Course Name: Microeconomics

Course Code: BTM 4209

Submitted to
Dr. Mohammad Zahir Raihan
Associate Professor (Finance)

Submitted by
Mohammed Raqibul Momen
Student Id: 200061169
Department of Business & Technology Management

Submission Date: May 19, 2023

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Unit 01: Introduction
Lesson 01: Nature and Methodology of Economics

1. What is Economics? Is Economics a normative or positive science? Illustrate your answer.

Economics is the study of how individuals, households, businesses, and societies make choices and
allocate scarce resources to satisfy their unlimited wants and needs.

Economics encompasses both positive and normative aspects.

Positive economics focuses on describing and explaining economic phenomena as they are, without
making value judgments. It deals with facts, data, and objective analysis. For example, positive
economics would study the relationship between an increase in the minimum wage and its impact on
employment levels, based on empirical evidence and economic theories.

On the other hand, normative economics involves making value judgments and prescribing what ought to
be. It deals with subjective opinions and policy recommendations. Normative economics would involve
discussions on whether the minimum wage should be increased or decreased based on societal values and
goals.

In summary, positive economics aims to provide an objective understanding of economic behavior and
outcomes, while normative economics involves subjective judgments about what should be done to
achieve certain economic goals or improve societal welfare.

2. Distinguish Microeconomics from Macroeconomics. What are the uses and limitations of
Microeconomic theories?

Microeconomics Macroeconomics
Microeconomics deals with the behavior and
Macroeconomics studies the behavior and
decision-making of individual economic agents,
performance of the economy as a whole
such as households, consumers, and firms
It examines how these individual units make It looks at aggregate variables, such as national
choices, interact in markets, and allocate scarce income, employment levels, inflation, and
resources at a smaller scale economic growth
Microeconomics covers subjects like supply and Macroeconomics covers areas like aggregate
demand, consumer and producer behavior, demand and supply, fiscal and monetary
market structures, and individual market policies, inflation, unemployment, and overall
outcomes economic stability
Example: Microeconomics analyzes how a Examples: Macroeconomics examines factors
household decides to allocate its income influencing the overall level of unemployment in
between different goods and services or how a the country, the impact of government policies
firm determines its production levels and pricing on economic growth, or the causes and
strategies consequences of inflation

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Uses:

i. Understanding Individual Behavior

ii. Analyzing Market Dynamics
iii. Policy Analysis
iv. Evaluating Efficiency

Limitations:

i. Ceteris Paribus Assumption

ii. Simplified Assumptions
iii. Lack of Complete Information
iv. Behavioral Considerations
v. Externalities and Public Goods

3. How are economic theories formulated? What are their uses and limitations?

The way how economic theories are formulated given below respectively:

1) Observation and Data Collection: Economic theories often start with the observation of real-world
economic phenomena. Economists gather data through surveys, experiments, or by analyzing
existing datasets, which provide evidence and insights into economic behavior and outcomes.
2) Conceptual Framework: Based on the observations, economists develop a conceptual framework
that outlines the key variables, relationships, and assumptions underlying the economic
phenomenon being studied. This framework helps structure the analysis and provides a foundation
for building the theory.
3) Assumptions: Economic theories typically involve simplifying assumptions to make the analysis
more manageable. Assumptions may include factors like rationality, self-interest, perfect
competition, or other simplifications that allow economists to isolate specific variables and study
their impact.
4) Mathematical Modeling: Many economic theories are formalized using mathematical models.
These models use mathematical equations and relationships to represent the behavior of economic
agents and the interactions among variables. Mathematical modeling helps economists analyze the
implications of different assumptions and predict the outcomes of economic phenomena.
5) Empirical Testing: Economic theories are subjected to empirical testing to assess their validity and
accuracy. Economists collect additional data or use existing data to test the predictions and
implications of the theory. Empirical analysis helps to refine and validate theories and assess their
relevance to real-world economic phenomena.
6) Feedback and Revision: Economic theories are not static and can evolve over time. Feedback from
empirical tests, further observations, and new insights may lead to the revision, refinement, or
rejection of existing theories. The process of formulating economic theories involves an iterative
cycle of observation, analysis, and revision.
7) Peer Review and Debate: Economic theories undergo scrutiny and evaluation through peer review
and academic debate. Economists present their theories and findings in academic journals,

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 conferences, and discussions, where they are critically assessed, debated, and refined based on
feedback from the scholarly community

Uses:

1) Understanding Complex Systems

2) Policy Analysis
3) Predictive Power
4) Resource Allocation

Limitations:

1) Simplifying Assumptions
2) Data Limitations
3) Causality and Complexity
4) Human Behavior and Heterogeneity
5) Ethical Considerations

Lesson 02: The Basic Problems of an Economy

3. What are the basic economic problems? Explain as to how they arise due to the scarcity of
resources.

The basic economic problems are the following:

1) The problem of Allocation of Resources: What?

2) The problem of Selecting Method of Production: How?
3) The problem of Distribution: For whom?
4) The problem of Determining the Rate of Investment

Let's explore how each of these problems arises from the scarcity of resources:

1) The problem of Allocation of Resources: What?

Scarcity requires us to make choices about what goods and services to produce and in what quantities.
The problem of allocation of resources arises because we cannot produce all the goods and services that
people desire. As a result, we must allocate resources among different alternatives, deciding what to
produce and what to forgo. This involves making trade-offs and prioritizing certain goods and services
over others.

2) The problem of Selecting Method of Production: How?

The scarcity of resources also requires us to determine the most efficient and effective methods of
production. The problem of selecting the method of production arises because we have limited resources
and need to decide how to use them optimally. We must choose between different production techniques,

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technologies, and combinations of inputs (such as labor, capital, and land) to produce goods and services
in the most efficient manner.

3) The problem of Distribution: For whom?

Scarcity raises the question of how to distribute the produced goods and services among individuals and
households. The problem of distribution arises because resources are limited, and not everyone can have
everything they desire. Society needs to decide how to allocate the available goods and services among
individuals, taking into account factors such as income, needs, and societal norms. This involves
questions of fairness, equity, and determining who gets access to what.

4) The problem of Determining the Rate of Investment:

Scarcity also affects the level of investment in an economy. The problem of determining the rate of
investment arises because resources used for investment purposes are resources that could have been used
for immediate consumption. Investment involves allocating resources towards the production of capital
goods, such as machinery, infrastructure, or research and development. The decision about the rate of
investment involves considering the trade-off between current consumption and future production
capacity.

4. What are the features of a mixed capitalist economic system? Does price mechanism help in solving
the problems of allocation of resources in such an economy in the most efficient way?

The features of a mixed capitalist economic system are as follows:

1) Private Ownership: Individuals and businesses have the right to own and control resources.
2) Market Mechanism: Supply, demand, and price signals determine the allocation of goods and
services.
3) Profit Motive: The pursuit of profit drives economic decisions.
4) Competition: Multiple firms compete, leading to better products and lower prices.
5) Role of Government: Government regulates the market, protects consumers, and provides public
goods and services.
6) Public Sector: Government-owned enterprises provide essential services.
7) Income Distribution: Measures are taken to address income disparities and support vulnerable
individuals.
8) Balancing Economic Objectives: Striking a balance between market forces and government
intervention is a goal.

The price mechanism facilitates efficient resource allocation by:

1) Signaling Scarcity: Prices reflect the relative scarcity of resources. When a resource becomes
scarce, its price tends to rise, signaling the need for a more efficient allocation of that resource.

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 2) Guiding Producers and Consumers: Prices provide information to producers and consumers about
the relative value and desirability of goods and services. Higher prices indicate greater consumer
demand, encouraging producers to allocate more resources to meet that demand.
3) Promoting Competition: Price competition among producers incentivizes efficiency improvements
and innovation to reduce costs and offer better products. This drives the allocation of resources
toward the most efficient producers, benefiting consumers.
4) Encouraging Resource Efficiency: Higher prices for scarce resources encourage their efficient use
and conservation. Producers and consumers have a financial incentive to minimize waste and find
more efficient methods of production and consumption.
5) Allocating Resources to Highest Valued Uses: The price mechanism helps allocate resources to
the most valued uses as determined by consumer preferences. Prices reflect the willingness of
consumers to pay for goods and services, guiding the allocation of resources to those that are in
high demand

7. (a) What role do market prices play in answering the first two of the three economic questions?

(b) What determines how much of the output of the private sector a person can claim?

a) Market prices play a crucial role in answering the first two of the three economic questions:

1) What to Produce: Market prices reflect the demand and scarcity of goods and services. By
observing prices, producers can determine what goods and services are in high demand and
allocate resources accordingly. Prices provide information about consumer preferences and help
guide decisions on what goods and services to produce.
2) How to Produce: Market prices also influence decisions regarding the methods of production.
Prices of inputs, such as labor and raw materials, impact the cost of production. Producers evaluate
different production techniques and choose the most cost-effective methods based on market
prices. Lower input prices may incentivize the use of certain technologies or production processes.

