DK 061 (B)

NO.6-1 JALAN BANDAR RAWANG 11 PUSAT BANDAR RAWANG 48000 RAWANG

SELANGOR DARUL EHSAN

CERTIFICATE OF BUSINESS MANAGEMENT

DIPLOMA IN MANAGEMENT (A 9500)

MICROECONOMICS

ECND 213 (CERTIFICATE)

ECND 413 (DIPLOMA)

Group Assignment

ASSIGNMENT FULLTIME MICROECONOMICS NOV 2020

Prepared for:

MISS NURIZZATI

Prepared by:

Student Name Student ID

NURSYAFIQAH BINTI MOHAMED ISMAIL DIM 0419005
PIRAVINA DEVI D/O PUSPANATHAN DIM 0818007
PAVITRA D/O THANARAJA COBM 0418001
 Submission Date: 1st December 2020

Essay Questions
a) With the help of graph, explain on the equilibrium rate of interest for loanable funds.

Interest rate % per year

S¹

e¹
i¹
S²
e²

i²

Q¹ Q² Quantity of funds per year

(Figure 1)

The initial equilibrium, e¹ , is determined by the intersection of the demand curve for loans, D,
and the initial supply curve, S¹. Changes in laws that induces more people to save shift the
supply curve to S². The interest rate, i², at the new equilibrium e², lower than the original
interest rate, i¹. More funds are loaned than originally is Q² > Q¹ .

If the government borrows to pay for its spending , its affects the market interest rate, which
affects your investment opportunities.

Because the capital market is competitive, the interest rate and the quantity of funds loaned and
borrowed is determined by the intersection of the supply curve for funds and demand curve for
funds as in Figure 1. Funds are demanded by individuals buying homes or paying for college
education, governments borrowing money to build roads or wage wars, and firms investing in
new plants or equipment. The demand curve D is downward sloping because more is borrowed
as the interest rate falls.

The supply curve reflects loans made by individuals and firms. Many people, when their
earnings are relatively high, save money in bank accounts and buy bonds ( which they convert
back money for consumption when they retire or during lean times). Firms that have no
alternative investments with higher returns may also loan money to banks or others. Higher
interest rates induce greater savings by both groups, so the initial supply curve, S¹, is upward
sloping.
 2

The initial equilibrium is e¹, with an equilibrium interest rate of i¹ and an equilibrium quantity of
funds loaned and borrows of Q¹. As usual, this equilibrium changes if any of the variables such
as tastes and government regulations that affect supply and demand shifts.

The supply curve of funds may shift to the right for many reasons. The government may remove
restriction on investment by foreigners. Or the government may make Individual Retirement
Accounts (IRAs) tax exempt until retirement, a policy that induces additional savings at any
given interest rate.

Such a change causes the supply curve to shift to the right to S² in Figure 1. The new
equilibrium is e², with a lower interest rate i². At the lower interest rate, firms and others
undertake investment projects with lower rates of return than before the shift. They borrow more
funds, so the new equilibrium is at Q² > Q¹ .
 3

b) Explain FIVE determinant of demand and how the determinant can affect level of
demand in market.

Price

Quan tity
Figure 2.1(a) (Increase in Demand)

The first determinant of demand is Income. Income of a consumer can influence the purchasing
decision of an individual. Other things being equal, when income increases consumers will
demand for more goods and services. These goods and services are known as normal goods
such as house, cars, shirts and books. For example, when the income of consumer increases,
the amount of burger demanded in higher at each price level. This change is illustrated in Figure
2.1 (a) where the demand curve shifts from DD¹ to DD². Figure 2.1(b) illustrates the changes in
demand curve when the income falls. Decrease in income results in lower demand for burgers
and demand curve shift to the left from DD² to DD¹. But the statement that income rises,
demand rises does not apply to all goods. There are some goods where there is decrease in
demand as income increase and we call them as inferior goods. Inferior goods such as low
grade rice, low grade potatoes and salted fish are used when the income is low. When for the
consumer’s income rises, they could afford better goods and thus the demand for inferior goods
falls.

The second determinant of demand is price of related goods. The demand for a good is also
affected by the changes in prices of related goods which fall into two categories which is
substitute goods and complementary goods.

