4MIC1 041110003 TMA1-commented

Microeconomics Tutor Marked Assignment 1 201
Name: Kishin Sham Mahtani

Student ID: 041110003
Title: Microeconomics Tutor Marked Assignment 1
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Question1.
(a). The equilibrium price is the price at which the quantity supplied and the quantity demanded are
equal this will not change unless the quantity demanded or supplied changes. On a graphical
representation it is the point at which the Demand and Supply curves intersect. On the other hand the
equilibrium quantity is the quantity supplied and quantity demanded at this equilibrium price.
Market Demand
(Kg) Price (RM Kg)
20 1.20
22 1.00
24 0.80
26 0.60
Market Supply
(Kg) Price (RM Kg)
24 1.20
22 1.00
20 0.80
18 0.60
Figure 1
With reference to the graph labeled Figure 1above plotted from the data of Market Demand and
Supply the equilibrium price which is where the Demand and Supply curve intersect is One
ringgit (1RM) and the equilibrium quantity which is the quantity demanded and supplied is
twenty two (22).
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(b.) At the price of RM 1.20 the quantity demanded is twenty (20) Kg’s of onions and the quantity that is
being supplied is twenty four (24) Kg’s of onions which results in an excess of four (4) Kg’s. This excess
is referred to as a surplus or excess supply and is the situation in which the quantity supplied is greater
than the quantity demanded.
As Onions are perishable goods the suppliers are under pressure to dispose of these onions before they go
bad so the viable option is to reduce their price, the effect of this reduction in price would be an increase
in the quantity demanded and a decrease in the quantity supplied. This scenario does not encourage the
suppliers to increase output. Their prices would continue to fall until the market attains a new
equilibrium. This new equilibrium price created could be higher or lower than the original one in Figure
1.
(c.) At the price of RM 0.60 the quantity demanded is twenty six (26) Kg’s of onions and the quantity that
is being supplied is eighteen (18) Kg’s of onions which results in a deficit of eight (8) Kg’s. This deficit is
referred to as a shortage or excess demand and is the situation in which the quantity demanded is greater
than the quantity supplied.
In this scenario which is totally the opposite of (b.) above the suppliers have the upper hand and are under
no pressure to improve the supply at this current price, the buyers are chasing a lower quantity of onions
and to avoid waiting would be willing to pay a slightly higher price and this is the signal that now makes
the suppliers start to raise their prices without fear of losing sales. This rising price encourages the
supplier to also increase output. As the price rises this leads to a decrease in demand and the quantity
supplied increases and once again the market moves towards a new equilibrium. This new equilibrium
price created could be higher or lower than the original one in Figure 1
(d.) Due to the severe drought the production of onion has dropped by four (4) Kg’s at each price level
and the demand has stayed constant the new data is reflected below in the demand and supply schedule
and this data of Market Demand and New Market Supply is plotted in Figure 2.
Market Demand (Kg) Price (RM Kg)

20 1.20
22 1.00
24 0.80
26 0.60
Original Market Supply New Market Supply

(Kg) (Kg) Price (RM Kg)
24 20 1.20
22 18 1.00
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20 16 0.80
18 14 0.60
Figure 2
With reference to the data plotted in figure 2 the two curves of demand and supply intersect at RM 1.20
(One ringgit and twenty cents) and this intersection is the new equilibrium price. The quantity demanded
and supplied at this point is twenty (20) Kg’s of onions. The output that has resulted from this severe
drought is now twenty (20) Kg’s of onions.
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Question 2.
(a).
Quantity Demanded Price (RM per

(Tons) Ton)
1000 20
900 25
750 30
600 35
500 40
350 45
Quantity Supplied Price (RM per