(b) The amount of output from the private sector that a person can claim is determined by several factors:

1) Income: A person's income, usually earned through employment or owning productive assets,
determines their purchasing power. Higher incomes allow individuals to claim a larger share of the
private sector's output.
2) Market Transactions: The ability to claim output from the private sector is closely tied to
voluntary market transactions. Individuals can claim a share of the private sector's output by
purchasing goods and services using their income.
3) Market Prices: Market prices determine the cost of goods and services. The amount of output a
person can claim is influenced by the prices of goods and services in the market. Higher prices
may limit the amount of output an individual can afford, while lower prices may allow for a larger
claim.

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 4) Distribution of Income: The distribution of income within society also plays a role. Factors such
as wages, salaries, profits, and ownership of assets affect how output is distributed among
individuals. Income disparities and inequalities can impact the ability of individuals to claim
output from the private sector.

8. Suppose there is a sudden cutoff of oil from the Middle East, as occurred in the early 1970s. Trace
the effects of this disruption in a market economy.

A sudden cutoff of oil from the Middle East can have several effects in a market economy:

1) Increase in Oil Prices: With reduced oil supply, the scarcity of oil leads to a significant increase in
its prices. This directly affects industries and consumers reliant on oil, leading to higher
production costs and increased prices for oil-dependent goods and services.
2) Inflationary Pressure: Higher oil prices can trigger inflationary pressures in the economy.
Increased production costs for businesses can result in higher prices for a wide range of goods and
services, impacting consumers' purchasing power.
3) Reduced Economic Output: Industries heavily dependent on oil, such as transportation and
manufacturing, face challenges due to higher costs. This can result in reduced production and
economic output as businesses struggle to adjust to higher input costs or seek alternative energy
sources.
4) Shifts in Consumer Behavior: Higher oil prices can influence consumer behavior. Consumers may
reduce their consumption of oil-intensive goods, such as fuel-guzzling vehicles or energy-
intensive products. This shift can impact industries and businesses that rely on such consumer
demand.

10. Suppose your instructor announces during the first class that everyone, regardless of performance on
exams, will receive a C in the course. How would you react? Now compare the analogy to the entire
economy.

If my instructor announced that everyone would receive a C in the course regardless of their performance
on exams, my initial reaction might depend on my personal perspective and goals. However, I can provide
a general response and compare it to the entire economy:

1) Individual Reaction: Some students might feel relieved, as they are guaranteed a satisfactory grade
without the pressure to excel. Others might feel frustrated or disappointed, especially if they were
aiming for a higher grade based on their efforts and abilities.
2) Incentives and Motivation: The announcement of a guaranteed C for all students could diminish
the incentives and motivation to work hard and perform at their best. Knowing that the outcome is
predetermined, some students may become less engaged in the course, leading to reduced effort
and potentially suboptimal learning outcomes.

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 3) Equality vs. Meritocracy: The announcement challenges the principle of meritocracy, where
grades reflect individual performance and effort. It promotes equality of outcome, ensuring that
everyone receives the same grade regardless of their performance. This can be seen as a departure
from traditional grading systems that reward individual achievements.

4) Impact on Effort and Performance: The guarantee of a C grade may result in a decline in overall
effort and performance. Students who would have strived for higher grades may lower their
standards and invest less time and energy into their coursework, potentially leading to a decrease
in academic excellence.

Now, comparing this analogy to the entire economy:

1) Incentives for Economic Activities: Similar to the classroom scenario, the entire economy operates
on the basis of incentives. In a market economy, individuals and businesses are driven by the
prospect of earning rewards and achieving better outcomes based on their efforts and abilities. The
guarantee of equal outcomes, regardless of performance, could undermine these incentives and
reduce overall economic productivity.
2) Market Efficiency: A market economy thrives on the efficient allocation of resources driven by
competition and incentives. If equal outcomes are guaranteed regardless of individual effort or
efficiency, it may lead to a suboptimal allocation of resources, as the drive to innovate, improve
efficiency, and excel may diminish.
3) Inequality and Meritocracy: Similar to the classroom analogy, the guarantee of equal outcomes
challenges the concept of meritocracy and individual achievement. It may result in a disregard for
individual talents, abilities, and hard work, potentially leading to a less dynamic and competitive
economic environment.
4) Incentive to Contribute: The guarantee of equal outcomes could impact individuals' willingness to
contribute their skills, ideas, and entrepreneurial efforts to the economy. If rewards and outcomes
are not aligned with individual contributions, it may dampen the motivation to innovate, take risks,
and drive economic growth

Unit 02: Demand and Supply

Lesson 01: Theory of Demand

1. (a) What is demand? How does it differ from need, want and desire?

(b) Distinguish between demand and quantity demanded.

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(a) Demand refers to the willingness and ability of consumers to purchase a specific quantity of a good or
service at a given price and within a particular time period.

Differentiating demand from other concepts:

Need: A need refers to a necessity for survival or well-being, such as food, water, or shelter. Needs are
essential and universal, unrelated to the concept of demand, which focuses on consumer preferences and
willingness to pay.
Want: A want is a desire or preference for a specific good or service that goes beyond basic needs. Wants
are shaped by individual tastes, cultural influences, and personal preferences. While wants influence
demand, they are not interchangeable concepts.
Desire: Desires are subjective longings or aspirations that may or may not be related to needs or wants.
They go beyond basic necessities and personal preferences, representing individual goals and emotional
factors. Desires are not directly linked to the concept of demand.

(b) Demand and quantity demanded are distinct concepts in economics:

Demand: Demand refers to the entire relationship between the price of a product and the quantity
consumers are willing and able to buy at that price. It is represented by a demand curve or schedule,
which shows the quantity demanded at various price levels, assuming other factors like income and
preferences remain constant.
Quantity Demanded: Quantity demanded refers to the specific quantity of a product or service that
consumers are willing and able to buy at a given price. It represents a point on the demand curve and can
vary depending on price changes while other factors remain constant. Quantity demanded is a specific
quantity at a particular price, while demand represents the relationship between price and quantity across
different price levels.

3. Explain demand schedule, demand curve and demand function. Derive curve from the demand
function Q=50-10 P.

Demand Schedule: A demand schedule is a table that shows the quantity demanded of a product at
different price levels.

Demand Curve: A demand curve is a graphical representation of the relationship between the price of a
good or service and the quantity demanded. It is derived from the demand schedule by plotting the
corresponding price and quantity pairs on a graph. The demand curve slopes downward from left to right,
indicating that as the price of a good decreases, the quantity demanded increases, assuming other factors
remain constant.

Demand Function: A demand function is a mathematical equation that expresses the relationship between
the quantity demanded of a good and its determinants, usually including the price of the good and other
factors such as income, tastes, and prices of related goods. It provides a functional form to describe how
the quantity demanded changes with changes in these variables.

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Let's derive the demand curve from the demand function Q = 50 - 10P, where Q represents the quantity
demanded and P represents the price.

To plot the demand curve, we can assume different price levels and calculate the corresponding quantities
demanded using the demand function. Let's take three price levels: P = 0, P = 5, and P = 10.

When P = 0:

Q = 50 - 10(0) = 50

So, when the price is 0, the quantity demanded is 50.

When P = 5:

Q = 50 - 10(5) = 50 - 50 = 0

When the price is 5, the quantity demanded is 0.

When P = 10:

Q = 50 - 10(10) = 50 - 100 = -50

When the price is 10, the quantity demanded is -50.

Plotting these price and quantity pairs on a graph, we can draw a downward-sloping demand curve. The
curve will intersect the y-axis at 50, indicating that when the price is 0, the quantity demanded is 50. As
the price increases, the quantity demanded decreases.

Negative quantities are not meaningful for demand analysis, so the demand curve would typically be
truncated at zero quantity demanded, indicating that consumers will not purchase the good when the price
is above a certain level.

6. (a) What factors are held constant when drawing a given demand curve?

(b) What happens when one or more of these factors change?

(c) How does increase in income, other factors remaining the same, affect the demand for
necessities, comforts and luxuries?

(a) When drawing a given demand curve, several factors are typically held constant, including:

• Price of the Good

• Income
• Price of Related Goods
• Consumer Tastes and Preferences

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(b) When one or more of these factors change, it can impact the demand curve in the following ways:

1) Price: If the price of the good changes, there will be a movement along the demand curve, as a
different quantity is demanded at the new price.

2) Income: If consumer income changes, it can lead to a shift in the demand curve. An increase in
income may result in higher demand for normal goods, shifting the demand curve to the right.
Conversely, a decrease in income may lead to lower demand for normal goods, shifting the
demand curve to the left.

3) Price of Related Goods: Changes in the prices of substitutes and complements can also shift the
demand curve. If the price of a substitute decreases, it may lead to a decrease in demand for the
original good, shifting the demand curve to the left. Conversely, if the price of a complement
decreases, it may increase demand for the original good, shifting the demand curve to the right.

