Principles of Microeconomics: First Homework

Nikki Roche

Principles of Microeconomics: First Homework

Subject 1: Introduction

1.Keynes’s Fallacy of Composition states that although economic policies may be good for one system, they could be harmful when applied to a different system. An example would be an individual saving money. It would be beneficial to the individual, because he wouldn’t spend all of their income, however it would be bad for the economy since there wouldn’t be money being re-infused. Macroeconomics looks at the behavior of economic aggregates on a national scale (aggregate, GDP). Microeconomics looks at the behavior of individual decision-making, and examines the economic activities of individual consumers and producers (households and business firms).

Subject 2: Demand, Supply, and Market Equilibrium

3. The Law of Demand states that there is an inverse relationship between price and quantity demanded. The main objective for consumer demand is to maximize utility, which is satisfying power. Therefore the consumer would like to pay the lowest price.

4. There are five determinants for consumer demand: taste, income, and price, prices of substitutes and complements, and future expectations. If you have a taste for a certain product, you are more likely to buy more. If you have a low income, you may not be able to buy an expensive product. Also, if a product of a substitute is cheaper, consumers may switch to a new product. Finally, future expectations may influence a consumers demand for a certain product because if it will be cheaper in the future, they may hold off on buying it until the price goes down.

5. Substitutes are goods that can serve as alternatives for one another. When the price of one increases; demand for the other increases. An example would be Pizza Hut and Dominos Pizza. Complements are goods that go together, a decrease in the price of one would result in an increase in demand for the other. An example would be DVD players and DVDs.

6. Movement along a given demand curve is the relationship between prices and quantity demanded. If Pizza Hut reduced the prices of pizza, John will buy more pizzas, whereas if Pizza Hut increases the price, John will buy fewer pizzas, and possibly switch to a different restaurant. Shifts in demand curves result from changes in determinants of demand (besides price). If John gets a salary increase, he will be able to buy more pizzas, and the demand shift will curve outward to demonstrate this.

7. All households will have different demand curves because they bought different amounts of the product because of taste and/or income. Market demand is the sum of all the quantities of a good demanded by all the households buying in the market for that good.

8. The law of supply says that there is a positive relationship between price and quantity of a good. Therefore supply curves typically have a positive slope.

9. The determinants of supply are: the price of the good or service, the cost of producing the good, and the prices of related products (complements and substitutes). The cost of producing the good depends on the price of required inputs (labor, capital, and land) and the technologies that can be used to produce the product.