Tons) Ton)
450 20
600 25
750 30
900 35
1050 40
1200 45
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(a). The amount of wheat traded in the market is the point where the quantity demanded equals the
quantity supplied also known as the equilibrium price. In this case referring to the graph above it can be
seen that at the point where the supply and demand curves intersect is thirty (30RM) ringgit and the
quantity supplied and demanded is seven hundred and fifty (750) Tons of wheat. Therefore the amount of
wheat traded is seven hundred and fifty (750) Tons.
(b). A price floor is a government or group imposed limit on how low a price can be charged for a product
and for this price floor to be effective it must be greater than the equilibrium price. At the price floor of
forty (RM 40) ringgit per ton the quantity demanded is five hundred tons (500) and the quantity supplied
is one thousand and fifty tons (1050), so at this price floor there is a surplus.
(c). There is a surplus of five hundred and fifty tons (550) at the price floor of forty (40RM) ringgit and
this surplus is the difference between the quantity demanded which is five hundred tons (500) and the
quantity supplied which is one thousand and fifty tons (1050).
Surplus = Qs (Quantity Supplied) – Qd (Quantity Demanded)
1050 - 500 = 550.
(d). The consequence of setting the price floor above the market equilibrium causes consumers to now
pay a higher price for the same product and as a result of this they now reduce their purchases or drop out
of the market entirely. On the other hand suppliers realize that they are guaranteed a new, higher price
than they were charging before. As a result they increase production thus over supplying the market.
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Taken together, these effects have now caused an excess supply also known as a surplus of the wheat in
the market. For the government to maintain this price floor over a longer period could cause people to
look for alternatives and to avoid this, the government may need to take action to remove it.
(e). With reference to a new price floor of twenty five ringgit (25RM) the quantity demanded is nine
hundred tons (900) and the quantity supplied is six hundred tons (600) which shows there is an excess
demand and this is three hundred tons (300).
Shortage = Qd (Quantity Demanded) - Qs (Quantity Supplied)
900 - 600 = 300
Question3.
(a). The price elasticity of demand in economics is a measure used in economics to show the
responsiveness of the quantity demanded of a good or service to a change in its price. To be more
precise, it is calculated as the percentage chance in quantity demanded in response to a one percent
change in price holding constant all the other determinants of demand, such as income. Price elasticity’s
are almost always negative although analysts tend to ignore this sign.
Price elasticity of demand = Percentage change in quantity demanded
______________________________
Percentage change in Price
The midpoint method is simply just a better way to do this calculation and is represented by the following
formula
P.E.D.. = [(Q2 - Q1) / ((Q1 + Q2) /2)] / [(P2 - P1) / ((P1 + P2) / 2)]
Q1= Initial Quantity
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Q2= New Quantity
P1= Initial Price
P2= New Price
Using the midpoint method and data supplied when income equals RM7, 500 the price elasticity of
demand between
(1). RM16 and RM20
P1= 16RM and Q1=9
P2= 20RM and Q2=6
Applying the formula:
P.E.D.. = [(Q2 - Q1) / ((Q1 + Q2) /2)] / [(P2 - P1) / ((P1 + P2) / 2)]
[(6-9)/ (6+9)/2] / [(20-16)/(20+16)/2]
{-3/7.5}/ {4/18}
= -1.80
The price elasticity of demand is 1.8 and this indicates that demand is elastic which means that a small
change in price affects the quantity demanded substantially. An example of an elastic good is coffee.
(2). P1 = 8RM and Q1 =15
P2 = 12RM and Q2= 12
Applying the formula:
P.E.D. = [(Q2 - Q1) / ((Q1 + Q2) /2)] / [(P2 - P1) / ((P1 + P2) / 2)]
[(12-15)/ (12+15)/2]/ [(12-8)/ (12+8)/2]
{(-3/13.5)}/ {(4/10)}
= -0.55
The price elasticity of demand is 0.55 which indicates that the demand is inelastic and this indicates that
the quantity demanded responds only slightly to changes in the price. An example of an Inelastic good is
gasoline.
The common practice is to drop the minus signs and report all price elasticities as positive numbers.
(Mathematicians call this the absolute value).
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(c). The income elasticity of demand in economics is a measure of the responsiveness of the demand for a
good or service to a change in the income of the people demanding the good or service and taking into
account that we are holding all prices constant. It is calculated as the percentage change in demand to the
percentage change in income. An example would be in response to a fifty (50%) percent change in
income the demand for a good increased by one hundred percent (100%), the income elasticity of demand
would be 100%/50% = 2.
Income elasticity of Demand = Percentage change in quantity demanded
________________________
Percentage change in Income.
Taking this formula and definition into account;
(1).At a price of RM16 the income elasticity of demand when income rises from RM5000 to RM10, 000