4) Consumer Tastes and Preferences: Changes in consumer tastes and preferences can also result in
shifts in the demand curve. For example, if there is a change in fashion trends or consumer
preferences, it can lead to an increase or decrease in demand, shifting the demand curve
accordingly.

(c) An increase in income, with other factors remaining the same, can affect the demand for necessities,
comforts, and luxuries as follows:

1) Necessities: An increase in income generally leads to a relatively smaller increase in the demand
for necessities. Since necessities are typically basic goods required for survival, individuals may
already be purchasing them even with lower income levels. Therefore, an increase in income may
result in a proportionally smaller increase in the quantity demanded for necessities.

2) Comforts: An increase in income often leads to a more significant increase in the demand for
comforts. Comforts are goods that provide additional convenience or improve the quality of life
but are not essential for survival. As income rises, individuals have the ability to afford more
comforts and may choose to increase their consumption of these goods.
3) Luxuries: Luxuries, which are goods and services considered non-essential and associated with
luxury or indulgence, experience the largest increase in demand with an increase in income. As
income rises, individuals have the means to afford luxury items and may choose to consume more
of these goods, resulting in a substantial increase in demand.

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8. State whether the following changes increase or decrease the current demand for new American-
made cars, and explain why. Also illustrate each on a diagram.

(a) An increase in the price of Japanese cars.

(b) A decrease in money incomes.

(c) Consumers expect lower U.S car prices in the future.

(a) An increase in the price of Japanese cars would likely increase the current demand for new American-
made cars. This is because the two goods, Japanese cars and American cars, are substitutes. When
the price of Japanese cars increases, consumers may find American cars relatively more affordable
and choose to shift their demand towards American cars.

To illustrate this on a diagram, we would show a shift in the demand curve for American cars to the right.
The original demand curve would represent the initial demand for American cars, and the new demand
curve would reflect the increased demand due to the higher price of Japanese cars.

(b) A decrease in money incomes would likely decrease the current demand for new American-made cars.
When consumers have lower incomes, they have less purchasing power and may reduce their
overall consumption, including the purchase of new cars.

To illustrate this on a diagram, we would show a leftward shift in the demand curve for American cars.
The original demand curve would represent the initial demand at higher income levels, and the new
demand curve would reflect the decreased demand due to lower money incomes.

(c) If consumers expect lower U.S car prices in the future, it would decrease the current demand for new
American-made cars. When consumers anticipate lower prices in the future, they may delay their
purchases and wait for the price drop before buying a car. This would reduce the immediate demand
for American cars.

To illustrate this on a diagram, we would show a leftward shift in the current demand curve for American
cars. The original demand curve would represent the initial demand before the expectation of lower
prices, and the new demand curve would reflect the decreased demand due to the anticipation of lower
prices in the future.

Lesson 02: Theory of Supply

Read the following news-story carefully and then answer the questions under it.

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THE GULF WAR AND OIL PRICES
In July 1990 the price of oil in world markets sank to soaring. In a matter of weeks the price of oil
$13 per barrel. This low price was hurting Iraq, which jumped from $13 a barrel to over $40 a barrel . The
had limited production capacity and badly needed the price of oil later fell when Saudi Arabia and other
revenue from oil exports. countries increased their oil production and the
Iraqis were forced to retreat from Kuwait.
After repeated pleas to Kuwait to curtail its oil
production. Shortly thereafter, the United States and Source: Bradley R. Schiller, The Economy Today
other countries attacked Iraq, effectively cutting off its (sixth edition), p-66, 1994, McGRAW-HILL, INC.
oil production and exports as well. The loss of both
Kuwaiti and Iraqi oil production reduced the world’s oil
supply by 4 million barrels a day and sent oil prices

Questions:

(a) What happened with the number of sellers?

(b) What happened with the position of the supply curve?
(c) What happened with the price of oil? Explain graphically.
Hints: The market supply curve shifts when a determinant of supply changes. In this case, a reduction in the
number of sellers shifted the supply curve leftward (reduced market supply).

(a) The number of sellers in the oil market decreased. Iraq's oil production and exports were effectively
cut off due to the Gulf War, reducing the number of sellers in the market.

(b) The supply curve shifted to the left. The loss of both Kuwaiti and Iraqi oil production reduced the
world's oil supply by 4 million barrels a day. This reduction in supply caused a shift to the left in the
supply curve.

(c) The price of oil increased significantly. Initially, the price of oil was at $13 per barrel. However, with
the decrease in supply due to the Gulf War, the demand remained relatively constant, causing a situation
of excess demand. As a result, oil prices skyrocketed. In a matter of weeks, the price of oil jumped from
$13 a barrel to over $40 a barrel.

Graphically, we would see a leftward shift in the supply curve, indicating a decrease in supply. The initial
equilibrium price would be at the intersection of the demand and supply curves at $13 per barrel.
However, due to the decrease in supply, the new equilibrium price would be at a higher level, such as $40
per barrel or even higher, reflecting the increased scarcity and higher demand.

Lesson 03: Price Determination: Equilibrium of Demand and Supply

Read the following news-story carefully and then answer the questions under it.
THE HIGH PRICE OF MARIJUANA

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 In late 1990 and early 1991 the US Drug Enforcement Other things the same, a declining demand should mean
Agency reported that the price of marijuana reached lower, not higher, pot prices.
historic highs.
But other things have not been the same. For a variety of
At the start of this decade the price of a “lid” (an reasons substantial reductions in marijuana supply have
ounce) of marijuana ranged from $200 to $400 in the occurred. First, law enforcement in Mexico - a major
United States. In comparison an ounce of gold was exporter of pot to the United States - has improved.
selling for $370. Second, many pot producers have shifted their resources
to alternative drugs. In particular, Colombia’s incredibly
Simple supply and demand explains this “refer profitable cocaine industry has expanded and attracted
madness.” On the demand side marijuana is by far resources from marijuana. It is also cheaper and easier to
the nation’s most commonly used illegal drug. It is smuggle small quantities of cocaine compared to bulky
estimated that about one-third of all American adults truck-and plane-loads of marijuana. Third, the
- some 66 million people - have used pot at least interdiction of pot smugglers has improved; less
once during their lives. However, the demand for marijuana is coming over our borders. Finally, within the
marijuana is declining. In 1979 over 35 percent of all United States efforts to apprehend marijuana growers
young adults (age 18-25) used pot at least once a and destroy their crops have been increasingly effective.
month. By 1990 this figure had declined to less than
13 percent. Stated differently, over 22 million people Source: Microeconomics by campbell R. McConnel and
smoked marijuana in 1979 compared to slightly over Staneley L. Brue, page 63, 12th edition, McGraw-Hill, Inc.
10 million in 1990.

Questions:

(a) What happened with the supply of marijuana?

(b) What happened with the position of the supply curve?
(c) What happened with the demand for marijuana?
(d) What happened with the position of the demand curve of marijuana?
(e) What happened with the price of pot? Explain it graphically.

Hints: Supply has fallen much more dramatically than has demand.

(a) The supply of marijuana has decreased significantly due to various reasons:

• Law enforcement in Mexico, a major exporter of marijuana to the United States, has improved,
resulting in reduced availability of Mexican marijuana.
• Many marijuana producers have shifted their resources to alternative drugs, particularly the highly
profitable cocaine industry in Colombia.
• It is cheaper and easier to smuggle small quantities of cocaine compared to bulkier shipments of
marijuana.
• Interdiction efforts have improved, leading to fewer marijuana smugglers bringing the drug over
the borders.

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 • Within the United States, efforts to apprehend marijuana growers and destroy their crops have
become more effective.

(b) The position of the supply curve for marijuana has shifted to the left. The decrease in supply due to
improved law enforcement, shifts in producer resources, interdiction efforts, and crop destruction has
resulted in a reduction in the quantity of marijuana available in the market.

(c) The demand for marijuana has also declined. Although marijuana was the most commonly used illegal
drug in the United States, the percentage of young adults using marijuana once a month decreased from
over 35% in 1979 to less than 13% in 1990. This decline in demand can be attributed to various factors,
including changing attitudes, alternative drug choices, and stricter law enforcement.

(d) The position of the demand curve for marijuana has shifted to the left. The decrease in demand is
reflected by the decline in the number of people using marijuana regularly, as mentioned earlier.

(e) The price of marijuana increased as a result of the substantial reductions in supply compared to the
decline in demand. Graphically, this can be represented by a leftward shift of the supply curve, indicating
a decrease in supply, and a leftward shift of the demand curve, indicating a decrease in demand. The new
equilibrium price would be at a higher level, reflecting the scarcity of marijuana in the market.