Substitute goods are goods that can be used in place of another good. For example, many
people who consume burger can purchase other things as well such as French fries or fried
chicken. Such goods are called substitute goods. Other example, are bread and biscuits, tea
and coffee, Pepsi or Coke, chicken and beef and many more. The change in price of a
substitute good affects product’s demand in the same direction in which price changes. Demand
for a good will increase, if the price of a substitute good rises and vice versa. For example,
when the price of fried chicken rises, the quantity demanded for fried chicken drops. Consumers
will switch to another alternatives such as burger and thus demand for burger will increase. This
can be illustrated in Figure 2.1(a) as a shift from DD¹ to DD². Take note that demand for burger
changes because of the change price of fried chicken and not the price of burger.
4

Complementary goods are goods that are used in conjunction with another good. Some of the
pairs complementary goods are burger and soft drinks, CD and CD players, pen and ink and
bread and butter. The change in price of complementary good affect on another products
demand in the opposite direction in which price changes. Demand for a good will decrease, if
the price of burger increase, the quantity demanded for burger falls since consumer choose
other alternatives, so the demand for soft drinks also decreases. This change is shown as shift
of demand curve to the left from DD² to DD¹.

The third determinant of demand is tastes and trends. Changes in tastes and trends of
consumers can change significantly the demand for goods and services.. For example, during
the 70s, there were many theatres in Malaysia. Many people prefer to watch movies in theatres.
But in 90s, after the introduction VCR to CD players, the demand for theatres has decreased
since people taste changes as they wish to watch movies at home. Currently, the demand for
Cineplax has increased as more people enjoy movie in a smaller room compared to theatre. As
a good becomes more trends, the demand will be higher and if the same good becomes
outdated, the demand will be lower. This can be illustrated in Figure 2.1.

The fourth determinant of demand is expectation. Expectation of consumers on future events

would give an impact on the current demand. Higher the expected future price of good, the
current demand for that good will be higher and vice versa. For example, when consumers
anticipate that the price of cars would fall when the new tariffs rates are implemented, the
consumers will not purchase cars at that time and rather wait for the price to fall. So, the current
demand for smartphones is lower and demand curve shifts from DD² to DD¹ as illustrated in
Figure 2.1(b) . Another example, if the consumer expects that the country will face pandemic in
near future, most probably, he or she will reduce the demand for goods and services now and
save their money for the future.

The fifth determinant of demand is advertisements. Advertised goods normally have higher
demand because of level of awareness. Consumers will only buy goods and services when they
are aware of the existence of those products. Most of big companies use celebrities to advertise
their products. Advertisements will attract people to purchase more of the advertised goods and
services. For example, Vivo Malaysia’s by Dato Sri Siti Nurhaliza.
 5

STRUCTURED QUESTIONS

QUESTION 1

The following shows a schedule of GD corporation in which capital is the fixed input and
labour is the variable input

a) What is meant by marginal product?

Change∈Total Product
Marginal Product (MP L) =
Change∈Labour

ΔTP
(MP L) =
ΔL

Marginal product (MP) is the change in the total product of that input corresponding to an
addition unit change in its labour assuming other factor, that is capital, is fixed. Marginal product
is that the additional to total product when another labour is used .
 6

b) Complete the following table (show your calculation and answer in two decimal place)

Marginal
Capital Labour Total product Average Product
product

15 6 28 - 4.67

15 9 35 2.33 3.89

15 12 46 46−35 46
=3.67 =3.83
12−9 12

15 15 51 1.67 51
=3.40
15
15 18 68 68−51 68
=5.67 =3.78
18−15 18

15 21 74 2.00 3.52

15 24 74 0 74
=3.08
24
15 29 69 -1.00 2.38
60−69
15 31 60 =−4.50 1.94
31−29
15 33 58 58−60 1.76
=−1.00
33−31
 7

QUESTION 2
The following table shows the demand and supply data for durians
Price (RM/Ton) Quantity Demanded (Tons) Quantity Supplied (Tons)
50 12 25
45 16 23
40 20 20
35 24 17
25 28 14
20 32 11
15 36 8
10 40 4
a) What are the equilibrium price and quantity?

Equilibrium price and quantity refers to the price and quantity that consumers are willing to buy
as they needed and suppliers are willing to sell as they wanted. The equilibrium price and
quantity will remain constant as long as either demand curve or supply curve does not shift.

b) If the price of the durians is RM 10, and the quantity demanded is 40 tons, the durians market
is at shortage situations.

c) If the price of the durians is RM 50 and quantity supplied is 25 tons, the durians market is in
surplus situations.

d) Calculate the price elasticity of supply when the price of the durians increases from RM 25 to
RM 45 per ton. Is supply elastic or inelastic at this price range?