would be as follows
Quantity Demanded at RM5, 000 = 6 referred to as QD1
Quantity Demanded at RM10, 000 =12 referred to as QD2
Therefore the percentage change in quantity demanded is
QD2 –QD1
__________ X 100%
QD1
Thus applying this formula gives us 12-6/6 X100% = 100%
Initial Income = RM 5000 referred to as Inc1
New Income = RM10, 000 referred to as Inc2
Therefore the percentage change in Income is
Inc2 – Inc1
_________ X100%
Inc1
Thus applying the formula gives us 10,000 -5000/5000 X100% = 100%
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So using the formula:
________________________
The income elasticity would be = 100/100 = 1
So when the income rises from RM5, 000 to RM10, 000 the income elasticity of demand is 1.
A positive income of elasticity of demand is associated with normal goods, as an increase in income leads
to a rise in demand.
Once again taking this formula and definition from above for Income elasticity of demand into account;
(2).At a price of RM16 the income elasticity of demand when income rises from RM7500 to RM10, 000
would be as follows
Quantity Demanded at RM7, 500 = 9 referred to as QD1
Quantity Demanded at RM10, 000 =12 referred to as QD2
Therefore the percentage change in quantity demanded is
QD2 –QD1
__________ X 100%
QD1
Thus applying this formula gives us 12-9/9 X100% = 33.33%
Initial Income = RM 7,500 referred to as Inc1
New Income = RM10, 000 referred to as Inc2
Therefore the percentage change in Income is
Inc2 – Inc1
_________ X100%
Inc1
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Thus applying the formula gives us 10,000 -7,500/7,500 X100% = 33.33%
So using the formula:
________________________
The income elasticity would be = 33.33/33.33 = 1
So when the income rises from RM7, 500 to RM10, 000 the income elasticity of demand is 1.
A positive income of elasticity of demand is associated with normal goods, as an increase in income leads
to a rise in demand.
Question 4
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Using the above figure we now see how to use a diagram to calculate the tax on buyers. We must keep in
mind that the quantity at which the demand curve exceeds the height of the supply curve by the amount of
the tax. This will be the after tax equilibrium quantity.
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After adding in the points:
The Red line is the Price sellers Receive and Quantity Demanded.
The Blue line is the Price without Tax and Quantity Demanded.
The Purple line is the Price buyers Pay and Quantity Demanded.
(a). With reference to the above diagram the price paid by buyers after tax is imposed is
eighteen (18) ringgit. It is shown by the purple line.
(b). Once again referring to the above diagram the effective price received by the sellers after the
tax is received is eight (8) ringgit. It is shown by the red line.
(c). the amount of tax per unit is the difference between what the buyers pay and what the
suppliers receive and this is ten (10) ringgit.
(d). The per unit burden of the tax for buyers is the difference between what price buyers pay and
the price without tax and this is four (4) ringgit. The per unit burden of the tax for sellers is the
difference between the price with tax and the actual price that the sellers receive and this is six
(6) ringgit.
(e). The tax revenue generated for this product would be calculated as the difference between
what price buyers pay and what price sellers receive which is ten (10) ringgit multiplied by the
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quantity supplied or sold which in this case is sixty (60) units. So the total revenue that this
product generates for the government is six hundred (600) ringgit.
Section B
Question1
(a)
Price
P2 Eq2
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P1 Eq1
Demand 1
(D1)
Q2 Q1 Quantity
Demanded of Milk
Referring to the above diagram it is seen that an Increase in the price of milk from P1 to P2 will cause the
quantity demanded to drop from Q1 to Q2 thus referring to the diagram we can clearly see that the
demand curve shifts in an upward moment along the demand curve creating a new equilibrium price from
Eq1 to Eq2. So the statement that an increase in the price of milk will cause the demand curve to shift to
the right is FALSE.
(b)
Price
Supply 2 (S2)
Supply 1 (S1)
P2 EQ2
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P1 EQ1
P3
Demand 1
(D1)
Q2 Q1 Quantity
Referring to the above diagram it shows that an increase in price due to the government imposing an
import tax on perfumes increases the price from P1 to P2, the resulting effect is a drop in the quantity
demanded from Q1 to Q2. In terms of supply a tax on sellers shifts the supply curve upward by the
amount of tax, the effective price now received by the sellers has dropped from P1 to P3. It is now not as
profitable for them to supply a larger quantity of perfume. Thus the statement that when the government
imposes and import tax on the perfumes; the supply of imported perfumes will increase is FALSE
(c).
Price
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(P1)
Demand 2 (D2)
Demand 1 (D1)
QD1 QD2 Quantity
With reference to the above diagram it can be seen that with a subsequent increase in population
there is a rise in the demand for goods and services at the same price level P1 and this is because