Unit 03: Elasticities of Demand and Supply

Lesson 01: Elasticity of Demand

1. (a) Explain the following concepts separately

(i) Price-elasticity of demand

(ii) Income-elasticity of demand

(iii) Price-elasticity of supply

(iv) Cross elasticity of demand

(i) Price Elasticity of Demand: Measures responsiveness of quantity demanded to a change in price.

(ii) Income Elasticity of Demand: Measures responsiveness of quantity demanded to a change in income.

(iii) Price Elasticity of Supply: Measures responsiveness of quantity supplied to a change in price.

(iv) Cross Elasticity of Demand: Measures responsiveness of quantity demanded of one good to a change
in price of another good.

4. Explain the concept of price elasticity of demand and the relationship between price elasticity,
average revenue and marginal revenue.

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Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is
calculated as the percentage change in quantity demanded divided by the percentage change in price.

The relationship between price elasticity, average revenue (AR), and marginal revenue (MR) is as
follows:

• When demand is elastic (elasticity > 1), a decrease in price leads to a proportionately larger
increase in quantity demanded. As a result, total revenue (TR = price × quantity) increases. In this
case, AR and MR are both positive.
• When demand is inelastic (elasticity < 1), a decrease in price leads to a proportionately smaller
increase in quantity demanded. As a result, total revenue decreases. In this case, AR and MR are
both negative.
• When demand is unit elastic (elasticity = 1), a change in price leads to an equal percentage change
in quantity demanded. Total revenue remains constant. In this case, AR and MR are both zero.
• MR is always below AR when demand is elastic, equal to AR when demand is unit elastic, and
above AR when demand is inelastic.

6. (a) What does price elasticity of demand measure?

(b) If two straight line demand curves intersect each other, which of them will have higher
elasticity of demand at point of intersection?

(c) Explain cross elasticity of demand and income elasticity of demand.

(a) Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It
indicates the percentage change in quantity demanded resulting from a 1% change in price.

(b) If two straight line demand curves intersect each other, the one with a flatter slope (lower absolute
value) at the point of intersection will have higher elasticity of demand. A flatter demand curve indicates a
higher responsiveness of quantity demanded to price changes.

(c) Cross elasticity of demand measures the responsiveness of quantity demanded of one good to a change
in the price of another good. It is calculated as the percentage change in quantity demanded of one good
divided by the percentage change in the price of another good. It helps determine whether two goods are
substitutes or complements.

Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. It
is calculated as the percentage change in quantity demanded divided by the percentage change in income.
It helps classify goods as normal (positive income elasticity) or inferior (negative income elasticity) based
on their response to changes in income.

16
Lesson 02: Elasticity of Supply

1. What is price elasticity of supply? How is it measured?

Price elasticity of supply measures the responsiveness of the quantity supplied of a good or service to a
change in its price. It helps to understand how suppliers adjust their quantity supplied when there is a
change in price.

Price elasticity of supply is measured using the formula:

Price Elasticity of Supply = Percentage Change in Quantity Supplied / Percentage Change in Price

If the value of price elasticity of supply is greater than 1, it indicates that supply is elastic, meaning that a
change in price leads to a relatively larger change in quantity supplied. If the value is less than 1, supply is
inelastic, indicating that a change in price has a relatively smaller effect on quantity supplied.

In the case of perfectly elastic supply, the price elasticity of supply is infinite, meaning that any change in
price will result in an infinitely large change in quantity supplied. Conversely, in the case of perfectly
inelastic supply, the price elasticity of supply is zero, indicating that quantity supplied does not change
regardless of price fluctuations.

2. Describe the determinants of price elasticity of supply.

The determinants of price elasticity of supply include:

1) Time Horizon: In the short run, supply tends to be less elastic as it takes time for producers to
adjust their production levels in response to price changes. In the long run, supply becomes more
elastic as producers have more flexibility to adjust inputs and production processes.
2) Availability of Inputs: If inputs required for production are readily available and can be easily
sourced, supply tends to be more elastic. On the other hand, if inputs are scarce or specialized,
supply becomes less elastic.
3) Production Flexibility: The ability of producers to switch between different inputs or adjust
production processes affects the elasticity of supply. Higher flexibility allows for more
responsiveness to price changes, resulting in more elastic supply.
4) Spare Production Capacity: If producers have unused or underutilized production capacity, they
can increase output without significant cost or time constraints, leading to more elastic supply. In
contrast, when production capacity is fully utilized, supply becomes less elastic.
5) Time Required for Production: The time it takes to produce a good or service influences the
elasticity of supply. If production can be quickly ramped up or scaled down, supply tends to be
more elastic. However, if production requires substantial lead time or has long gestation periods,
supply becomes less elastic.

17
 6) Mobility of Resources: The ease with which resources, such as labor and capital, can be
reallocated across different industries or regions affects supply elasticity. Higher resource mobility
allows for more elastic supply as resources can be shifted to industries with higher prices.

Read the following news-story carefully and then answer the questions under it.

Raising the D.C. Gas Tax: A Lesson in Elasticity

Like many local governments, the District of Columbia is Unfortunately, the District’s projections were grossly in
perennially short of revenues. In an effort to raise additional error. In August 1980, gasoline sales in the nation’s
revenue, Mayor Marion Barry of Washington, D.C., decided in capital fell from 16 million gallons per month to only 11
early 1980 to increase the city’s tax on gasoline. On August 6, million. Ten gas stations closed down, and more than 300
1980, the city government raised the gas tax to 18 cents per service-station workers were laid off.
gallon, form the previous level of only 10 cents per gallon. The
The price elasticity of demand for D.C. gasoline turned
higher tax raised the retail price of gasoline by 8 cents, to $
out to be much higher than the city had thought. How did
1.60 per gallon.
the city make such a mistake? Evidently the leaders
The mayor and city council thought the higher gas tax would forgot about the price and availability of other goods.
be an easy way to increase city revenue. The difference of a True, the price elasticity for gasoline is generally quite
few pennies a gallon would hardly be noticed, they reasoned, low. But there are readily available substitutes for D.C.
since gasoline prices were already so high. Furthermore, much gasoline. By driving just another mile or so, a motorist can
of the increased tax would be paid by tourists and buy gasoline in Virginia or Maryland. When the price of
suburbanites rather than city residents (i.e., voters). Finally, a D.C. gasoline went up, motorists responded by doing just
few pennies a gallon would generate lots of revenue, since that. The ready availbility of cheaper gasoline in Maryland
District gas stations were then selling 16 million gallons a and Virginia doomed the hopes of the D.C. government
month. for increased revenues.
The D.C. Department of Finance and Revenue knew about the Source: Bradley R. Schiller, The Economy Today (sixth
law of demand. But it thought the reduction in quantity edition), p-426, 1994, McGRAW-HILL, INC.
demanded (gasoline sales) would be very small in relation to
the gas-tax increase. Economists had consistently estimated
the price elasticity of demand for gasoline to be very low.
Questions:

1. What attempt had been taken by the City Mayor?

2. What did the D.C. Department of Finance and Revenue think about the change in quantity demanded of gasoline in
relation to the gas-tax increase?
3. What was the wrong in the projection about gasoline sales?
4. What happened ultimately with the demand for gasoline?
5. What were the available substitues for D.C. gasoline?
6. What do you think about the price elasticity of supply of gasoline?
Hints: If demand is price-elastic, a price increase will lead to a disproportionate drop in unit sales. In this case,
the ready availability of substitutes made demand highly price-elastic.

1. The City Mayor attempted to raise additional revenue by increasing the gas tax in Washington,
D.C.

18
 2. The D.C. Department of Finance and Revenue believed that the reduction in quantity demanded of
gasoline would be minimal compared to the increase in the gas tax. They thought the price
elasticity of demand for gasoline was low.
3. The projection about gasoline sales was significantly incorrect. Gasoline sales in Washington,
D.C. fell from 16 million gallons per month to only 11 million gallons after the gas tax increase,
resulting in the closure of gas stations and layoffs.
4. Ultimately, the demand for gasoline in Washington, D.C. declined significantly after the gas tax
increase.
5. The available substitutes for D.C. gasoline were gasoline sold in neighboring states, specifically
Maryland and Virginia, where prices were lower.
6. Based on the information provided, it can be inferred that the price elasticity of demand for
gasoline in Washington, D.C. was high, indicating that the demand for gasoline was sensitive to
price changes.

Unit 04: Consumer Behavior

Lesson 01: Introduction

2. What is utility? Is it measurable? Describe different approaches to the measurement of utility.

Utility refers to the satisfaction or usefulness that individuals derive from consuming goods or services.

It represents the subjective value or benefit that individuals perceive when they consume or possess
something. Utility, being a subjective concept, is difficult to measure directly in quantitative terms.
However, economists use different approaches to indirectly measure and analyze utility:

1) Cardinal Utility: This approach treats utility as a quantifiable and measurable concept. It assigns
numerical values to utility levels, allowing for comparison and calculation. However, cardinal
utility is considered less realistic and less commonly used in modern economics.

