Mount Kenya University Bed 1101: Introduction To Micro-Economics Cat I Name: Abdikadir Osman Edin REG - NO: BOP/2020/63138

MOUNT KENYA UNIVERSITY
BED 1101: INTRODUCTION TO MICRO-ECONOMICS CAT I
NAME: ABDIKADIR OSMAN EDIN
REG.NO: BOP/2020/63138
1. a) Explain the concept of scarcity, choice and opportunity cost.
Scarcity
This refers to the condition that exists when there are not enough resources to satisfy all the wants of
individuals or society.
scarcity of resources gives rise to the fundamental economic problem of choice.
As a society cannot produce enough goods and services to satisfy all the wants of its people, it has to make
choices
Choice
It is the decisions individuals and society make about the use of scarce resources.
It refers to the ability of a consumer or producer to decide which good, service or resource to purchase or
provide from a range of possible options.
Being free to chose is regarded as a fundamental indicator of economic wellbeing and development.
Opportunity Costs
The next highest valued alternative that is given up when a choice is made.
Opportunity cost is a key concept in economics, and has been described as expressing "the basic
relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in attempts to
ensure that scarce resources are used efficiently.
b) Illustrate & explain the maximum and minimum price fixation by government.
The maximum price occurs when a government sets a legal limit on the price of a good or service, with the
aim of reducing prices below the market equilibrium price.
If the maximum price is set below the equilibrium price, it will cause a shortage then, demand will be
greater than supply.
A minimum price is the lowest price that can legally be set, for example, minimum price for alcohol,
minimum wage.
Prices are set the market forces, where supply and demand meet, but there are various reasons governments
may wish to intervene in a free market to set prices.
Make some goods more expensive e.g. food to increase revenue of farmers or discourage demand for
demerit goods.
Make some goods cheaper e.g. to make sure housing is affordable
To stabilise prices e.g. prevent rapid fluctuations in the price of food
The following graph illustrates the maximum and minimum price fixation by government.
Pea
Max price
Q1 Qe Q2
Min price S
Pe
Q1 Qe Q2
Both graphs indicate the fixing of maximum and minimum prices by the government.
c) Distinguish between a shift in demand and a movement along the demand curve.
A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both
price and quantity demanded from one point to another on the curve. The movement implies that the
demand relationship remains consistent.
Therefore, a movement along the demand curve will occur when the price of the good changes and the
quantity demanded changes in accordance to the original demand relationship.
In other words, a movement occurs when a change in the quantity demanded is caused only by a change in
price, and vice versa.
On the other hand, a shift in a demand occurs when a good's quantity demanded changes even though price
remains the same.
Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity
demand is affected by a factor other than price.
A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of
alcohol available for consumption.
2. a) Explain clearly the determinants of demand for a commodity.

Income of the People
The demand for goods also depends upon the incomes of the people. The greater the incomes of the people,
the greater will be their demand for goods. In drawing the demand schedule or the demand curve for a good
we take income of the people as given and constant.
Changes in Prices of the Related Goods
The demand for a good is also affected by the prices of other goods, especially those which are related to it
as substitutes or complements. When we draw the demand schedule or the demand curve for a good we
take the prices of the related goods as remaining constant.
Advertisement Expenditure
Advertisement expenditure made by a firm to promote the sales of its product is an important factor
determining demand for a product, especially of the product of the firm which gives advertisements. The
purpose of advertisement is to influence the consumers in favour of a product. Advertisements are given in
various media such as newspapers, radio, and television. Advertisements for goods are repeated several
times so that consumers are convinced about their superior quality. When advertisements prove successful
they cause an increase in the demand for the product.
The Number of Consumers in the Market
The market demand for a good is obtained by adding up the individual demands of the present as well as
prospective consumers of a good at various possible prices. The greater the number of consumers of a
good, the greater the market demand for it.
Consumers’ Expectations with Regard to Future Prices
Another factor which influences the demand for goods is consumers’ expectations with regard to future
prices of the goods. If due to some reason, consumers expect that in the near future prices of the goods
would rise, then in the present they would demand greater quantities of the goods so that in the future they
should not have to pay higher prices. Similarly, when the consumers expect that in the future the prices of
goods will fall, then in the present they will postpone a part of the consumption of goods with the result
that their present demand for goods will decrease.
b) Calculate the price elasticity of demand for the product X & Y
Price of product/Unit of Quantity Demanded of X

X
100 100
120 20
Solution
∆Q P Q2−Q1 P
Price elasticity of demand = . = .
∆P Q P 2−P1 Q
20−100 100 −80
= . = X1
120−100 100 20
= -4
Price of product/Unit of Quantity Demanded of Y

Y
100 20
200 15
15−20 100
Price elasticity of demand = X
100−200 20
−5 5
=> X =¼
−100 1
c) The demand and supply functions are given as follows;
Qd=1000-60P and Qs=600+40P
Determine the Equilibrium price and quantity.
AT Equilibrium price and quantity, Qd = Qs
1000-60P = 600+40P
 1000 – 600 = 40P + 60P
 400 = 100P
100P = 400
 P=4
Therefore, equilibrium price = 4
Equilibrium quantity = 1000 – 60(4) = 1000 – 240

 760
REFERENCES
Saleemi M.A (2001) Economics Simplified (Revised Edition) Saleemi Publishers Ltd (Pages 15-42)
Koutsoyiannis A; (1994), Modern Microeconomics, Macmillan Education Ltd
BED1101 Introduction to Microeconomics – mku module

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MOUNT KENYA UNIVERSITY

BED 1101: INTRODUCTION TO MICRO-ECONOMICS CAT I

NAME: ABDIKADIR OSMAN EDIN

1. a) Explain the concept of scarcity, choice and opportunity cost.

scarcity of resources gives rise to the fundamental economic problem of choice.

Make some goods cheaper e.g. to make sure housing is affordable

To stabilise prices e.g. prevent rapid fluctuations in the price of food

2. a) Explain clearly the determinants of demand for a commodity.

Price of product/Unit of Quantity Demanded of X

Price of product/Unit of Quantity Demanded of Y

Equilibrium quantity = 1000 – 60(4) = 1000 – 240

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