# Microeconomics Tutor Marked Assignment 1 201 1

Name: Kishin Sham Mahtani Student ID: 041110003 Title: Microeconomics Tutor Marked Assignment 1

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Microeconomics Tutor Marked Assignment 1 201 1
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) 20 22 24 26 Market Supply (Kg) 24 22 20 18 Price (RM Kg) 1.20 1.00 0.80 0.60 Price (RM Kg) 1.20 1.00 0.80 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). 2

Microeconomics Tutor Marked Assignment 1 201 1
(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) 20 22 24 26 Original Market Supply (Kg) 24 22 New Market Supply (Kg) 20 18 3 Price (RM Kg) 1.20 1.00 0.80 0.60

Price (RM Kg) 1.20 1.00

80 0.Microeconomics Tutor Marked Assignment 1 201 1 20 18 16 14 0. 4 .60 Figure 2 With reference to the data plotted in figure 2 the two curves of demand and supply intersect at RM 1. 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.20 (One ringgit and twenty cents) and this intersection is the new equilibrium price.

Quantity Demanded (Tons) 1000 900 750 600 500 350 Quantity Supplied Tons) 450 600 750 900 1050 1200 Price (RM per Ton) 20 25 30 35 40 45 Price (RM per Ton) 20 25 30 35 40 45 5 .Microeconomics Tutor Marked Assignment 1 201 1 Question 2. (a).

so at this price floor there is a surplus. 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). higher price than they were charging before. Therefore the amount of wheat traded is seven hundred and fifty (750) Tons. 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. (c). As a result they increase production thus over supplying the market. 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. (d).Microeconomics Tutor Marked Assignment 1 201 1 (a). 6 . On the other hand suppliers realize that they are guaranteed a new. Surplus = Qs (Quantity Supplied) – Qd (Quantity Demanded) 1050 500 = 550. 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). 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. (b). 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.

such as income. 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).Microeconomics Tutor Marked Assignment 1 201 1 Taken together.. To be more precise. (e).Q1) / ((Q1 + Q2) /2)] / [(P2 .E. Price elasticity’s are almost always negative although analysts tend to ignore this sign. 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. = [(Q2 . 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.Qs (Quantity Supplied) 900 600 = 300 Question3. (a).D. Shortage = Qd (Quantity Demanded) . 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. 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. the government may need to take action to remove it.P1) / ((P1 + P2) / 2)] Q1= Initial Quantity 7 .

Q1) / ((Q1 + Q2) /2)] / [(P2 . (2).D.P1) / ((P1 + P2) / 2)] [(6-9)/ (6+9)/2] / [(20-16)/(20+16)/2] {-3/7.8 and this indicates that demand is elastic which means that a small change in price affects the quantity demanded substantially.55 which indicates that the demand is inelastic and this indicates that the quantity demanded responds only slightly to changes in the price.P1) / ((P1 + P2) / 2)] [(12-15)/ (12+15)/2]/ [(12-8)/ (12+8)/2] {(-3/13.E. 8 . An example of an elastic good is coffee. RM16 and RM20 P1= 16RM and Q1=9 P2= 20RM and Q2=6 Applying the formula: P.5}/ {4/18} = -1..D.55 The price elasticity of demand is 0. An example of an Inelastic good is gasoline.Microeconomics Tutor Marked Assignment 1 201 1 Q2= New Quantity P1= Initial Price P2= New Price Using the midpoint method and data supplied when income equals RM7.Q1) / ((Q1 + Q2) /2)] / [(P2 .5)}/ {(4/10)} = -0.E. = [(Q2 . P1 = 8RM and Q1 =15 P2 = 12RM and Q2= 12 Applying the formula: P. 500 the price elasticity of demand between (1). (Mathematicians call this the absolute value). The common practice is to drop the minus signs and report all price elasticities as positive numbers. = [(Q2 .80 The price elasticity of demand is 1.

Microeconomics Tutor Marked Assignment 1 201 1 (c). 000 referred to as Inc2 Therefore the percentage change in Income is Inc2 – Inc1 _________ X100% Inc1 Thus applying the formula gives us 10.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. 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. the income elasticity of demand would be 100%/50% = 2.000 -5000/5000 X100% = 100% X 100% 9 . 000 =12 referred to as QD2 Therefore the percentage change in quantity demanded is QD2 –QD1 __________ QD1 Thus applying this formula gives us 12-6/6 X100% = 100% Initial Income = RM 5000 referred to as Inc1 New Income = RM10. 000 = 6 referred to as QD1 Quantity Demanded at RM10. 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%). (1). Taking this formula and definition into account. It is calculated as the percentage change in demand to the percentage change in income. Income elasticity of Demand = Percentage change in quantity demanded ________________________ Percentage change in Income.