2) Ordinal Utility: This approach focuses on the ordinal ranking or ordering of preferences rather
than assigning specific numerical values to utility. It recognizes that individuals can rank their
preferences and make choices based on the relative desirability of alternatives. Ordinal utility
provides a comparative understanding of utility but does not measure the exact magnitude.

Lesson 02: The Cardinal Utility Approach

1. (a) What is marginal utility?

(b) What is the law of diminishing marginal utility?

(c) What evidence is there to suggest that diminishing marginal utility exists?

19
 (d) Calculate the marginal utilities of additional glasses of orange juice from the following figures:

Number of Total Utility

Glasses

0 0

1 100

2 190

3 200

4 150

(a) Marginal utility refers to the additional utility or satisfaction gained from consuming one additional unit of a
good or service. It represents the change in total utility when the quantity of a good consumed increases by one
unit.

(b) The law of diminishing marginal utility states that as a person consumes more and more units of a specific good,
the additional utility gained from each additional unit decreases. In other words, the more of a good a person
consumes, the less satisfaction or utility they derive from each additional unit.

(c) There is empirical evidence to support the existence of diminishing marginal utility. For example:

➢Satiation: People tend to experience diminishing marginal utility because they eventually reach a point of
satiation, where the consumption of additional units of a good provides less additional satisfaction.
➢Consumer behavior: Observations of consumer behavior often show that individuals are willing to pay a
higher price for the first unit of a good compared to subsequent units, indicating a higher marginal utility
for the initial unit.
➢Substitution effect: As individuals consume more of a good, they may start seeking alternative goods or
experiences to fulfill their needs and preferences. This reflects a decrease in the marginal utility of the
original good.

These pieces of evidence suggest that individuals' preferences and satisfaction tend to exhibit diminishing marginal
utility, supporting the notion that the law of diminishing marginal utility holds in practice.

(d)

Number of Total Utility Marginal Utility

Glasses

0 0

1 100 100

20
 2 190 90

3 200 10

4 150 -50

2. Suppose you are in the market for a new bicycle. A salesperson shows you a new 10-speed model for $249.
You say the bicycle is nice but you cannot afford such an expensive model. What do you really mean when
you say you cannot afford this item? Surely you could fine $249 in either your savings or a small loan?

When you say you cannot afford the expensive bicycle, it means that you do not have the financial capacity or
willingness to allocate $249 towards purchasing it. Affordability is not just about having the exact amount of
money required; it also involves considering your financial situation, priorities, and constraints.

In this situation, even if you could technically find $249 in your savings or obtain a small loan, saying you cannot
afford the item suggests that you have evaluated your financial circumstances and determined that allocating that
amount towards a bicycle is not justifiable or feasible for you at the moment.

Factors such as your current financial obligations, budget constraints, savings goals, and other competing needs or
desires might influence your decision. It is not solely about the availability of funds, but also about making a
responsible and informed choice based on your overall financial situation.

Lesson 03: Ordinal Utility Theory - Indifference Curve

2. What is an indifference curve? What are the main properties of indifference curve? What will be
the shape of indifference curve if one of the two goods is a free commodity?

An indifference curve is a graphical representation used in economics to show different combinations of

two goods or commodities that provide an individual with an equal level of satisfaction or utility. It
represents the various combinations of goods among which an individual is indifferent, meaning they are
equally preferable to them.

The main properties of indifference curves are as follows:

1) Downward Sloping: Indifference curves are typically downward sloping, which means that as the
quantity of one good increases, the quantity of the other good must decrease to maintain the same
level of satisfaction.
2) Convex to the Origin: Indifference curves are usually convex to the origin, meaning they are
bowed inward. This reflects the concept of diminishing marginal rate of substitution, indicating

21
 that as more of one good is consumed, the individual is willing to give up smaller amounts of the
other good.
3) Non-Intersecting: Indifference curves do not intersect each other. This property implies that higher
indifference curves represent higher levels of satisfaction, and combinations of goods on higher
indifference curves are preferred to those on lower indifference curves.
4) Higher Curve, Higher Utility: A higher indifference curve represents a higher level of utility or
satisfaction. As individuals move to a higher indifference curve, they prefer the combinations of
goods on that curve over those on lower curves.
5) Indifference Map: Multiple indifference curves together form an indifference map, which
represents the complete range of preferences and trade-offs of an individual. The shape, slope, and
position of indifference curves in an indifference map reflect the individual's preferences and
willingness to substitute between goods.

If one of the two goods is a free commodity, meaning it is available in unlimited quantities and has a zero
price, the indifference curve will have a unique shape known as a straight-line or L-shaped indifference
curve. In this scenario, since one of the goods is free, the individual can consume an infinite amount of
that good without giving up any units of the other good. As a result, the individual's preferences and
utility solely depend on the quantity of the non-free good.

8. Suppose there are two commodities each of which cause a reduction in total utility beyond a
certain rate of consumption. What would be the shape of a typical indifference curve?

If both commodities cause a reduction in total utility beyond a certain rate of consumption, the typical
indifference curve would exhibit a convex shape.

The convex shape of the indifference curve represents the concept of diminishing marginal utility, which
states that as the quantity of a commodity increases, the additional utility or satisfaction derived from each
additional unit decreases. When the rate of consumption exceeds a certain point, the marginal utility of the
commodity starts to decline, resulting in a diminishing rate of substitution between the two commodities.

As a result, the indifference curve will be bowed inward or convex towards the origin. This curvature
indicates that the individual is willing to give up larger quantities of one commodity only if they can
obtain an increasing amount of the other commodity to maintain the same level of satisfaction. The
increasing rate at which the individual is willing to substitute one commodity for another diminishes as
the quantity of each commodity increases.

The convex shape of the indifference curve reflects the preference for variety and the diminishing
marginal utility experienced from consuming larger quantities of a particular commodity.

22
Unit 05: Production, Cost and Supply
Lesson 01: Concepts Related to Production

1. Explain the relationship between the average cost and marginal cost curves.

The relationship between the average cost (AC) and marginal cost (MC) curves is as follows:

• When the marginal cost is below the average cost, the average cost curve decreases.
• When the marginal cost is above the average cost, the average cost curve increases.
• When the marginal cost is equal to the average cost, the average cost curve is at its minimum
point.

In summary, the average cost curve is U-shaped, and the marginal cost curve intersects the average cost
curve at its minimum point.

2. Explain the behavior of cost curves in short run. Show the relationship between marginal cost,
average variable cost, average total cost.

In the short run, cost curves exhibit specific behaviors that show the relationship between different cost
measures:

• Marginal Cost (MC): It represents the additional cost incurred by producing one more unit of
output. The marginal cost curve generally slopes upward because as production increases,
additional inputs are required, which increases costs.
• Average Variable Cost (AVC): It is the variable cost per unit of output. The average variable cost
curve is U-shaped, initially decreasing due to economies of scale and then increasing due to
diminishing returns.
• Average Total Cost (ATC): It is the total cost per unit of output, including both fixed and variable
costs. The average total cost curve is also U-shaped, primarily influenced by the shape of the
average variable cost curve and the level of fixed costs.

The relationship between these cost curves can be summarized as follows:

➢ When the marginal cost is below the average variable cost, the average variable cost decreases.
➢ When the marginal cost is below the average total cost, the average total cost decreases.
➢ When the marginal cost is above the average variable cost, the average variable cost increases.
➢ When the marginal cost is above the average total cost, the average total cost increases.

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Unit 06: Perfect Competition
Lesson 01: Characteristics of Perfect Competition, AR & MR Curves in Perfect Competition

1. (a) What is a perfectly competitive firm?

(b) What are the two characteristics that give rise to such a firm?

(a) A perfectly competitive firm is a type of market structure in which there are many small firms that
produce identical products and have no control over the market price. These firms are price-takers,
meaning they must accept the prevailing market price and cannot influence it through their individual
actions.

(b) The two characteristics that give rise to a perfectly competitive firm are:

1) Large Number of Buyers and Sellers: In a perfectly competitive market, there are numerous
buyers and sellers, none of whom have a significant market share. This ensures that no individual
firm can have a substantial impact on the market price. Each firm is a small player in the market
and must accept the price determined by market forces.
2) Homogeneous Products: The products offered by firms in a perfectly competitive market are
identical or homogeneous. This means that consumers perceive no differences between the
products of different firms. As a result, consumers are willing to switch between different firms'
products based solely on price, and firms have no ability to differentiate their products or charge a
higher price based on product characteristics.

2. (a) What is the shape of the demand curve facing a perfectly competitive firm?

(b) What is implied by such a demand curve?

(a) The shape of the demand curve facing a perfectly competitive firm is perfectly elastic or horizontal.

