Question

a) Sketch and label a diagram to identify the equilibrium price for a product or 8 service.

b) Explain the difference between macroeconomics and microeconomics.

Answer 1

a)

Determination of the equilibrium price of a product

Assume that the product market is perfect competition.

In a perfectly competitive market, there is a large number of buyers and sellers. The buyers and sellers are in competition to buy and sell a homogeneous product. The number of buyers and sellers in such a market is so large that each of them buys or sells a negligible fraction of the total quantity bought and sold in the market. As a consequence, none of them has any indi­vidual influence on the process of price determination.

In a perfectly competitive market, the equi­librium price of the product is determined through a process of interaction between the market demand and the market supply. The equilibrium price is such a price at which the market demand becomes equal to market supply.

If at any particular price, demand and supply are equal, the buyers and sellers both remain satisfied, for, at the said price, the sellers supply what the buyers demand, and the buyers demand what the sellers supply.

There­fore, the buyers and sellers accept this price, and they buy and sell accordingly. None of them is dissatisfied, and so, none of them would want a change in the price. That is why this price is called the equilibrium price.

The DD curve in the figure above is the market demand curve for the product. This curve tells us what is the market demand of the buyers at any particular price, and, as such, this curve is the horizontal summation of the indi­vidual demand curves of all the buyers. Owing to the law of demand, the individual demand curves are downward sloping towards the right.

On the other hand, the SS curve is the market supply curve for the good. This curve tells us what is the market supply of the goods at any particular price, and so, this curve is the horizontal summation of the individual supply curves of the sellers.

The price, p0, of the good that would be obtained at the point of intersection, E, of the market demand curve, DD, and the market supply curve, SS, would itself be the equilibrium price of the good. At p = p0, the market demand and market supply of the goods are equal, both being equal to q = q0.

That is why here p = p0 is the equilibrium price, and q = q0 is the equilibrium quantity demanded and supplied.

b)

Differences	Microeconomics	Macroeconomics
Definition	It is the study of economic actions of individuals and small group of individuals	It studies the economy as the whole
Concerns	Households, Firms, and Industries	National Income, General Price level, National Output, Unemployment, exchange rate, international trade, and Poverty
Objective	Demand-side - utility maximization Supply-side - Profit maximization	Full employment, Price stability, Economic growth and a favourable balance of Payment
Basis	Price mechanism that operates with the help of demand and supply	Aggregate demand & aggregate supply determining national income, output, and employment
Assumption	Rational behavior of individuals	The aggregate volume of output of an economy, the extent to which its resources are employed
Limitations	Existence of full employment	Involvement of "Fallacy of Composition" which does not prove true because it is possible that what is true for aggregate may not be true for individuals.
Scope	Demand, Supply, product pricing, factor pricing, production, consumption, and economic welfare	National income, General Price level, Distribution, Employment, and Money Supply