500 referred to as Inc1 New Income = RM10. 000 to RM10. The income elasticity would be = 100/100 = 1 So when the income rises from RM5. 000 =12 referred to as QD2 Therefore the percentage change in quantity demanded is QD2 –QD1 __________ QD1 Thus applying this formula gives us 12-9/9 X100% = 33. 000 would be as follows Quantity Demanded at RM7. 500 = 9 referred to as QD1 Quantity Demanded at RM10. 000 referred to as Inc2 Therefore the percentage change in Income is Inc2 – Inc1 _________ X100% Inc1 X 100% 10 . 000 the income elasticity of demand is 1. (2). A positive income of elasticity of demand is associated with normal goods.At a price of RM16 the income elasticity of demand when income rises from RM7500 to RM10.33% Initial Income = RM 7. Once again taking this formula and definition from above for Income elasticity of demand into account.Microeconomics Tutor Marked Assignment 1 201 1 So using the formula: Income elasticity of Demand = Percentage change in quantity demanded ________________________ Percentage change in Income. as an increase in income leads to a rise in demand.

Microeconomics Tutor Marked Assignment 1 201 1 Thus applying the formula gives us 10.000 -7.500 X100% = 33.500/7. The income elasticity would be = 33.33 = 1 So when the income rises from RM7.33% So using the formula: Income elasticity of Demand = Percentage change in quantity demanded ________________________ Percentage change in Income. as an increase in income leads to a rise in demand. 500 to RM10. A positive income of elasticity of demand is associated with normal goods. 000 the income elasticity of demand is 1.33/33. Question 4 11 .

12 . This will be the after tax equilibrium quantity. 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.Microeconomics Tutor Marked Assignment 1 201 1 Using the above figure we now see how to use a diagram to calculate the tax on buyers.

Section B Question1 (a) Price P2 Eq2 14 . So the total revenue that this product generates for the government is six hundred (600) ringgit.Microeconomics Tutor Marked Assignment 1 201 1 quantity supplied or sold which in this case is sixty (60) units.

So the statement that an increase in the price of milk will cause the demand curve to shift to the right is FALSE.Microeconomics Tutor Marked Assignment 1 201 1 P1 Eq1 Demand 1 (D1) Q2 Demanded of Milk Q1 Quantity 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. (b) Price Supply 2 (S2) Supply 1 (S1) P2 EQ2 15 .

Price 16 . In terms of supply a tax on sellers shifts the supply curve upward by the amount of tax. It is now not as profitable for them to supply a larger quantity of perfume. the effective price now received by the sellers has dropped from P1 to P3. the resulting effect is a drop in the quantity demanded from Q1 to Q2.Microeconomics Tutor Marked Assignment 1 201 1 P1 P3 EQ1 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. Thus the statement that when the government imposes and import tax on the perfumes. the supply of imported perfumes will increase is FALSE (c).

Thus we can conclude that the statement as the population of Indonesia increases the demand for goods and services increases is TRUE. (d).Microeconomics Tutor Marked Assignment 1 201 1 (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. Price 17 .

Hence the statement as the price of chicken decreases. Price 18 . the demand for beef decreases (assume chicken and beef are substitute goods) is TRUE (e). 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.Microeconomics Tutor Marked Assignment 1 201 1 P1 Demand 1(D1) Demand 2 (D2) QD2 QD1 Quantity As chicken and beef are substitute goods. The demand curve has shifted to the left from D1 to D2 and the quantity demanded has dropped from QD1 to QD2.

A decrease in the price of television will cause the supply of television to decrease is TRUE (f). Price 19 .Microeconomics Tutor Marked Assignment 1 201 1 Supply 1 (S1) P2 P1 Demand 1 (D1) Q1 Quantity Q2 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.

