Microeconomics Questions

1) a. If we do not have scarce resources, will we have a law of demand? Will we observe price rationing for goods?

The law of demand states the relationship between quantity demanded and price, showing that the lower the price, the higher the demand and vice versa. If we do not have scarce resources, there will still be a law of demand, because all humans are greedy. This means that we will always want more of what is there and demand always initially exceeds supply, but supply will then catch up, and over time will fall behind again, although this ‘bottlenecking’ is always temporary. This can be seen in fibre optic cables, as they catapulted the amount of information able to be transferred by 100 times at once, however, society still demands bigger and faster amounts.

With this, we will still observe price rationing, as we are so greedy that we want to have as much money as humanly possible, unless the resource that is not scarce is actually our money.

b. The Council of a large university, after considering two sites for building a new sporting complex, chose to build on a plot of land the university already owned rather than on another tract of land that the university would have to buy. The reason given was that the chosen site lowered the cost of the sporting complex because the land was free, whereas the other site would cost over $3 million. Analyse this reasoning.

This example is an example of an opportunity cost. They could have spent $3 million on a block of land that could have possibly been better than the one they own, or they could use that $3 million dollars on some other part of the university. Using the free land is a good idea because it frees up money that could be used to build and improve the sporting facilities, or could be put into more important parts of the university. Overall, using the free land will provide maximum benefit for students in the long run, as the $3 million can be used on something else in the university.

2) a. Explain the difference between point elasticity of demand and arc elasticity of demand.

Point elasticity is the measure of responsiveness or sensitivity of quantity demanded to changes in price. However, arc elasticity is the measure of elasticity between two points on the demand curve. At the two points move closer together on the demand curve, it approaches point elasticity.

Point elasticity is calculated by the percentage change in quantity demanded divided by the percentage change in price, which is shown in formula by: ∆Q% P1

∆P% x Q1

Arc elasticity is calculated the same as point elasticity, although instead of the percentage change, it is calculated by the actual difference between the points. This is shown in formula by: Q2-Q1 P1+P2

P2-P1 x Q2+Q1

This formula is used when there is the change in Price and the Quantity, which allows arc elasticity to be more accurate than point elasticity.

b. Construct on the same graph two straight-line demand curves with the same intercept on the vertical axis, with one curve flatter than the other. Can you make a general statement about which one is the more elastic curve? If so, what is it?

This demand curve shows two straight lines. Line A is steeper and represents a less elastic curve while Line B is flatter and represents a more elastic curve. Point elasticity is the measure of responsiveness or sensitivity of quantity demanded to changes in price. If the elasticity is higher (more than 1), it means that there will be a larger response in demand with price, which is illustrated by curve B. One reason for lower elasticity is brand loyalty, with consumers sticking to one brand all the time. A reason for higher elasticity is the number of substitute products, because as soon as one product reduces its price, it will gain more sales than its substitutes.

3) It has been argued that in order to fight drug abuse sensibly, policy makers must understand the demand for drugs

a. Would you expect that the price elasticity of demand for illegal drugs to be greater than, or less than one?

The price elasticity of illegal drugs is less than one, which is inelastic. This is because drug addicts are will to pay anything to get their hit that they crave. If the person is craving the drug very badly, they will be willing