there are more people in the market looking for the same goods and services which causes the
demand curve to shift to the right from D1 to D2 which concurrently raises the demand from
QD1 to QD2. Thus we can conclude that the statement as the population of Indonesia increases
the demand for goods and services increases is TRUE.
(d). Price
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P1
Demand
1(D1)
Demand 2 (D2)
QD2 QD1 Quantity
As chicken and beef are substitute goods, due to the decrease in price of chicken the consumers
tend to buy more thus reducing their demand for beef which is more expensive in comparison to
chicken even though it has remained at the same price P1. The demand curve has shifted to the
left from D1 to D2 and the quantity demanded has dropped from QD1 to QD2. Hence the
statement as the price of chicken decreases, the demand for beef decreases (assume chicken and
beef are substitute goods) is TRUE
(e).
Price
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Supply 1 (S1)
P2
P1
Demand 1
(D1)
Q1 Q2
Quantity
With reference to the above diagram it can be seen that with a drop in prices of televisions from
P2 to P1 the supply of televisions also drops from Q2 to Q1 as it is not so profitable and
encouraging for the supplier to deliver so many televisions so the statement; A decrease in the
price of television will cause the supply of television to decrease is TRUE
(f).
Price
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Price 1
Demand 2 (D2)
Demand 1 (D1)
QD1 QD2 Quantity
From the diagram above it can be seen that with an increase in income the quantity demanded for
cereal increases from QD1 to QD2 at the same price1 as the consumer now has more disposable
income as his purchasing power has increased. As cereal is a normal good a subsequent rise in
income increases the demand for cereal. This then shifts the demand curve to the right from D1
to D2. Hence the statement if the income of consumers increases, the demand curve for cereal
shifts to the left (assume cereal is a normal good) is FALSE
Question2
(a). A daily newspaper reports that banana provides more nutrients than apple.
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Price
Supply (S)
P1 EQ2 EQ1
Demand
1
Demand 2
Q2 Q1
Quantity Demanded
With reference to the above diagram even though the price of apples has stayed constant at P1
the demand has still dropped from Q1 to Q2 because the values of people has changed as the
incentive to consume bananas has increased due to the article that shows bananas have more
nutrients than apples. The demand curve shifts to the left. This is the case of change in demand.
(b). The Government has increased the emolument of civil servants.
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Price
Price 1
Demand 2 (D2)
Demand 1 (D1)
QD1 QD2 Quantity
As the government increases the emolument of civil servants, they now have more disposable
income which they can now use to buy more apples. This causes the quantity demanded to rise
from QD1 to QD2 at the price remaining constant at Price 1. The demand curve shifts to the right
from Demand 1 to Demand 2. This is a case of change in demand.
(c). the price of oranges falls.
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Price
P1
Demand 1
(D1)
Demand 2 (D2)
QD2 QD1 Quantity
Oranges and Apples are substitutes, as both are fruits and satisfy similar desires so when the
price of orange falls the demand for apples decreases. The Demand curve of apple D1 moves to
the left and is represented by D2. Even though the price of apples stays constant at P1 the fact
that Oranges and Apples are substitutes the quantity for apples drops from QD1 to QD2. This
shift in the demand curve for apples when the price of oranges falls is a case of change in
demand.
(d). The Price of apples falls
Price
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EQ1
P1
EQ2
P2
Q1 Q2
Quantity
Demanded
With reference to the above diagram it can be clearly seen that with a reduction in price of apples from P1
to P2 the quantity demanded rises from Q1 to Q2. The demand curve shifts downwards as can be seen by
the creation of a new equilibrium price from the original EQ1 to EQ2. This is a case of change in the
quantity demanded.
(e). Consumers expects the price of apples to increase in the future;
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Price
P2
P1
Demand2
Demand1
Q1 Q2 Quantity
Demanded
The increase in demand from Q1 to Q2 bought about by consumers expecting a price increase
shifts the demand curve to the right from Demand 1 to Demand 2 and in the process increases the
price from P1 to P2. The fact that consumers expect the price of apples to increase in the future is
a case in change in demand.
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(f). the weather condition had decreased the supply of apples and as a result the price of apples had
increased.
Price
Supply2 (S2)
Supply 1
(S1)
P2 EQ2
P1 EQ1
Demand1
QD2 QD1
Quantity
Due to the adverse weather conditions the supply of apples drops thus causing the supply
curve to shift to the left from S1 to S2. This now creates a new equilibrium point EQ2 and
represents a movement upwards along the demand curve from the original equilibrium point
