1. (a) what is microeconomics? How it is different from macroeconomics?

How the
fundamental economic question is addressed in a market economy?

Microeconomics is a branch of economics that studies the behavior of individuals and businesses and how
decisions are made based on the allocation of limited resources. Simply put, it is the study of how we make
decisions because we know we don't have all the money and time in the world to purchase and do everything.
Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and
services, which determine the prices we pay. These prices, in turn, determine the quantity of goods supplied by
businesses and the quantity of goods demanded by consumers.
Microeconomics explores issues such as how families reach decisions about what to buy and how much to save.
It also affects how firms, such as Nike, determine how many shoes to make and at what price to sell, as well as
how competitive different industries are and how that affects consumers.
Key Differences between Micro and Macro Economics
1.

Microeconomics studies the particular market segment of the economy, whereas Macroeconomics
studies the whole economy that covers several market segments.
2.
Microeconomics deals with an individual product, firm, household, industry, wages, prices, etc., while
Macroeconomics deals with aggregates like national income, national output, price level, etc.
3.

Microeconomics covers issues like how the price of a particular commodity will affect its quantity
demanded and quantity supplied and vice versa while Macroeconomics covers major issues of an economy like
unemployment, monetary/ fiscal policies, poverty, international trade, etc.

4.

Microeconomics determines the price of a particular commodity along with the prices of complementary
and the substitute goods, whereas the Macroeconomics is helpful in maintaining the general price level.

5.

While analyzing any economy, microeconomics takes a bottom-up approach, whereas the
macroeconomics takes a top-down approach into consideration.
Economists generally recognize three distinct types of economic system. These are 1) command
economies; 2) market economies and 3) traditional economies. Each of these kinds of economies
answers the three basic economic questions (What to produce, how to produce it, for whom to
produce it) in different ways.
In a command economy, the government decides the answers to the three basic questions. It decides
what will be made, how they will be made, and who will get them. Recently, pure command
economies have usually been communist countries. Good examples today would be North Korea and
China.
In a market economy, consumers decide the answers to the three questions. They do this by their
choices of what to buy. No one tells companies what to make -- they make whatever they think will
sell. If they choose wrong, they go out of business. Most developed economies today are
predominantly market economies. The US, Japan and Germany are all market economies.
In a traditional economy, the three questions get answered by referring to tradition -- you make what
has always been made, in the way it has always been made, etc. There aren't really any countries

whose whole economies are traditional. The closest you could get to this would be Afghanistan or
Bhutan -- places where there is little connection to the global economy.

2. what is PPF? What will the shapes of PPF in the following cases (show in graph):
i. increasing opportunity cost.
ii. constant opportunity cost.
A productionpossibility frontier (AKA Production Possibility Curve (PPC)) is a graphical representation of possible combination
of two goods with constant resources and technology.
It is a graph representing production tradeoffs of an economy given fixed resources. It is a graphical representation of the maximal mix
of outputs that an economy can achieve by fully using its existing resources and in the most efficient way.
In its microeconomic applications, the graph shows the various combinations of amounts of two commodities that an economy can
produce per unit of time (such as number of guns vs. kilograms of butter) using a fixed amount of each of the factors of production,
given the production technologies available.

The marginal rate of transformation (MKT) is the amount of one good G which must be given up
in order to release resources necessary to produce an additional unit of second good D.

