelastic demand, while products that exist in a competitive marketplace have
elastic demand. This is because a competitive marketplace offers more options for
the buyer

(5 marks)

CHAPTER 4 (20 MARKS)

ESSAY QUESTIONS
1. Describe utility. Differentiate between cardinal utility and ordinal utility.

‘Utility’ means the satisfaction obtained from consuming a commodity.

Cardinal Approach

• The cardinal utility theory says that utility is measurable and by placing a number of
alternatives so that the utility can be added.

• The index used to measure utility is called utils.

Ordinal Approach

• The ordinal utility theory says that utility is not measurable but it can be compared. •
Ordinal approach uses the ranking of alternatives as first, second, third and so on.
(4marks)

2. Define consumer behavior and explain its importance in the field of economics

Consumer behavior studies how people buy and use products, services, experiences, and
ideas. It is essential because it helps businesses understand their customers’ needs,
wants and desires and create products accordingly.Consumer behavior and marketing
strategy go hand-in-hand. But how exactly does it impact organizations? Let us
understand.

Identifying market opportunity

Companies must first be aware of what their customers are looking for to identify a market
opportunity. The best way to do this is by conducting a thorough market analysis and
identifying key trends. This can be done through surveys, focus groups, and other tools.

Selecting target market

After identifying the market opportunity, it is time to select which customers you will target.
You may want to consider demographics such as age, gender, and ethnicity;
psychographics such as personality traits or values; or even geographic location if your
product has geographic limitations.
Customer retention
Once you have identified your target market, your next goal should be to retain the
customers by providing high-quality products at competitive prices and excellent customer
service whenever possible. This means listening carefully to their needs so that you can
meet them better than anyone else!

Dynamic nature of the market

The market is dynamic, which means that it changes quickly and frequently. This can be a
challenge for organizations trying to predict how consumers will behave. Still, it also means
that those who can adapt and adjust their strategies can gain an advantage over their
competitors.

(4 marks)
3. Explain “Before economic growth, there were too few goods, after growth, there is too
little time.

Before economic growth, most people live at the subsistence level. By practically anyone’s
definition, this implies “too few goods.” After economic growth, goods are in relative
abundance. To make more takes time, but the relative abundance of goods means that there
are already many goods to enjoy. So, now there is a clash between the use of time to make
more goods and the use of time to relax and enjoy the goods one already has. There just
isn’t enough time.

(6 marks)

4. Explain why consumer equilibrium is equivalent using marginal utility and

indifference curve analysis.

Equilibrium is attained by a state of balance between two variables where neither of them is
recognized as greater or more substantial. Therefore, the two variables cancel each other
when they are balanced; hence no changes are depicted. In economics, demand and supply
intersect and create a balance or a state of equilibrium.

Consumer equilibrium is where the consumer of a commodity uses up their income to

purchase a quantity of a commodity in a bid to garner maximum satisfaction from a constant
consumption level. The consumer equilibrium is standard for both the marginal utility and
indifference curves analyses. This is because the consumer seeks to attain the highest
 indifference curve in a bid to gain maximum satisfaction. Similarly, in marginal utility, the aim
is for the consumer to maximize utility from the consumption of particular commodities.

Additionally, similarity in the two analyses is depicted in the proportionality of goods' prices
and their respective utilities.

(6 marks)

CHAPTER 5 (20 MARKS)

ESSAY QUESTIONS
1. Differentiate between an implicit cost and an explicit cost. Give examples.

Implicit cost is value of input services that are used in production but not purchased in a
market. In other words, these are the costs that are not directly linked to an expenditure. For
example, a factory may close down for the day in order for its machines to be serviced. The
explicit cost to repair the machines is $10,000. However, the factory has lost a whole days
output which has cost it $50,000 in lost production. This indirect cost is known as the implicit
cost.

Explicit cost is value of resources purchased for production. For example, employee wages,
inputs, utility bills, and rent, among others. These are the costs which are stated on the
businesses balance sheet.