EQ1 to EQ2. This has an overall effect of reducing the quantity demanded from QD1 to QD2
and the price increases from P1 to P2. This movement along the demand curve indicates a
change in quantity demanded.
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Question 3
(a). Land, labor, capital, machines, tools and money are the resources that every economy needs. A
resource is anything that people can use to make or obtain what they need or want. The choices that
individuals and nations make in using these limited resources help in shaping that nation’s economy.
Economics is defined as the study of how individuals and nations make choices about how to use scarce
resources to fulfill their needs and wants. Economics helps one to understand both costs and benefits and
this therefore helps us to make better decisions. Economics examines facts in order to make choices.
The reason we need to make choices is because everything that exists is limited even though some items
like air and water may appear to be in overabundant supply.
Scarcity simply means that people do not and cannot have enough income, time or resources to satisfy
their every desire. Scarcity affects both businesses and individuals.
With reference to the definitions above it can be seen that the study of Economics without doubt depends
upon the phenomenon of scarcity. If resources were abundant and people and nations could simply have
all that they wanted there would not exist the field of Economics. If we were not to study economics we
would not know if we are making the correct and more profitable choices with what to do with our scarce
resources. The phenomenon of scarcity allows us through the study of Economics know what our tradeoff
is and what’s the opportunity cost of a decision we take using our limited resources.
A tradeoff is simply the exchanging of one thing for another and every time an individual, business or
nation makes a tradeoff they use there scarce resources in one way not another.
Opportunity cost is the next best alternative that had to be given up for the alternative that was chosen.
Every tradeoff involves an opportunity cost.
A simple example of how economics depends upon the phenomenon of scarcity is like the case of
Selangor recently, the land to grow palm oil is scarce (even though land might appear to be abundant)
because the land required to grow this extra palm oil is forest reserve land. Now if we did not have this
scarcity we could both have our land for palm oil and our forest reserve but this is not possible. So now
due to this scarcity of land we have to apply the principle of Economics to assess the tradeoff for
development over conserving the environment. If we decide for development the opportunity cost would
be an increase in pollution with the destruction of the environment, but the financial gain from palm oil
would be high and increase the standard of living of the population of Selangor. So then Economists
study and propose what are the different possible outcomes. But what happens after that now depends
upon the values of the decision makers and people of Selangor. So if they choose more palm oil the
opportunity cost to them is a higher level of pollution.
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(c) An incentive is something such as the prospect of a punishment or a reward that induces a person to
act, and because rational people make decisions by comparing costs and benefits they respond to
incentives. Over a period incentives will cause people to alter their behavior.
Currently the school year stands at nine and half months per year (91/2 months) and teachers for many
years have been used to this system and plan their holidays and other non-teaching activities around
this long break. The perceived benefits of being a teacher are working for nine and half months per
year (91/2 months) and being paid for twelve (12) months. Due to this period of having to cover the
entire curriculum for the year teachers tend to be more organized and plan their lessons so that there
time in the classroom is well utilized. Teachers are motivated and statistically a lot of young ladies
prefer going into this teaching line for these benefits of extra free time and good pay.
If the policy changes and the school year is now extended to eleven (11) months per year, initially
there will be a resistance by teachers to adapt to this ruling, as they will perceive there having to bear
an increase in the cost of teaching though they were paid for the full year they never had to work the
full year. It was one of the perks for signing up to be a teacher. Eventually the will have to agree but
those who can find work in different sectors with better pay will take it as the conditions will be
similar to that sector a eleven month working year. This will be the start of a shortage of teachers.
Those who cannot find other jobs will continue to work but will not be as motivated as before.
The long term consequences of this however would be teachers will look for other jobs and many
parents would not encourage their children to go into the teaching profession as they would be able to
get a better salary in another sector under the same working conditions.
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Question4
(a).
Price Supply2 (S2)