In the table, each additional unit of D has the same cost in terms of G, resources capable of
producing 8 units of G must be diverted to increase output of D by one unit, regardless of the level
of production of G and D. Constant cost means that the MRT is constant. It is the result of each
factor of production being equally effective in producing both goods, that is, a factor of production
is not more suited to the production of one good than two other.
The production possibilities curve (MM) then shows all possible combinations of two
commodities which country W might produce. The particular combination to be chosen lies on
the curve. Points inside the curve such as (g) -represent outputs of less than full employment and
are therefore not considered. Points beyond the curve, such as (h), require more resources than
the country possesses and are therefore also beyond consideration.
Increasing Costs:
It would seem unlikely that most nations would be confronted with constant costs over the
substantial range of production. Constant costs imply that all resources are of equal quality and
that they are all equally suited to the production of both commodities.
Increasing opportunity costs mean that for each additional unit of G produced, ever-increasing
amounts of D must be given up. At first as production G is increased, resources suited to G but
not to D are used to increase greatly the output of G and reduce the output of D by little. But
eventually, the resources being transferred are not well-suited to G but highly suited to D and
consequently Gs production increases by little and Ds fall by a great deal.
Increasing opportunity costs can best be explained by the use of a table.

Suppose we take a given amount of land, labor and capital and experimentally find out how much
G and D we can produce. If all our resources are devoted to the production of G, we find that we
can produce 40 units of G . if we want 36 units of G, we find that we can have one unit of D, with
all our resources fully employed. If we want two units of D, we can have only 30 units of G. With 3
units of D, we can have only 20 units of G. The first unit of D costs 4 units of G, the second 6 and
the third 10.

The MRT of G for D is increasing; larger amounts of G must be given up for additional units of D.
This is what is meant by increasing opportunity costs. When costs are increasing, the demand
affects the exchange ratio also, since the relative costs the substitution ratio will vary with the
relative demand for G and D. Given the combination of G and D which is demanded, the exchange
ratio between them will equal their substitution ratio at that point. In other words, the ratio at
which G and D will exchange against one another in the market will be equal to the ratio of their
marginal costs. Any other situation would be one of disequilibrium: there will be an incentive to
produce more G and less D or conversely. The data in the table may be represented graphically as
a transformation curve.
First, a combination of 40 G and zero D is plotted in the figure 36 G and one of D etc.; the
connected points yield a production possibilities curve, the slope of which is the mrt. The
production possibilities curve is concave toward the origin, showing that the substitution rate is
not constant but increasing.
At a combination of 20 G and 3 D, represented by point (a) in the figure, one unit of D may be
substituted in production for 10 of G. But at the combination of 36 G and one D, represented by
point (b) in the figure, the resources required to produce one D can be used alternatively to
produce 4 additional unit of G. Now, the production possibilities curve shows all possible
combination of G and D which can be produced at full employment. To be inside the curve is to be
at less than full employment. There are not sufficient resources to go beyond the curve.

A price ratio must be introduced in our graph of production possibilities curve in order to
determine the output of two commodities. With the assumption, that nation W has a closed
economy the domestic price-ratio is drawn tangent to the production possibilities curve in the
figure. The equilibrium point is at (K), where og1 of G and od1 of D are produced and consumed.
A straight line tangent to the transformation curve indicates the ratio of market prices of the two
commodities, and the condition of tangency expresses equilibrium in production, that is, equality
between prices and marginal costs stated in opportunity terms. Domestic demand conditions
enter into this construction via community indifference curves, or simply as a consumption point
determined by a given arrangement of production and income distribution. In an open economy,
the world price ratios enter to reveal the possible positions of equilibrium with international
trade.

3. Explain the law of demand. Mention two examples from your context where the law
of demand doesn't work. "Remaining all other things unchanged, if the price of the commodity rises,

quantity demanded for the commodity decreases; however, the demand for the commodity remains
unchanged" - do you agree with the statement. Justify your answer with graphs.
The law of demand is a microeconomic law that states, all other factors being equal, as the price of a good or service increases,
consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the
lower the quantity demanded, because consumers opportunity cost to acquire that good or service increases, and they must
make more tradeoffs to acquire the more expensive product.