(b) Such a demand curve implies that the firm can sell any quantity of output at the prevailing market
price without affecting the price. In other words, the firm is a price-taker and has no control over the
market price. The perfectly elastic demand curve indicates that consumers are willing to buy as much as
the firm is willing to supply at the given market price. If the firm tries to increase the price even slightly,
consumers will switch to other identical products offered by other firms, resulting in a loss of all sales for
the firm. Therefore, the perfectly competitive firm faces a demand curve that is flat at the market price.

4. Write a short note on AR and MR curves of a competitive firm.

24
In the context of a perfectly competitive firm, the average revenue (AR) and marginal revenue (MR)
curves are important concepts that help understand the firm's pricing and revenue generation.

Average Revenue (AR) Curve:

The average revenue curve represents the firm's total revenue per unit of output sold. In a perfectly
competitive market, the average revenue is equal to the market price because each unit of output is sold at
the same price. Therefore, the AR curve of a perfectly competitive firm is a horizontal line at the market
price.

Marginal Revenue (MR) Curve:

The marginal revenue curve shows the change in total revenue resulting from the sale of one additional
unit of output. In a perfectly competitive market, the marginal revenue is equal to the market price as
well. However, unlike the AR curve, the MR curve for a perfectly competitive firm is downward sloping.
This is because in order to sell an additional unit of output, the firm must lower the price for all units sold,
reducing the marginal revenue earned from each additional unit. Therefore, the MR curve lies below the
AR curve and has twice the slope.

Lesson 02: Equilibrium of a Competitive Firm

1. Explain the short run equilibrium of a competitive firm. When would a competitive firm close
down its business in the short run?

In the short run, a competitive firm reaches equilibrium when it maximizes its profit or minimizes its
losses. This equilibrium is determined by the interaction of the firm's marginal cost (MC) curve and the
market price.

Short Run Equilibrium of a Competitive Firm:

1) Profit Maximization: In the short run, a competitive firm aims to maximize its profit. It will
continue to produce output until marginal cost (MC) equals marginal revenue (MR), which is
equal to the market price (P). At this point, the firm is producing at the level where it can generate
the highest possible profit.
2) Determining Output Level: The firm will produce the quantity where MC = MR = P. If MC is
below MR, increasing production will lead to additional profit. If MC is above MR, reducing
production will help minimize losses. The firm will stop adjusting production when MC equals
MR, ensuring maximum profit.
3) Shut Down Point: In the short run, a competitive firm may face situations where it incurs losses. If
the total revenue earned by the firm is not sufficient to cover its variable costs, the firm may
choose to shut down temporarily. The shut down point is reached when the firm's total revenue is

25
 below its variable costs. In this case, the firm minimizes its losses by ceasing production and
covering its fixed costs only.

A competitive firm would decide to shut down in the short run if the price (P) falls below the minimum
average variable cost (AVC). This means that the firm cannot even cover its variable costs through sales
revenue. By shutting down, the firm avoids further losses associated with variable costs, but it still incurs
fixed costs.

3. Write a short note on the relationship between firm’s short run cost curves and supply curve.

The relationship between the short-run cost curves and the supply curve can be summarized as follows:

• Marginal Cost (MC) Curve: The firm's MC curve represents the additional cost incurred by the
firm to produce each additional unit of output. The MC curve intersects both the AVC and ATC
curves at their minimum points.
• Average Variable Cost (AVC) Curve: The AVC curve represents the variable cost per unit of
output. It is derived by dividing the total variable cost by the quantity of output produced. The
AVC curve is U-shaped, reflecting the diminishing marginal returns and increasing marginal cost
as output expands.
• Average Total Cost (ATC) Curve: The ATC curve represents the total cost per unit of output. It is
derived by dividing the total cost (sum of fixed and variable costs) by the quantity of output
produced. The ATC curve is also U-shaped due to the presence of both fixed and variable costs.
• Supply Curve: The supply curve of a competitive firm is determined by the firm's MC curve above
the minimum point of the AVC curve. The portion of the MC curve that lies above the minimum
AVC point represents the firm's short-run supply curve. The firm is willing to produce and supply
output as long as the market price is equal to or greater than its marginal cost.

Unit 07: Monopoly

Lesson 01: Nature of Monopoly Market and AR and MR Curves in Monopoly Market

2. What is monopoly and how does its definition depend on how the industry is defined?

Monopoly is a market structure characterized by a single seller with exclusive control over the supply of a
unique product with no close substitutes, resulting in limited competition and the ability to set prices.

The definition of a monopoly can depend on how the industry is defined because it determines the scope
and boundaries within which market power is assessed. The industry definition determines the relevant
market in which the monopolistic firm operates and faces limited competition. If the industry is defined
narrowly, the monopolistic firm may appear to have more control and dominance, whereas a broader
industry definition may include more substitutes and potential competitors, reducing the monopolistic

26
firm's market power. Therefore, the definition of monopoly is influenced by how the industry is defined,
as it shapes the assessment of market concentration and the extent of competition within that specific
market.

3. Bangladesh Railway is generally given exclusive right to provide rail transportation service
throughout the country. Is Bangladesh Railway a monopolist? Explain.

Yes, Bangladesh Railway can be considered a monopolist in the context of rail transportation service
throughout the country. As the entity granted the exclusive right to provide rail transportation, it holds a
monopoly over the rail sector in Bangladesh. Being a monopolist means that there is no direct competition
for Bangladesh Railway in terms of providing rail services.

The key characteristics of a monopoly, such as a single seller, control over the market, and the ability to
set prices, align with the situation of Bangladesh Railway. It is the only entity authorized to operate and
provide rail transportation services across the country, without facing any significant competition from
other rail service providers.

As a monopolist, Bangladesh Railway has the authority to determine factors like fares, routes, and
schedules without direct market pressures from competitors. This exclusive control over the rail
transportation sector can have implications for market dynamics, pricing, and service quality.

5. Explain the sources of monopoly.

There are several sources or factors that can give rise to a monopoly. These include:

1) Legal Barriers: Monopolies can be created through government legislation or legal barriers that
restrict entry into a specific industry. This can include patents, copyrights, or licenses granted
exclusively to a single firm, preventing others from entering the market and competing.

2) Control over Key Resources: A firm can establish a monopoly by gaining exclusive control over
crucial resources or inputs necessary for production. This control can limit the ability of potential
competitors to enter the market or make it economically unfeasible for them to do so.
3) Economies of Scale: Monopolies can emerge when a firm benefits from significant economies of
scale, meaning that as production increases, the average cost per unit decreases. This cost
advantage makes it difficult for smaller firms to compete, leading to a concentration of market
power in the hands of a few dominant players.
4) Network Effects: In certain industries, network effects can contribute to the formation of a
monopoly. Network effects occur when the value of a product or service increases as more people
use it. This creates a barrier for new entrants, as they struggle to attract users away from an
established network.
5) Technological Superiority or Innovation: A firm that possesses superior technology or innovation
in a particular industry can establish a monopoly by outperforming competitors and gaining a

27
 significant market share. This can be achieved through patents or trade secrets that protect the
firm's unique technology or processes.
6) Natural Monopolies: Some industries exhibit natural monopoly characteristics due to the high
fixed costs involved in infrastructure development and operations. Industries such as water supply,
electricity distribution, or railways may naturally lend themselves to a single firm providing
services more efficiently than multiple competitors.

Unit 08: Monopolistic Competition and Oligopoly

Lesson 01: Monopolistic Competition

1. Discuss the characteristic features of monopolistic competition. How does it differ from perfect
competition?

Monopolistic competition is a market structure characterized by a large number of firms producing

differentiated products. Here are the characteristic features of monopolistic competition and how it differs
from perfect competition are stated respectively:

1) Large Number of Firms: Monopolistic competition involves a large number of firms operating in
the market, but not as many as in perfect competition. Each firm has a relatively small market
share.

2) Differentiated Products: Firms in monopolistic competition produce differentiated products that

are similar but not identical to each other. Product differentiation can be based on physical
characteristics, branding, packaging, location, or customer service.

3) Freedom of Entry and Exit: Firms can freely enter and exit the market in the long run, which
means there are no significant barriers to entry or exit.

4) Non-Price Competition: Firms in monopolistic competition engage in non-price competition,

focusing on product differentiation, marketing, advertising, and branding to attract customers. This
allows firms to have some control over the price and demand for their products.

5) Imperfect Information: Both buyers and sellers have limited information about prices, quality, and
characteristics of products due to the differentiated nature of goods. This creates an environment
where firms can use advertising and branding to influence consumer preferences.

6) Limited Market Power: While firms in monopolistic competition have some degree of market
power, it is limited compared to a monopoly. Each firm has some control over the price of its
product, but it faces competition from other firms producing similar goods.

28
 7) Short-Run and Long-Run Profits: In the short run, firms in monopolistic competition can earn
economic profits or losses. However, in the long run, due to easy entry and exit, profits will attract
new firms, increasing competition and eroding profits until firms are left with normal profits.