Supply 1(S1)
P2 Eq2
P1 Eq1
P3 Eq3
Demand2 (D2)
Demand 1(D1)
Q3 Q2 Q1
Quantity Demanded
The outbreak of bird flu results in two demand-supply effects. The first of which is a decrease in
the quantity of chicken supplied due to the destruction of live chickens. This causes the supply
curve S1 to shift towards the left to supply curve S2 and this places an upward pressure on prices
and has a negative impact on quantity traded which drops from Q1 at Equilibrium point 1 to Q2
at equilibrium point 2 and this increases the price from P1 to P2.
At the same time there is a decrease in the quantity of chicken demanded due to fear of the
disease and a change in consumer preference, this then results in an inward or left shift from D1
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to D2 and this places a downward pressure on price which reduces from P2 back to P1 and
finally down to P3. There is also a negative impact on quantity traded which further falls from
Q2 to Q3.
The overall effect on price will be ambiguous as from the above diagram the demand change
suggests falling prices, while the supply change suggests rising prices. We do not have enough
information to know which effect will outweigh the other.
The overall effect on quantity traded will be negative: both the demand change and supply
change suggest a decline in the quantity traded.
(b). the market for beef was unaffected as there were no external factors affecting it and thus we assume
that the price remained the same and the quantity supplied and demanded also was also unchanged. The
people buying beef would still buy there beef and as there is no indication that the people who used to
buy chicken would switch to beef we therefore assume that in this case the market was unaffected. For
the market of Beef to have been affected we would have to assume that Beef and Chicken were substitute
goods, and this would have had different ramifications.
(c). Price
Supply 1(S1)
P1 EQ1
P2 EQ2
Demand 1
(D1) Demand 2 (D2)
QD2 QD1
Quantity
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The effect of a mad cow disease scare affects the beef market but not entirely in the same way as the bird
flu pandemic. The key criterion here is it is a scare and could have been caused by a rumor or
misinformation or some other variable. But in reality as it is only a scare it does not really affect the
supply and this causes the supply curve (S1) to remain the same. The quantity of beef supplied does not
change. On the other hand now that the values of people have changed due to this scare they have reduced
their demand for beef. This has the effect of moving the Demand curve from D1 to D2 and this causes the
original equilibrium point EQ1 to move to a new equilibrium point EQ2 which reflects both a reduction in
quantity demanded and price. The quantity drops from QD1 to QD2 and the price from P1 to P2.
5. (A). The field of Economics is divided into two subfields: Microeconomics and Macroeconomics and
are the fundamental tools to be learnt, in order to understand how the economic system is administered,
and sustained. Microeconomics and macroeconomics are important studies within economics that are
essential to sustain the overall growth and standard of the economy. While the two studies are different,
with microeconomics focusing on the smaller business sectors, and macroeconomics focusing on the
larger income of the nation, they are interdependent, and work in harmony with each other.
Further defining them in detail to show their main differences, Microeconomics is the study of decisions
that individuals and businesses make regarding the allocation and utilization of scarce resources and the
resulting prices of goods and services. Microeconomics also takes into account taxes and regulations put
forward by governments. Microeconomics focuses on demand and supply and other forces that could
determine the price levels seen in the economy. An example could be the study of how an organization
like Proton could maximize the use of its factors of production so that it could lower prices and compete
further in this competitive automobile industry.
On the other hand Macroeconomics on the other hand is the field that studies the behavior and
characteristics of the overall economy and concentrates on two major areas, increasing economic growth
and changes in the national income and not just decisions of specific individuals and businesses. It
focuses on entire industries and economies and looks at economy wide phenomena’s such as the Gross
National Product (GDP) and how the changes in unemployment, national income, rate of growth and
price levels affect the economy. An example of macroeconomics would look at how an increase/decrease
in net exports of Malaysia would affect our nation’s balance of payments, or how GDP could be affected
by a high unemployment rate.
Referring to the definitions above:
1. The impact of a change in consumer income on the purchase of luxury automobiles is a

