Demand Curve and Marginal Cost - Assignment Example

Question 1 a. All factors held constantly, when the price of a commodity rises, the demand falls and likewise when the price of the same commodity falls, the demand increases (Tucker, 279). The law of demand is as result of scarcity in resources whereby resources are allocated to production of most essential goods in a given market system. If there is no scarcity in resources, the law will not hold since goods will be produced sufficiently and as thus price will no longer be the determinant of demand (Boyes et al, 47). Likewise, efficiency in the use of resources will lose its meaning since producers will not see the need of overstretching a resource to gain maximum benefit from it since the resource is already in abundance. Producers observe the objective of efficiency due to scarcity resource and they try to make maximum use of its resource. If scarcity of resources does not exist, then the objective of efficiency cannot hold (Tucker, 279). Question 1 b. Every society faces three problems in its market systems. The three problems are the problem of scarcity, choice and how to allocate resources. The price mechanism plays a vital role as an allocative device in helping to solve these fundamental problems. First and foremost, it plays the signalling role (Krugman et al, 60). This means that it helps to give a signal as to where resources should be allocated and where they should not. Secondly, the price mechanism acts as a transmission of preference. The choices consumers make are mostly influenced by prices and they help send a message to producers on how their needs and wants are changing. Finally, price mechanism performs the rationing function. Prices help in rationing of the scarce resource available for production when demand in the market is higher than supply (Boyes et al, 47). The market system is characterized by so many defects. One of the defects is instability in terms of employment, growth and also inflation which affects the performance of the market. Market system is also ineffective and it tends to only satisfy the wants it has created through its advertising channels rather than the total market demand. Market systems also fall short of vital services such as defence which is a good in great demand by consumers. Finally, the price mechanism used to solve fundamental problems in the market overlooks some problems such as externalities and as thus may give misleading information to producers and customers (Tucker, 270-279). Question 2 a. The couples' reasoning is not valid at all. Their reasoning implies that there is no opportunity cost in foregoing the vacation since the amount they spend for the vacation, which is $300 per week totals to $3000 for the ten weeks they are on vacation which is equal to the amount they spend on expenses per year (Gans, 56). What they are forgetting is that, for the other weeks they are not on vacation, the bills still count and the $3000 for the vacation stills adds to the figure thus their budget is way more above $3000.The couple is ignoring the concept of opportunity cost and as thus their reasoning is not valid (Gans, 56). Question 2 b. The theory of comparative advantage implies that, an individual that has comparative advantage in production can produce a commodity at a lower cost than someone else. However, having a comparative advantage in production does not mean that someone is good at what they are doing, the only advantage is that they can do it at a much lower cost (Mc nutt, 404). A company maybe better placed to contract out specific activities from external contractors even if the cost involved in contracting it is high that it would be if the company performed the activity itself (Gans, 56). The company has to look at the opportunity cost of performing the activity itself. It may spend a lot of money and resources performing the activity at the expense of other activities which would be more profitable to it rather than performing this specific activity. It might be worthwhile to incur the cost of foregoing the activity at the expense of performing other activities (Gans, 55-57). Question 3 A price floor is defined as the lowest price at which a commodity is offered to its consumers, and an example is minimum wage that is the minimum amount a person can pay for providing labour. A price floor is set above the market equilibrium price. A price ceiling is set by the government and it indicates the limit of how high the price of a commodity can rise. A price ceiling is set below the market equilibrium. Price floors and price ceilings help in quantity rationing (Wessels, 40-45). When a price floor is set, supply is more than demand. Consumers will only be willing to buy the quantity where the demand curve intersects the price floor. The producers are willing to supply quantity whereby their marginal cost equals the price floor. When a price ceiling is set, demand in the market then