Differences from Perfect Competition:

• Product Differentiation: In perfect competition, all firms produce identical products, whereas in
monopolistic competition, firms produce differentiated products.
• Market Power: Firms in perfect competition have no market power and are price takers, while
firms in monopolistic competition have some degree of market power and can influence prices to
some extent.
• Entry and Exit: In perfect competition, there are no barriers to entry or exit, while monopolistic
competition allows for relatively easy entry and exit in the long run.
• Non-Price Competition: Perfectly competitive firms do not engage in non-price competition,
whereas firms in monopolistic competition heavily rely on non-price strategies to differentiate
their products.

2. What is monopolistic competition? What are the effects of product differentiation on:

(i) Firm's MR and AR curves; and

(ii) Firm's equilibrium

Monopolistic competition is a market structure characterized by a large number of firms producing

differentiated products. Each firm has some degree of market power due to product differentiation, but
faces competition from other firms in the industry.

(i) Effects of Product Differentiation on Firm's MR and AR Curves:

Product differentiation leads to a downward-sloping demand curve for each firm in monopolistic
competition. As a result, the firm's marginal revenue (MR) curve lies below its average revenue (AR)
curve. The MR curve is more elastic than the demand curve because the firm has to lower the price on all
units to sell an additional unit due to competition.

(ii) Effects of Product Differentiation on Firm's Equilibrium:

In the short run, a firm in monopolistic competition seeks to maximize profits or minimize losses. It does
so by producing the quantity where marginal revenue (MR) equals marginal cost (MC). However, due to

29
product differentiation, the firm operates in an imperfectly competitive market, so its price will exceed
marginal cost.

4. How is the equilibrium of a firm affected under monopolistic competition where there is no barrier
to entry of new firms.

In monopolistic competition with no barriers to entry, the entry of new firms increases competition, shifts
the demand and marginal revenue curves downward, and reduces profits. In the long run, firms earn zero
economic profits and produce at the minimum point of their average total cost curve.

7. Suppose by lowering its price from $1.20 to $1.15 per gallon, a service station can sell 15,000
gallons of gasoline per week as opposed to 10,000. Can we infer from these figures that the marginal
revenue of an extra gallon sold in this range of output is $1.15? Why or why not? What is MR in this
case?

No, we cannot infer that the marginal revenue (MR) of an extra gallon sold is $1.15 based on the given
information. Marginal revenue is the change in total revenue resulting from selling one additional unit of
output.

In this case, we are provided with the information about the quantity sold at two different prices. To
determine the marginal revenue, we need to compare the total revenue at the two different levels of
output.

Given the price reduction from $1.20 to $1.15 per gallon, we can infer that the service station is engaging
in price discrimination, selling additional gallons at a lower price to attract more customers. The marginal
revenue will depend on the price elasticity of demand for gasoline in this range of output. If demand is
relatively elastic, the marginal revenue could be less than $1.15 per gallon, as the lower price leads to a
larger increase in quantity sold. If demand is relatively inelastic, the marginal revenue could be higher
than $1.15 per gallon, as the price reduction has a smaller impact on quantity sold.

Without additional information about the elasticity of demand, we cannot determine the exact value of
marginal revenue in this case.

14. Compare:

a. perfect competition and monopolistic competition.

b. monopoly and monopolistic competition.

a. Perfect competition and monopolistic competition:

30
 • Market Structure: Perfect competition involves a large number of small firms producing
homogeneous products, while monopolistic competition involves a large number of firms
producing differentiated products.
• Product Differentiation: In perfect competition, products are identical, and firms are price takers.
In monopolistic competition, products are differentiated, and firms have some degree of control
over pricing.
• Entry and Exit: In perfect competition, there are no barriers to entry or exit, allowing firms to
freely enter or exit the market. In monopolistic competition, entry and exit barriers can exist, but
they are generally lower compared to monopoly.
• Market Power: Firms in perfect competition have no market power, while firms in monopolistic
competition have a limited degree of market power due to product differentiation.

b. Monopoly and monopolistic competition:

• Market Structure: Monopoly involves a single firm as the sole provider of a product or service,
while monopolistic competition involves many firms competing in the market.
• Degree of Market Power: A monopoly has substantial market power, allowing it to control prices
and quantities. In monopolistic competition, firms have limited market power due to product
differentiation but are still subject to competitive pressures.
• Barriers to Entry: Monopolies often have significant barriers to entry, which can prevent or restrict
the entry of new firms into the market. In monopolistic competition, entry barriers are generally
lower, allowing for easier entry of new firms.
• Product Differentiation: Monopolies typically offer a unique product or service with no close
substitutes. In monopolistic competition, firms differentiate their products through branding,
quality, features, or other factors to create a perceived uniqueness.

Lesson 02: Oligopoly

1. (a) What is an oligopoly?

(b) What characteristics are necessary to have an oligopoly?

a) An oligopoly is a market structure characterized by a small number of interdependent firms that

dominate the industry. These firms have a significant influence over market conditions and can affect
prices and output levels.

b) The following characteristics are necessary to have an oligopoly:

• Few Firms: There are only a small number of firms operating in the market.

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 • Interdependence: The actions and decisions of one firm have a noticeable impact on the others.
Firms must consider the likely reactions of their competitors when determining their own
strategies.
• Barriers to Entry: Oligopolistic markets often have barriers to entry, making it difficult for new
firms to enter and compete.
• Product Differentiation: Oligopolistic firms may offer differentiated products to establish a
competitive advantage and create brand loyalty.
• Non-Price Competition: Competition in oligopolies often extends beyond price, with firms
focusing on advertising, product development, customer service, and other non-price factors to
attract customers.
• Collusion: Oligopolistic firms may engage in collusion, where they cooperate to restrict
competition and maximize their joint profits. However, collusion is often illegal and subject to
antitrust regulations in many countries.

3. State and explain the concept of Nash equilibrium.

Nash equilibrium is a concept in game theory that represents a stable state of strategic interaction between
two or more players. It occurs when each player, knowing the strategies of the others, chooses the best
response considering the actions of others, and no player has an incentive to unilaterally change their
strategy.

In Nash equilibrium, each player's strategy is the best response to the strategies chosen by others. If any
player deviates from their strategy, they would be worse off. It is a self-enforcing outcome where no
player can improve their position by changing their strategy alone.

In summary, Nash equilibrium is a state in which all players' strategies are optimal given the strategies of
others, and no player has an incentive to deviate from their chosen strategy unilaterally. It represents a
stable and self-enforcing outcome in strategic interactions.

6. What are the characteristic features of an oligopolistic industry. How does it differ from
monopolistic competition?

Oligopoly is a market structure characterized by a small number of interdependent firms that dominate the
industry. Here are the characteristic features of an oligopolistic industry:

• Few Large Firms: There are only a few dominant firms in the market, typically less than a handful.
These firms have a significant market share and can influence market conditions.
• Interdependence: The actions and decisions of one firm in the oligopoly have a direct impact on
the other firms. Each firm takes into account the likely reactions of its competitors when making
decisions.

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 • Barriers to Entry: Oligopolistic industries often have significant barriers to entry, making it
difficult for new firms to enter and compete. This can include high capital requirements,
economies of scale, or strong brand loyalty.
• Product Differentiation: Oligopolistic firms may engage in product differentiation strategies to
distinguish their products from competitors. This can be through branding, features, or marketing
techniques.

• Non-Price Competition: Oligopolies typically compete through non-price factors such as

advertising, product quality, customer service, and innovation, rather than solely on price.

How oligopoly differs from monopolistic competition:

• Number of Firms: Oligopoly consists of a small number of large firms, whereas monopolistic
competition has many small firms.
• Interdependence: The interdependence between firms is stronger in oligopoly, where firms closely
monitor and react to each other's actions. In monopolistic competition, firms have limited
interdependence as they have less impact on each other.
• Barriers to Entry: Oligopolistic industries have high barriers to entry, making it challenging for
new firms to enter and compete. Monopolistic competition has lower barriers, allowing easier
entry for new firms.
• Product Differentiation: While both oligopoly and monopolistic competition involve product
differentiation, it is typically more pronounced in monopolistic competition, where firms aim to
create a unique selling proposition for their products.
• Pricing Power: Oligopolistic firms have greater pricing power due to their market dominance,
whereas firms in monopolistic competition have limited pricing power as they face competition
from many other firms.

8. Discuss the game theory used to obtain the equilibrium solution of an oligopolistic firm.

Game theory is a mathematical framework used to analyze strategic interactions among multiple decision-
makers. In the context of oligopoly, game theory helps to model and predict the behavior of firms in an
interdependent market. One of the key concepts in game theory is the Nash equilibrium, which represents
a stable outcome where no firm has an incentive to unilaterally deviate from its chosen strategy.