microeconomic statement as it deals with the demand of luxury automobiles and considers how
changes in consumer incomes will affect this demand and further determine the price levels in the
economy. It meets the criteria of microeconomics.
2. Factors influencing the rate of economic growth are a component of macroeconomics, as it

focuses on the characteristics of the overall economy.
3. The impact of tax policy on national saving is also a component of macroeconomics, as tax
policies and saving habits affect the overall economy thus meeting the criteria of being classified
as macroeconomics.
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4. The effect of a change in the price of Coke on the purchase of Pepsi reflects on the demand of a
product Coke whose price has increased or decreased when there is an equivalent substitute in the
market. This meets the criteria to be classified as microeconomics
(b). A normative statement is one that would express judgment about whether a situation in the world is
desirable or undesirable and what it ought to be. It is very difficult to disprove these statements as they
not only involve facts but beliefs and characteristics that the person or group making the statement
considers important.
On the other hand a positive statement is a statement about what is and contains no indication of approval
and disapproval. A positive statement can be wrong, but it is a positive statement because it is a statement
about what exists in the world as it is.
Economists have found the positive-normative distinction of great importance because it helps
people with very different values and mindsets about what is desirable to communicate with each
other. If their disagreement is strictly on normative grounds, they know that their disagreement
lies outside the realm of economics, so economic theory and evidence will not bring them
together. However, if their disagreement is on positive grounds, then further discussion, study,
and testing may bring them closer together, both positive and normative statements must be
combined to make a policy statement. One must make a judgment about what goals are desirable
(the normative part), and decide on a way of attaining those goals (the positive part) Most
statements are not easily categorized as purely positive or purely normative. Rather, they are like
tips of an iceberg, with many invisible assumptions hiding below the surface.
(1.) The minimum wage creates unemployment among young, and unskilled workers are a
positive statement as it is being stated as a fact.
(2.)There is a tradeoff between inflation and unemployment in the short run is also a positive
statement as it is being stated as a fact.
(3.)Malaysian income distribution is not fair is a judgmental statement of an issue that is
undesirable thus it is a normative statement.
(4.)If interest rates increase, then investment will decrease is also being stated as a fact thus it
is a positive statement.
32
1
REFRENCES
MankiwPrinciples of Economics. 4thed. Canada: Thomson South-Western, 2007.
http://en.wikipedia.org/wiki/Demand_and_supply (accessed Feb 2011).
http://en.wikipedia.org/wiki/Elasticity_(economics) (accessed Feb 2011).
http://en.wikipedia.org/wiki/Economics (accessed Feb 2011).
http://en.wikipedia.org/wiki/Positive_economics (accessed Feb. 2011).
http://en.wikipedia.org/wiki/Normative_economics (accessed Feb2011).
33