Hence the statement if the income of consumers increases. A daily newspaper reports that banana provides more nutrients than apple. This then shifts the demand curve to the right from D1 to D2.Microeconomics Tutor Marked Assignment 1 201 1 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. the demand curve for cereal shifts to the left (assume cereal is a normal good) is FALSE Question2 (a). 20 . As cereal is a normal good a subsequent rise in income increases the demand for cereal.

The demand curve shifts to the left.Microeconomics Tutor Marked Assignment 1 201 1 Price Supply (S) P1 EQ2 EQ1 Demand 1 Demand 2 Q2 Quantity Demanded Q1 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. (b). 21 . The Government has increased the emolument of civil servants. This is the case of change in demand.

This causes the quantity demanded to rise from QD1 to QD2 at the price remaining constant at Price 1. (c). The demand curve shifts to the right from Demand 1 to Demand 2.Microeconomics Tutor Marked Assignment 1 201 1 Price Price 1 Demand 2 (D2) Demand 1 (D1) QD1 QD2 Quantity As the government increases the emolument of civil servants. 22 . This is a case of change in demand. the price of oranges falls. they now have more disposable income which they can now use to buy more apples.

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. The Demand curve of apple D1 moves to the left and is represented by D2. This shift in the demand curve for apples when the price of oranges falls is a case of change in demand. (d). as both are fruits and satisfy similar desires so when the price of orange falls the demand for apples decreases. The Price of apples falls Price 23 .Microeconomics Tutor Marked Assignment 1 201 1 Price P1 Demand 1 (D1) Demand 2 (D2) QD2 QD1 Quantity Oranges and Apples are substitutes.

24 . The demand curve shifts downwards as can be seen by the creation of a new equilibrium price from the original EQ1 to EQ2.Microeconomics Tutor Marked Assignment 1 201 1 EQ1 P1 EQ2 P2 Q1 Demanded Q2 Quantity 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. Consumers expects the price of apples to increase in the future. This is a case of change in the quantity demanded. (e).

25 . The fact that consumers expect the price of apples to increase in the future is a case in change in demand.Microeconomics Tutor Marked Assignment 1 201 1 Price P2 P1 Demand2 Demand1 Q1 Demanded Q2 Quantity 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.

Microeconomics Tutor Marked Assignment 1 201 1 (f). the weather condition had decreased the supply of apples and as a result the price of apples had increased. 26 . 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. Price Supply2 (S2) Supply 1 (S1) P2 P1 EQ2 EQ1 Demand1 QD2 Quantity QD1 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 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.

Microeconomics Tutor Marked Assignment 1 201 1 Question 3 (a). business or nation makes a tradeoff they use there scarce resources in one way not another. Economics helps one to understand both costs and benefits and this therefore helps us to make better decisions. tools and money are the resources that every economy needs. Land. A tradeoff is simply the exchanging of one thing for another and every time an individual. 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. But what happens after that now depends upon the values of the decision makers and people of Selangor. capital. 27 . A simple example of how economics depends upon the phenomenon of scarcity is like the case of Selangor recently. The choices that individuals and nations make in using these limited resources help in shaping that nation’s economy. With reference to the definitions above it can be seen that the study of Economics without doubt depends upon the phenomenon of scarcity. Every tradeoff involves an opportunity cost. Scarcity affects both businesses and individuals. 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. 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. 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. time or resources to satisfy their every desire. If resources were abundant and people and nations could simply have all that they wanted there would not exist the field of Economics. Opportunity cost is the next best alternative that had to be given up for the alternative that was chosen. If we decide for development the opportunity cost would be an increase in pollution with the destruction of the environment. labor. Economics examines facts in order to make choices. So if they choose more palm oil the opportunity cost to them is a higher level of pollution. 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. A resource is anything that people can use to make or obtain what they need or want. 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. machines. Scarcity simply means that people do not and cannot have enough income. 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. 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.

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. If the policy changes and the school year is now extended to eleven (11) months per year. 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. Those who cannot find other jobs will continue to work but will not be as motivated as before. 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. 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. It was one of the perks for signing up to be a teacher. 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. initially there will be a resistance by teachers to adapt to this ruling. Over a period incentives will cause people to alter their behavior.Microeconomics Tutor Marked Assignment 1 201 1 (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. 28 . 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. This will be the start of a shortage of teachers. 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.