exceeds supply. And the opposite of a price floor occurs (Wessels, 40-45). This intervention by the government has resulted in a few problems. A government can introduce a price floor to ensure that farmers get a price higher than the market price for their farm production. The resulting problem is the deadweight loss. Setting a price floor creates a difference between the price the marginal demander is willing to pay and the equilibrium price (Mceachem, 83-89). Dead weight loss can be described as the loss of consumer and producer surplus. A price ceiling on the other hand results into inefficiency also since the quantity supplied at the price ceiling since the marginal benefits exceeds the marginal cost. Other problems such as black market come in due to such interventions (Wessels, 40-45). Supply Price Floor DWL DEMAND Q.d Q.s Quantity Question 4 a. Assuming that both the rich and the poor have a linear demand curves, the demand curve for both of them is equally elastic. Due to their financial ability, the main determinant of elasticity in this case is the price. When the price remains constant, both the rich and the poor will buy at the equilibrium price which is set by the market (Chaippori, 113). When prices increases, the rich can still buy at the new price level thus their demand curve shifts to the new price level. Likewise when price rises, the poor are unable to purchase at this new price thus the amount of commodity they can purchase equally falls. Thus the demand curves for the rich and the poor are equally elastic (Mceachem, 117). Question 4 b. If the demand curve for illegal drugs is inelastic, and the government increases penalties for suppliers, and then the amount of crime committed by users of illegal drugs goes up. The suppliers of the illegal drugs will reduce supply thus making the price of the drugs to go up (Mceachem, 117). This is because the demand curve for the illegal drugs is inelastic and although supply goes down, the users will still demand the same amount. The users will then be forced to commit more crime to get more money to satisfy their usual cravings. The demand for drugs will remain the same, the price for the drugs will go up and so will the crime level (Chiappori, 113). Question 5 The knowledge of factor prices factor productivity is very essential in getting the cost condition. The factor prices help in determining how much of the factors can be used in production. Knowledge about factor productivity helps to determine how much of output can be generated from a combination of certain inputs. Having the knowledge of how much input and output is required helps to come up with cost conditions associated with a certain level of production and how much it would require producing an extra amount of the same output (O'connor, 4-7). Marginal cost is the cost incurred or associated with the production of an additional unit of a commodity. Average cost is the cost is the production cost per unit of output. Marginal cost can be calculated either from total cost or from total variable costs. This is because there is a direct relationship and total costs and total variable costs. Total costs are made up fixed costs and the variable costs (O'connor, 4-7). The fixed costs remain constant regardless the quantity of goods produced. Marginal cost is the change between the total costs incurred in production over the total quantity produced. Calculating marginal costs from total variable costs would still give the same results because fixed costs remain constant. The short run marginal cost curve falls initially and subsequently rises. This is because of the law of diminishing marginal returns, Marginal costs increase at a decreasing rate that's why the curve falls and then they rise subsequently leading to the rise of the curve. Same case applies to average variable costs (O'connor, 4-7). Work Cited Tucker, Irvin B. Macroeconomics for Today. Mason, OH: South-Western Cengage Learning, 2011. Print.279 Boyes, William J, and Michael Melvin. Economics. Australia: Cengage Learning South-Western, 2013. Print.47 Krugman, Paul, and Robin Wells. Macroeconomics. New York, NY: Worth Publ, 2006. Print.60 Wessels, Walter J. Economics. Hauppauge, NY: Barron's, 2000. Print.41 McEachern, William A. Microeconomics: A Contemporary Introduction. Cincinnati, 1993. Print.84 Gans, Joshua. Principles of Economics. South Melbourne, Vic: Cengage Learning, 2011. Print.56 McNutt, Paddy. The Economics of Public Choice: [contemporary Issues in the Political Economy of Governing]. Hants, En: Edward Elgar, 1996. Print.404 O'Connor, David E. The Basics of Economics. Westport, Conn: Greenwood Press, 2004. Print.4 McEachern, William A. Microeconomics: A Contemporary Introduction. Mason, OH: South-Western Cengage Learning, 2012. Print.117 Chiappori, Pierre-André, and I Ekeland. The Economics and Mathematics of Aggregation: Formal Models of Efficient Group Behavior. Boston: Now, 2009. Internet resource.113 Read More