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Microeconomics Tutor Marked Assignment 1 201

Name: Kishin Sham Mahtani

Market Demand (Kg) Price (RM Kg)

Original Market Supply New Market Supply

Quantity Demanded Price (RM per

Quantity Supplied Price (RM per

Surplus = Qs (Quantity Supplied) – Qd (Quantity Demanded)

1050 - 500 = 550.

Shortage = Qd (Quantity Demanded) - Qs (Quantity Supplied)

900 - 600 = 300

Price elasticity of demand = Percentage change in quantity demanded

Percentage change in Price

Q1= Initial Quantity

P1= Initial Price

P2= New Price

(1). RM16 and RM20

P1= 16RM and Q1=9

P2= 20RM and Q2=6

Applying the formula:

[(6-9)/ (6+9)/2] / [(20-16)/(20+16)/2]

(2). P1 = 8RM and Q1 =15

P2 = 12RM and Q2= 12

Applying the formula:

[(12-15)/ (12+15)/2]/ [(12-8)/ (12+8)/2]

Income elasticity of Demand = Percentage change in quantity demanded

Percentage change in Income.

Taking this formula and definition into account;

Quantity Demanded at RM5, 000 = 6 referred to as QD1

Quantity Demanded at RM10, 000 =12 referred to as QD2

Therefore the percentage change in quantity demanded is

Thus applying this formula gives us 12-6/6 X100% = 100%

Initial Income = RM 5000 referred to as Inc1

New Income = RM10, 000 referred to as Inc2

Therefore the percentage change in Income is

Thus applying the formula gives us 10,000 -5000/5000 X100% = 100%

Income elasticity of Demand = Percentage change in quantity demanded

Percentage change in Income.

The income elasticity would be = 100/100 = 1

Quantity Demanded at RM7, 500 = 9 referred to as QD1

Quantity Demanded at RM10, 000 =12 referred to as QD2

Therefore the percentage change in quantity demanded is

Thus applying this formula gives us 12-9/9 X100% = 33.33%

Initial Income = RM 7,500 referred to as Inc1

New Income = RM10, 000 referred to as Inc2

Therefore the percentage change in Income is

So using the formula:

Income elasticity of Demand = Percentage change in quantity demanded

Percentage change in Income.

The income elasticity would be = 33.33/33.33 = 1

QD1 QD2 Quantity

QD2 QD1 Quantity

QD1 QD2 Quantity

(b). The Government has increased the emolument of civil servants.

QD1 QD2 Quantity

(c). the price of oranges falls.

QD2 QD1 Quantity

(d). The Price of apples falls

(e). Consumers expects the price of apples to increase in the future;

Price Supply2 (S2)

Referring to the definitions above:

1. The impact of a change in consumer income on the purchase of luxury automobiles is a

2. Factors influencing the rate of economic growth are a component of macroeconomics, as it