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. Price Supply 1(S1) Supply2 (S2) P2 Eq2 P1 P3 Eq3 Eq1 Demand2 (D2) Demand 1(D1) Q3 Quantity Demanded Q2 Q1 The outbreak of bird flu results in two demand-supply effects. 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 29 .Microeconomics Tutor Marked Assignment 1 201 1 Question4 (a). The first of which is a decrease in the quantity of chicken supplied due to the destruction of live chickens.

For the market of Beef to have been affected we would have to assume that Beef and Chicken were substitute goods. Price Supply 1(S1) P1 EQ1 P2 EQ2 (D1) QD2 Quantity 30 QD1 Demand 1 Demand 2 (D2) . The overall effect on quantity traded will be negative: both the demand change and supply change suggest a decline in the quantity traded. (c). 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. There is also a negative impact on quantity traded which further falls from Q2 to Q3. We do not have enough information to know which effect will outweigh the other.Microeconomics Tutor Marked Assignment 1 201 1 to D2 and this places a downward pressure on price which reduces from P2 back to P1 and finally down to P3. while the supply change suggests rising prices. The overall effect on price will be ambiguous as from the above diagram the demand change suggests falling prices. and this would have had different ramifications. 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. (b).

rate of growth and price levels affect the economy. Further defining them in detail to show their main differences. On the other hand now that the values of people have changed due to this scare they have reduced their demand for beef. 31 . 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. they are interdependent. Microeconomics and macroeconomics are important studies within economics that are essential to sustain the overall growth and standard of the economy. Microeconomics focuses on demand and supply and other forces that could determine the price levels seen in the economy. While the two studies are different. Referring to the definitions above: 1. It meets the criteria of microeconomics. Microeconomics also takes into account taxes and regulations put forward by governments. The quantity of beef supplied does not change. 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. as tax policies and saving habits affect the overall economy thus meeting the criteria of being classified as macroeconomics. or how GDP could be affected by a high unemployment rate. and sustained. and work in harmony with each other. national income. as it focuses on the characteristics of the overall economy. with microeconomics focusing on the smaller business sectors. The field of Economics is divided into two subfields: Microeconomics and Macroeconomics and are the fundamental tools to be learnt. The impact of tax policy on national saving is also a component of macroeconomics. 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. 3.Microeconomics Tutor Marked Assignment 1 201 1 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 quantity drops from QD1 to QD2 and the price from P1 to P2. in order to understand how the economic system is administered. 5. 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. and macroeconomics focusing on the larger income of the nation. (A). 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. 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. An example of macroeconomics would look at how an increase/decrease in net exports of Malaysia would affect our nation’s balance of payments. 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. 2. Factors influencing the rate of economic growth are a component of macroeconomics.

However. On the other hand a positive statement is a statement about what is and contains no indication of approval and disapproval. study. (4. and decide on a way of attaining those goals (the positive part) Most statements are not easily categorized as purely positive or purely normative.) The minimum wage creates unemployment among young.Microeconomics Tutor Marked Assignment 1 201 1 4. so economic theory and evidence will not bring them together. (1. then further discussion.)If interest rates increase. they know that their disagreement lies outside the realm of economics. If their disagreement is strictly on normative grounds. they are like tips of an iceberg. A positive statement can be wrong. 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.)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. One must make a judgment about what goals are desirable (the normative part). and testing may bring them closer together. 32 . with many invisible assumptions hiding below the surface. 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. both positive and normative statements must be combined to make a policy statement. then investment will decrease is also being stated as a fact thus it is a positive statement. if their disagreement is on positive grounds.)Malaysian income distribution is not fair is a judgmental statement of an issue that is undesirable thus it is a normative statement. and unskilled workers are a positive statement as it is being stated as a fact. but it is a positive statement because it is a statement about what exists in the world as it is. (3. (2. Rather. 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. 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).

org/wiki/Demand_and_supply (accessed Feb 2011).wikipedia. 33 . http://en.wikipedia. Canada: Thomson South-Western.wikipedia. http://en.Microeconomics Tutor Marked Assignment 1 201 1 REFRENCES MankiwPrinciples of Economics. 2007. http://en. 2011).org/wiki/Positive_economics (accessed Feb.wikipedia. http://en.org/wiki/Economics (accessed Feb 2011).org/wiki/Elasticity_(economics) (accessed Feb 2011). http://en.wikipedia.org/wiki/Normative_economics (accessed Feb2011). 4thed.