23−14 RM 25
¿ x =0.81
14 RM 45−RM 25
 S
P2

P1

0 S 14 23 Quantity Supplied

This supply inelastic at this price range because large percentage of change within the price of
an honest will only affect a little percentage of change of the number supplied.
9

e) Explain FOUR determinants of price elasticity of supply

First determinants of price elasticity of supply is time period. The elasticity of supply usually is
more elastic in the long run than in the short run. Over a short period of time, firms cannot easily
change the quantity goods they wanted produce. Thus, in short run, the quantity supplied is not
responsive to the price. Look again at the effect of rent increases on the availability of
apartments. Suppose apartment rents during a city rise. If we are watching a supply curve of
apartments over a period of a couple of months, the rent increase is probably going to induce
apartment owners to hire out a comparatively small number of additional apartments. With the
upper rents, apartment owners could also be more vigorous in reducing their vacancy rates,
and, indeed, with more people trying to find apartments to rent, this could be fairly easy to
accomplish.

Second determinants of price elasticity of supply is technology improvement. The improvement

of technology enables producers to use the less resources to lower the value of production and
increase the availability . For an example, advance technology in paddy harvest will make the
harvest easier, save time, save cost and this may increase the availability of rice

Third determinants of price elasticity of supply is availability and mobility of factors of

production. When the factors of production such as land, labour and capital are more mobile
and available the supply tends to be more elastic.

Fourth determinants of price elasticity of supply is perishability. Products that are easily
perishable like agricultural products, the supply is inelastic. Changes in the price do not affect
supply much because the sellers cannot store perishable products for the longer period of time.
 10
QUESTION 3
a) Complete the following table (show your calculation and answer in two decimal place)

Variable Marginal Average

Output Fixed cost Total cost
cost (RM) cost Cost
(unit) (RM) (RM)
(RM) (RM)
1 28 8 36 - 36.00
52−28=24 .00
2 28 52 16 26.00
28+38=66.00 14 66
3 28 38 =14.00 =22.00
1 3
4 28 48 76 10 19.00
128−28=100.00
5 28 128 52 25.60

6 28 133 161 33 26.83

28+145=173.00 173
7 28 145 12 =24.71
7
8 28 164 192 19 24.00
28+178=206.00 14
9 28 178 =14.00 22.89
1
224
10 28 224 252 46 =22.40
10

b) Is the firm operating in the short run or long run? Why?

The firm operating in short run. Firm operating in short run is a certain period in the future, at
least one input is fixed while others are variable.

11
QUESTION 4
The following graph shows the profit-maximizing firm in a monopolistically competitive
market.

Revenue (RM)

15

10

Quantity
10 20
(unit)

a) What is the profit maximizing output and price?

A monopolistically competitive firm would maximize profit when the MR is equal to MC. The
intersection point of MR and MC curve determine the profit maximizing output level and price.
On Figure, MR = MC occurs at an output of 10.

b) Calculate the total revenue and total cost at the equilibrium output (show your
calculation)
Total Revenue = 15 x 10 = 150 Total Cost = 10 x 10=100

c) Calculate profit of this firm (show your calculation)

Therefore, P = TR−TC

¿(15 x 10) – (10 x 10)

¿ 50

Economic profit = TR > TC

12

d) Explain FOUR attributes for this market structure

First attributes for this market structure is number of firms. the quantity of firms competing
during a market is arguably the single-most important determinant of profitability of every firm
within the market. If there's just one firm, it's during a much better position to line its price like
each positive economic profit. However, if there are many firms, competition makes each firm a
price-taker. as an example , it must sell at the prevailing market value alternatively sell nothing
which forces the market towards zero economic profit.

Second attributes for this market structure is degree of concentration. Degree of concentration
refers to the extent of the market share held by top firms. There are kind of measures like
Herfindahl-Hirschman Index, Rothchild Index and four-firm concentration ratio, wont to assess
degree of concentration of a market. A monopoly has highest degree of concentration, followed
by an oligopoly. Monopolistic competition and excellent competition both have low degree of
concentration but in perfect competition, one firm's market share is negligible.

Third attributes for this market structure is entry and exit barriers. The extent to which existing
firms during a market can restrict new firms from entering the market is an indicator of market
power. The barriers to entry may arise either from patents, copyrights, economies of scale, etc.
The entry barriers are the very best just in case of a monopoly and to some extent in oligopoly.
Monopolistic competition and excellent competition, on the opposite hand, have very low
barriers to entry.

Fourth attributes for this market structure is demand curves. one among the foremost important
factor affecting market power of a firm is that the elasticity of demand of its product and
therefore the nature of its demand curve. A firm which features a monopoly during a product
faces a down-ward sloping demand curve and therefore the product typically has very low
elasticity of demand. just in case of an oligopoly, albeit the industry demand curve slopes
downward and therefore the market elasticity of demand is low, each individual firm features a
demand curve and elasticity of demand which are less steep than the general market. Firms in
perfect competition, on the opposite hand, face a horizontal demand curve and hence
theoretically infinite price elasticity of demand.
13