Microeconomics Intermediate Microeconomics

Question: Discuss about the Microeconomics for Intermediate Microeconomics. Answer: 1. Due to the increase in price of rubber used to make tires, the cost of producing tires increases and hence the supply of tires falls. This leads to a shift in the supply curve upwards from S1 to S2. On the other hand decrease in the price of cars increases the demand for cars and in turn the demand for tires also increases since tires are a part of cars shifting the demand curve rightward from D1 to D2. We see that the quantity demanded remains the same after the adjustments but the price of the tires increases from P0 to P1. Fig 1 shows the movement of the equilibrium point from E0 to E1 with output remaining same and price increasing. Fig 1 2. In the short run the equilibrium price is where the market demand and supply intersect. In the short run as the price of pears increases the demand for apples increase shifting the demand curve as we see in Fig 2.1 from D1 to D2 increasing the equilibrium output and price to Q1 and P1. Fig 2.1 shows the movement of the equilibrium point E0 to E1 increasing quantity from Q0 to Q1 and the equilibrium price rises to P1 from the initial price P0. Fig 2.1 As prices rises, in long run in the perfectly competitive market the high price attracts new firms in the industry producing more and more apples thus increasing the overall supply of apples. This is demonstrated by the shift of the supply curve from S1 to S2 ,i.e., the supply curve shifts downward as seen in Fig 2.2. Due to shift in the supply curve, the equilibrium point that was previously attained due to demand shift now reaches E2 which is at the same level of E1. At E2 the quantity demanded increases to Q2 and as there occurs excess supply, the market price again falls to P0. At this point the firms who cannot cover costs at this price and quantity leave the market and the price may then gain rise with time. Fig 2.2 The short run equilibrium is at the quantity 500 where the real GDP demanded (500) is equal to the real GDP supplied (500). The equilibrium price is 95. The economy has a recessionary gap as the equilibrium real GDP is lower than the potential GDP. The full employment potential GDP is 600 trillion yen whereas the equilibrium GDP is 500, hence there is a recessionary gap of 100 trillion yen. The government can adopt expansionary fiscal policy by increasing expenditures or reducing tax rates to cover the recessionary gap. The economy is below full employment level and the potential GDP is exceeds the real GDP. The unemployment rates are shown to be rising and the government and consumer spending is seem to falling. These macroeconomic indicators show a decrease in economic activity implying that Italy in 2012 was at the recessionary phase of the business cycle. From the given graphs we see that consumer spending and government spending has been decreasing since 2012 along with the increase in unemployment indicating a decrease in aggregate demand. This is demonstrated by the shift in the AD curve downward from AD1 to AD2. The initial equilibrium GDP was at Y with the equilibrium point at A and price P0. As the aggregate demand curve shifts downward with the short run supply curve remaining the same as SRAS1, the price falls to P1 and we get the equilibrium at B with equilibrium output at Y1. This is the recessionary gap caused due to fall in demand that Italy suffered from in 2012 when the real GDP here indicated as Y1 is less than the potential GDP causing a recessionary gap. In the long run as firms and workers adjust to the fall in prices more than they had expected, the costs fall and the short run aggregate supply increases and this is demonstrated as the SRAS curve shifts downward from SRAS1 to SRAS2. As the supply increases, the equilibrium point moves back to the potential GDP at equilibrium point C with output at Y and price falling further to P2. Hence, in short run the aggregate demand falls causing recession whereas in the long run there occurs a decrease in the price level. Fig 2 From the given graphs we see that from 2012 to 2013 the government spending and consumer spending has been decreasing. We also see that this is accompanied with increase in unemployment. Hence, the due to the falling of the government and consumer spending as well as a greater number of individuals losing their jobs there is a fall in the aggregate demand. This causes the decrease in aggregate demand as shown by the shift in the AD curve leftwards in the AD, AS diagram Fig 2 in (a) from AD1 to AD2. The fall in aggregate demand decreases the price level to P1 as there occurs a recessionary gap when the real GDP is less than the potential GDP, i.e., Y1 is less than the potential level of GDP Y. Based on the above graphs the unemployment rate in January 2013 was 11.3 and on July 2013 was 12.1. The labor force participation rate in Jan 2013 was: = (Labor force/ Working age population) *100 =(20000000/40100000)*100=0.49*100= 0.5*100= 50% The labor force participation rate in July 2013 was: = (Labor force/ Working age population) *100 = (27,000,000/40,900,000)*100 = 66% The key macroeconomic indicators of Australia are as below: GDP growth rate: 0.6% Unemployment rate: 5.7% Inflation rate: 1.3% Interest rate: 1.75% Balance of trade: -2163 AUD Million Government debt to GDP: 33.8% The GDP Growth rate of the country is at 0.6% compared to the previous quarters 1.1% and as low as 0.3% before that indicating that the economy is most likely sitting in the contractionary phase of the business cycle. The inflation rate is at 1.3% which had been falling since July 2014 when it reached the highest point of 3%. Unemployment had been at the same level of 5.7% as the previous quarter though it had been decreasing over time with the labor force participation rate at 64% implying that there are fewer people looking for work hence with low unemployment it places the economy at a high point of the business cycle. Consumer spending has been increasing; government spending has been overall at the same level. Exports has increased more than imports but not significant enough for improvement in balance of trade although. The business confidence has also decreased. Though expansion in final consumption expenditure contributed to economic growth, but investments fell along with no significant improvement in net exports. Hence the economy is most likely at a contractionary phase with GDP growth rate falling; unemployment is low and inflation also low. 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