Question

Please read the following applications and then apply Microeconomics Principles to explain each topic.

If you can please also, add charts and graphs to broaden the explanation as well as add articles and references. Please list all references and citations if you use any.

Application 1: Scarcity/Incentives

Incentives to Buy Hybrid Vehicles

As stated in the text, “rational people respond to incentives.” I find this to be a very true statement. When the tradeoff or benefit from something else changes, people tend to change their behavior to get that certain benefit. The Number of hybrid cars that has been increased from 10,000 cars in 2000 to more than 340,000 in 2007, can be explained by this application. Increase in gas prices along with federal subsidy encouraged people to buy more hybrid cars by reducing cost of driving and cost of hybrid cars. As, Subsidy was the main reason behind 1/5 the sale of 2007, which is estimated so far. Incentives refer to something that induces a person to act accordingly. People take decisions by comparing cost and benefit, so they always respond to incentives. The location of new business depends upon market factors. Some business must be located in urban areas so as to be close to market for raw materials and to sell finished goods. In such cases the cost and benefits are measured. If the benefits of locating in an urban area exceed the cost of cleaning up brownfields then industries do clean up before setting up their unit and set up in urban areas. While if the cost of cleaning is much higher than rural or suburban areas are targeted to cut down on cleaning costs. People respond as per market incentives of maximizing profits.

Application 2: Opportunity Costs

How Fast to Sail?

The margin principle can increase the level of an activity as long as its marginal benefit exceeds the marginal cost. Thinking at the margin allows us to adjust our decisions. As speed of any ship increases more fuel is consumed just as it happens with car. That is mileage per liter falls, but more speed means ship can travel faster and thus can load and unload fast-meaning it travels a greater number of times than a slow-moving ship than it gains by travelling more (transporting a greater number of times). This gain should be compared with loss from fall in mileage. When the gain in weight is equal to loss in mileage equilibrium is reached as in case of any marginal analysis.

Application 3: Law of Supply and Demand

Law of Demand and Cigarettes

The law of supply and demand is a concept that explains the interaction between the supply of a resource and the demand of that resource. The law of demand says that more product will be purchased when the prices fall. The demand of the product can be defined as the consumers are able to buy a certain product. The demand of cigarettes is based upon many of the determinants like: The price of the cigarettes. The ability of the consumer to buy them or Purchasing power of the consumers, and lastly, market segmentation based upon the age group of the consumers. The consumption of the products is based upon the price of the product. The less the price the more the demand is. As the prices of the cigarettes becomes low the purchase will be increased. The demand of cigarettes also depends upon the ability of the buyer or Purchasing power of the consumers. In researches regarding the change in the demand of the product depends upon the Purchasing power of the consumers. If the consumer can only buy when the price of the product decreases then it will be according to the law of demand. But there are people who are used to smoking and hence there is no effect on the demand of the cigarettes whether the change in the price takes place or not. The law of demand does not apply to this. Another determinant is the market segmentation of the consumer on the basis of age group. It is highly noted that now-a-days youngsters are more prone towards the habit of smoking. They are not really hampered by the prices of the cigarettes and hence the law of demand is not applicable to the people of younger age group because they use it a status symbol and a little variation in the price does not affect the demand of the product.

Application 4: Market Analysis (Equilibrium)

Equilibrium: Chinese Demand and Pecan Prices

In the market for any specific type of goods, the decision of buyers interacts instantaneously with the decisions of sellers. When the demand for any goods equal the supply of those goods, the market is said to be in equilibrium. It is a situation in which the quantity demanded and the quantity supplied is equal. In this condition when the demand is increased the price rises and when the supply increase the price decreases. The pecans are highly in demand in China as the people are of the view that pecans help in developing brain and also in minimizing the health-related issues in cardiovascular. This help the price of the pecans to rise as the demand increases.

Answer 1

APPLICATION 1

INCENTIVES

               

Incentives are what encourage you to behave in a certain way that enables them to perform and achieve something. Economic incentives are financial motivation that helps the people to save money and grab more benefits. Subsidies are economic incentive for the people to set up industries, start ups, enterprises etc. There should be a positive impact in the economy because of the economic incentives.

COST BENEFIT ANALYSIS

Cost benefit analysis is a process of calculating cost and benefit from an investment to take an optimal decision. Before taking a decision on investment, the company/firm officials take up cost benefit analysis by listing the entire list of revenue and expenses. In order to get the total benefit we calculate NET PRESENT VALUE by discounting revenue with market rate of interest. We make investment only when the net present value is non-negative. When benefit exceeds the cost, we take positive decision regarding investment, setting up of industries, introducing new strategies etc. when this difference between cost and benefit is the greatest, profit will be maximized.

APPLICATION 2

OPPORTUNITY COST

Opportunity cost refers to the next best alternative forgone. Opportunity cost is the cost incurred by not taking the benefit from the alternative choice.

For eg: A person can teach in university level but he opted the job in marketing field. So here his opportunity cost is the salary that he could have received from the university, if he had taken teaching as his job.

Opportunity cost is not the sum of alternative options available but the highest value of option available. Opportunity cost can be of explicit and implicit. Explicit involves direct money payments. On the other hand implicit cost is the imputed values.

APPLICATION 3

LAW OF DEMAND

The law of demand states that ,other things remaining the same when price increases , quantity demand falls. In other words price and quantity demanded are inversely related.

Q= f(P)

Demand for a commodity depends on many factors including price, income of the consumers, price of other good , taste and preferences of the consumer etc.

There are some exceptions to the Law of demand including addictions to some products( alcohol, cigarettes ), inferior goods, network externalities. People are addicted to toxic products and in that case whatever may be the price , they will demand the same. Some people consume products as a symbol of status. For eg Diamonds

APPLICATION 4

MARKET ANALYSIS

Market reaches equilibrium, when the quantity demanded equals the quantity supplied.In equilibrium there is no tendency for change. In market equilibrium equilibrium price and quantity is determined.

When demand increases from D to D1 , both price and quantity increases. On the other hand when supply increases from S to S1, price decreases but quantity increases. This is shown in the following diagram.