Normally, the demand curve slopes downwards from left to right, showing that more is demanded at lower
price and vice-versa. However, there are some exceptions to the law of demand in which case the fall in the
price of a commodity will contract the demand and vice-versa i.e., the demand curve may slope upward to the
right. These are as follows:
(i) Goods which are expected to become scarce or whose prices are expected to rise in future: In case of
goods which are expected to become scarce in future the consumers may buy more of those goods even at a
higher price. Similarly when the price of a good has increased but consumers expect that it will rise further in

future, then they will prefer to buy more of the commodity even at a higher price at present. Conversely, though
the price has fallen but the people expect that it will fall further in future, they prefer not to buy more of it even
at lower price at present and will prefer to wait for the further fall.
(iii) Giffen goods: The real exception of the law of demands is in case of giffen goods. If the price of inferior
good falls, its demand may also fall. This is because the fall in the price of an inferior good increases the real
income of the consumers and therefore they can afford to buy superior goods. They will start substituting
superior good in place of an inferior good and therefore the demand for the inferior good will decline.
Conversely, if the price of an inferior good reduces the real income of the consumers and they will also
increase. The increase in the price of an inferior good reduces the real income of the consumers and they will be
forced to spend more on the inferior good. This phenomenon was first of all observed by Sir Robert Giffen.
In Great Britain, in early 19th century when the price of bread (considered to be an inferior good) increased,
low paid British workers purchased more bread and not less of it. This was contrary to the law of demand.
Giffen explained this paradox by stating that the bread was a necessity of life.
4. Explain the law of supply. Show graphically the effect of the following changes on the position of the

supply curve of plain rice in Bangladesh:

i) Price of fertilizer has been increased;
ii) Rice boilers in Bangladesh have been colluded and created the supply shock of rice in the market,
iii) Price of wheat rocketed high.
The law of supply is a fundamental principle of economic theory which states that, all else equal, an increase in price
results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity:
quantities respond in the same direction as price changes.

5. Explain graphically how the market equilibrium is achieved? Suppose, demand function for and

supply function of rice are QD =40 - 2P and QS= 30 + 3P respectively.

i. Calculate the equilibrium price and quantity of rice.
ii. Suppose, the demand for rice has been increased to QD = 50 - 2P. What will happen to the market price
of plain rice?
Market equilibrium is the state of product or service market at which the intentions of producers and consumers, regarding the quantity and
price of the product or service, match. At market equilibrium point, consumers collectively purchase the exact quantity of goods or services
being supplied by producers and both the parties also agree on a single price per unit. We use the word equilibrium because the market
always tends to revert back to matched price and quantity after any price or quantity disturbances on either producers' or consumers' side.
Market equilibrium is represented by the point of intersection of supply and demand curves of a market. The price and quantity prevailing at
Market equilibrium point is known as equilibrium price and equilibrium quantity respectively. At any price above or below equilibrium price, the
quantity supplied doesn't equal the quantity demanded. This creates forces that tend to push the market back to its equilibrium state as
explained in the following example. But before we move to the example, it is important to note that equilibrium point is not static and
anything that shifts supply or demand curves will also shift the market equilibrium point
Consider the following supply and demand schedules of a hypotetical product market:

Unit
Price
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0

Quantity
Supplied
393
368
339
305
262
210
133
0

Quantity
Demanded
44
67
93
124
162
210
280
400

When we plot the above schedules in a single Catesian coordinate system and fit trend lines to the scattered points, we obtain intersecting
supply and demand curves as shown below:

The equilibrium point of the market is the point at which the supply curves cross each other. We have equilibrium price and quantity of $3.0
and 210 units respectively.

i) given that

QD =40 - 2P and QS= 30 + 3P

When equilibrium Qd=Qs
So, 40-2P=30+3P
Or, 40-30=2P+3P
Or, 5P=10
Or, P=2
So, equilibrium price is 2
And equilibrium quantity = Qd=40-2P
40-2.2
40-4
36
And Qs=30+3P
30+3*2
30+6
36
Both are the same so, equilibrium quantity is 36
2)If the demand for brown rice has been increased to Qd=50-2P, the market price of brown rice will increase to. To find new equilibrium
price we should equal
new Qd = Qs.
50 - 2P = 30 + 3P
5P = 20
Pe = 4