Explicit Cost Examples

An explicit cost is one that is a clear and obvious monetary amount made by the firm. It has
a clear monetary amount which can be seen in the firm’s financial balance sheet. Such
examples include:

1. Advertising and marketing costs.

2. Employee wages, bonuses, commissions, and any other compensation to employees.
3. Employee benefits that are not paid directly to the employee, I.e. healthcare, staff
restaurant, or staff gym.
4. Equipment that businesses purchase to make production and output more efficient.
5. Rent or other mortgage payments required for the land the firm is using.
6. Supplies that the firm requires in order to supply its output to consumers.
7. Taxes and legal fees.
8. Utilities that are required to keep the firm running such as electricity, water, and internet
service.

Implicit Cost Examples

Whilst explicit costs have a specific value, implicit costs are not always so clear cut. For
example, spending 5 hours playing video games means those 5 hours cannot be used for
studying. The implicit cost is the hours that could have been used for studying instead. The
value by which is not necessary monetarily quantifiable, but is still considered as a cost.

1. Lost interest on funds occurs when the firm employs its capital, which means it foregoes
the interest it could have earned in interest.
2. Training a new employee presents an implicit cost in the fact that those seven hours could
have been used doing other work.
3. Going to University means that there is an implicit cost which is the money which could
have been earned during that period.
4. Maintenance means the firm has to stop production for a time which can lead to a lower
level of output or dissatisfied customers.

(4 marks)
2. The average variable cost curve and the average total cost curve get closer to each
other as output increases. What explains this?

The average variable cost (AVC) is calculated by dividing the firm’s variable costs by the
output or quantity that has been produced. The average total cost, on the other hand, is
calculated by dividing the total cost by the output or quantity of goods that have been
produced.

It is important to note that the total cost of a firm is a combination of both variable costs
(labor and electricity) and fixed costs (buildings and equipment). Variable costs increase
proportionally to the number of items produced, while the fixed costs are spread among the
items as production increases.

At the start of production, fixed costs are higher than the variable costs but as production
increases the variable costs increase. Thus, as quantity increases, both the variable costs
and, consequently, the total costs will continue to increase. The situation forces the ATC and
AVC curves to move closer to each other as the quantity continues to increase.
 (4 marks)

3. Answer TRUE or FALSE with BRIEF EXPLANATIONS.

a. Firm should continue to produce to maximize output even though marginal

cost is failing.

This is false because a firm should continue to increase an activity so long as the total
revenue from the activity exceeds the total cost of the activity. If marginal revenue is equal to
marginal cost, profit must be at maximum. If total cost is equal to total revenue, then profit is
equal to zero.

b. Average product will be negative when marginal product negative.

False. If the marginal product is negative, it means that the total profit is lost
However, the average production (TP/Q) will remain positive. The AP is negative only when t
he output or input is negative, which is not the case. So the mean product is not always nega
tive.

c. Average product is at maximum when it crosses with marginal product.

True.The relationship between the marginal product (MP) curve and the average product
(AP) curve is that the marginal product will always cross...
(6 marks)

4. Explain the four factors of production with examples.

The features of production are resources, which are the building blocks of the economy; are
used to create products and services. Economists divide the factors of production into four

factors: land, labor, capital and market.

Land includes any natural resource used to produce goods and services; anything that
comes from the land. Some common land or natural resources are water, oil, copper, natural
gas, coal, and forests. Land resources are the raw materials in the production process.
These resources can be renewable, such as forests, or nonrenewable such as oil or natural
gas.

Labor is the effort that people contribute to the production of goods and services. Labor
resources include the work done by the waiter who brings your food at a local restaurant as
well as the engineer who designed the bus that transports you to school. It includes an
artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If
you have ever been paid for a job, you have contributed labor resources to the production of
goods or services.

Think of capital as the machinery, tools and buildings humans use to produce goods and
services. Some common examples of capital include hammers, forklifts, conveyer belts,
computers, and delivery vans. Capital differs based on the worker and the type of work being
done. For example, a doctor may use a stethoscope and an examination room to provide
medical services. Your teacher may use textbooks, desks, and a whiteboard to produce
education services.

An entrepreneur is a person who combines the other factors of production - land, labor, and
capital to earn a profit. The most successful entrepreneurs are innovators who find new
ways to produce goods and services or who develop new goods and services to bring to
market. Without the entrepreneur combining land, labor, and capital in new ways, many of
the innovations we see around us would not exist. Entrepreneurs are a vital engine of
economic growth helping to build some of the largest firms in the world as well as some of
the small businesses in your neighborhood. Entrepreneurs thrive in economies where they
have the freedom to start businesses and buy resources freely.

(6 marks)

CHAPTER 6,7 & 8 (20 MARKS)

ESSAY QUESTIONS

1. Define market structure and discuss its significance in the field of economics

Market structure refers to the number and distribution size of buyers and sellers in the
market of a good and service.It was an indication of the number of buyers and sellers; their
market shares; the degree of product standardization and the ease of market entry and exit.

Market structure is important in that it affects markets outcomes through its impact on the
motivations, opportunities and decisions of economics actors participating in the market.

(2 marks)

2. Differentiate between perfect competition and monopoly. What are the key characteristics
of each market structure?
Definition of perfect competition is a market in which there are many buyers and sellers, the
products are homogeneous and sellers can easily enter and exit from the market.

Key characteristics of perfect competition :

– Large number of buyers and sellers – firms are price takers
– Homogenous or standardized product – the buyers do not differentiate the products of one
seller to another seller
– Free of entry and exit into the market
– Role of non-price competition is insignificant

Definition of monopy is monopoly is a market structure in which there is a single seller and
large number of buyers and selling products that have no close substitution and have high
entry and exit barrier.

Key characteristics of monoply :

– One seller and large number of buyers – the monopolist is a firm as well as an industry by
itself
– No close substitution – monopoly firm would sell a product which has no close substitute
– Price maker – monopolist is a price maker since there is one seller or producer and it has
the market power to control over the price
– Restriction of entry of new firms

(6 marks)

3. Explain the concept of monopolistic competition and provide examples of industries that
exhibit this market structure.

Monopolistic competition occurs when there are many firms offering similar but defective pro
ducts to compete for goods or services. Hairdressers and clothing stores are examples of in

dustries with monopolistic competition.

Monopolistic competition is present in restaurants like Burger King and McDonald's. Both
are fast food chains that target a similar market and offer similar products and services.
These two companies are actively competing with one another, and seek to differentiate
themselves through brand recognition, price, and by offering different food and drink
packages.
(6 marks)
4. Discuss the concept of oligopoly and its key features. Provide examples of industries that
have oligopolistic market structures.

Oligopoly is defined as a market structure with a small number of firms, none of which can keep
the others from having significant influence. An Oligopoly market situation is also called
‘competition among the few’. In this article, we will look at Oligopoly definition and some
important characteristics of this market structure.

Key features of oligoply :

 Oligopolies occur when a small number of firms collude, either explicitly or implicitly,
to restrict output or fix prices, in order to achieve above normal market returns.
 Oligopolies can be contrasted with monopolies where only one firm exists as a
producer.
 Government policy can discourage or encourage oligopolistic behavior, and firms in
mixed economies often seek government blessing for ways to limit competition.
 Examples of oligopolies can be found across major industries like oil and gas,
airlines, mass media, automobiles, and telecom.
 The existence of oligopolies does not imply that there is coordination or collusion
going on.

Example of industries that have oligopolistic :

The computer technology sector shows us the best example of oligopoly. If we dig under
computer operating softwares, two prominent names come up: Apple and Windows. These
two players have managed the majority of the market share. There is one more player in this
oligopoly named Linux Open Source. But apart from these three, there are hardly any
players in this sector as they command almost 100 % of the global market share. The
computer can be of any brand, but the operating system will be for sure from any of those.
They have achieved this stage because of two primary factors.

One is the brand image and trust they have created in the eyes of consumers, and secondly,
there is the lack of players who can stand in front of these three while building trust among
consumers. Moreover, their dominance in this sector gets increased as the majority of
computer softwares made are compatible with these three operating systems, which in turn
is making this oligopoly self-sustaining. Their innovations into their sector also keep them
unique, which helps them create an ecosystem that completely sustains their growth.

(6 marks)

~ END OF QUESTIONS ~