Unit 11: Microeconomic Practices in Bangladesh

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Discuss the Economic Features of Bangladesh
After the victory of Bangladesh against Pakistan in bloody liberation war, Bangladesh’s whole economy
became devastated. One of the greatest challenges was to reconstruct a destroyed nation and to bring back
the economy on the track. Bangladesh started her journey towards economic prosperity with a very small
capital stock. Bangladesh made some economic progress achieving target growth rates in a few sectors
amidst all economic and non-economic odds against sustainable economic development. At present,
Bangladesh is a developing country. Some of the significant economic features of Bangladesh are
discussed as follows:

• Agriculture: Agriculture is the backbone of Bangladesh's economy. Approximately 45% of the

population is engaged in agriculture, which accounts for about 16% of the country's GDP. The
country's main crops include rice, jute, tea, wheat, sugarcane, and pulses. Bangladesh is the
world's second-largest exporter of jute and the fourth-largest producer of rice.
• Garments and Textiles: Bangladesh is the world's second-largest garment exporter, with the
industry accounting for more than 80% of the country's total export earnings. The industry
employs more than 4 million people, mainly women, and has played a significant role in reducing
poverty and improving the standard of living in the country.
• Remittances: Bangladesh is a significant recipient of remittances. According to the World Bank,
in 2020, the country received approximately $19.8 billion in remittances, accounting for 5.9% of
its GDP. The remittance inflow has helped to reduce poverty and improve the balance of payments
in the country.
• Manufacturing: Bangladesh has a growing manufacturing sector, with industries such as
pharmaceuticals, ceramics, leather goods, and processed food products. The government has
provided various incentives to encourage foreign investment in the manufacturing sector, such as
tax holidays, duty-free import of raw materials, and simplified procedures for setting up industries.
• Services: The services sector, which includes tourism, banking, and telecommunications, is a
significant contributor to the country's economy. The sector accounts for more than half of the
country's GDP and employs about a quarter of the workforce.
• Infrastructure: Bangladesh has made significant investments in infrastructure development, such
as roads, bridges, ports, and power generation. These investments have improved the country's
transport and communication facilities and attracted foreign investment in various sectors.
• Human Capital: Bangladesh has a large pool of young, educated, and skilled workers, which is a
significant advantage for the country. The government has also made significant investments in
education and health, which has led to an improvement in the quality of human capital in the
country.

Make Microeconomics Analysis of Employment Situation in Agriculture

Sector of Bangladesh
The employment situation in the agriculture sector of Bangladesh is influenced by various microeconomic
factors. These are as follows:

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 • Labor Supply: The supply of labor in the agriculture sector is mainly determined by the size of
the rural population, which constitutes the majority of the workforce in the sector. Other factors
that influence labor supply include the availability of alternative job opportunities, level of
education and training, and access to social safety nets.
• Labor Demand: The demand for labor in the agriculture sector is mainly influenced by the level
of agricultural output, which in turn is affected by factors such as land availability, technology,
and government policies. The demand for labor is also influenced by the level of mechanization in
the sector, as well as the relative cost of labor compared to capital.
• Equilibrium Wage Rate: The wage rate in the agriculture sector is determined by the interaction
of labor supply and demand. The current minimum wage in Bangladesh is BDT1,500.00 per
month in 2023. In Bangladesh, the wage rate in the sector is typically lower than in other sectors
of the economy due to a large supply of rural labor and limited alternative job opportunities. The
equilibrium wage rate is also influenced by government policies such as minimum wage laws and
labor regulations.
• Employment Level: The employment level in the agriculture sector is determined by the
intersection of labor supply and demand. In Bangladesh, the agriculture sector employs a
significant portion of the labor force, although the share has been declining in recent years due to
urbanization and industrialization.
• Labor Productivity: Labor productivity in the agriculture sector is influenced by various factors
such as the level of mechanization, technology, and access to credit and inputs. Improvements in
productivity can lead to higher wages and increased employment opportunities in the sector.
• Gender Disparities: Women play a significant role in the agriculture sector in Bangladesh,
although they are often employed in lower-paying and less-skilled jobs. Addressing gender
disparities in the sector through policies that promote equal access to education, training, and
credit can lead to improved labor productivity and higher wages for women.

Make Microeconomics Analysis of Imports of Major Food Crops of

Bangladesh
Every year, Bangladesh imports a large volume of agricultural and industrial commodities from abroad. If
we analyze the GDP of Bangladesh, her export is always less than its import where every country strives
to achieve the opposite. Especially developed countries made policies aiming at improving domestic
production and reducing import dependence can help to promote sustainable development in the
agriculture sector. A microeconomic analysis of the imports of major food crops in Bangladesh would
involve examining the following factors:

• Demand for Major Food Crops: The demand for major food crops in Bangladesh is determined
by various factors such as population growth, income levels, and consumer preferences. The
demand for these crops is also influenced by the availability of substitute goods and their relative
prices.
• Supply of Major Food Crops: The supply of major food crops in Bangladesh is determined by
various factors such as weather conditions, land availability, technology, and government policies.

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 The supply of these crops is also influenced by the cost of production, including the cost of labor,
inputs, and capital.
• International Trade: The international trade of major food crops in Bangladesh is influenced by
various factors such as global supply and demand, trade policies, and transportation costs.
Bangladesh is a net importer of major food crops such as rice, wheat, and maize, and the country's
food security is heavily dependent on imports.
• Price Elasticity of Demand: The price elasticity of demand for major food crops in Bangladesh is
relatively low, which means that changes in the price of these crops have a relatively small impact
on the quantity demanded. This is because these crops are essential for meeting basic food needs,
and consumers have limited ability to switch to other goods in response to price changes.
• Market Structure: The market structure for major food crops in Bangladesh is characterized by a
large number of small-scale producers and traders, which can lead to inefficiencies and market
failures. Government policies such as price controls and subsidies can distort market incentives
and affect the behavior of market participants.
• Impact on the Economy: The import of major food crops in Bangladesh can have a significant
impact on the economy, as it affects the country's balance of trade, foreign exchange reserves, and
food security. The import of these crops can also lead to price fluctuations and inflationary
pressures in the domestic market.

Make Microeconomics Analysis of Price Support System for Agricultural

Commodities
A microeconomic analysis of price support systems for agricultural commodities involves examining the
economic effects of government policies that aim to provide a minimum price for agricultural products
through direct or indirect support.

• Price Support System: Price support systems for agricultural commodities refer to government
policies that aim to stabilize prices and incomes for farmers by providing direct or indirect
support. Direct support includes government purchases of agricultural products at a minimum
price, while indirect support includes subsidies, tax breaks, and other incentives that lower the cost
of production.
• Market Effects: Price support systems can have various market effects on the supply and demand
of agricultural commodities. By providing a minimum price, the government encourages
producers to increase supply, which can lead to surplus production and storage costs. At the same
time, consumers may respond to higher prices by reducing demand, which can lead to market
inefficiencies and deadweight losses.
• Impact on Producers: Price support systems can benefit producers by providing a stable income
and reducing income volatility. However, these benefits may be limited to large-scale producers
who have the resources to invest in production and storage facilities. Smaller producers may not
have the resources to benefit from price support systems, and may continue to face income
volatility.

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 • Impact on Consumers: Price support systems can have a negative impact on consumers by
increasing the price of agricultural commodities. This can have a regressive impact on low-income
consumers who spend a higher proportion of their income on food, and can also lead to
inflationary pressures in the economy.
• Opportunity Costs: Price support systems can also have opportunity costs by diverting resources
from other sectors of the economy. Governments that provide support for agriculture may be
neglecting other sectors that could have a greater impact on economic growth and development.
• Trade Effects: Price support systems can also have trade effects by distorting international trade
and leading to trade disputes. By providing support for domestic producers, governments may be
undermining the competitiveness of producers in other countries, leading to reduced trade and
economic growth.

Make Microeconomics Analysis of Industrial Commodities in Bangladesh

Microeconomic analysis of industrial commodities in Bangladesh involves examining the market forces
that determine the production, pricing, and consumption of goods and services within the country's
industrial sector. In this analysis, we will focus on three key industrial commodities: textiles,
pharmaceuticals, and jute.

• Textiles: Bangladesh is a leading exporter of textile products, including clothing, home textiles,
and industrial fabrics. The textile industry contributes significantly to the country's economy,
providing employment to millions of people and accounting for more than 80% of its total exports.
The production of textiles is influenced by several factors, including raw material availability,
labor costs, technology, and government policies. Raw materials such as cotton and yarn are
imported to Bangladesh, and the prices of these materials are subject to global market forces. The
cost of labor in Bangladesh is lower than many other countries, which provides a competitive
advantage for textile manufacturers. The government has also implemented policies to support the
textile industry, such as providing tax incentives and infrastructure development. The demand for
textiles is influenced by several factors, including consumer preferences, global economic
conditions, and fashion trends. In recent years, there has been an increasing demand for
sustainable and eco-friendly textiles, which has led to the development of new manufacturing
processes and materials.
• Pharmaceuticals: The pharmaceutical industry in Bangladesh has experienced significant growth
in recent years, with a focus on the production of generic drugs for export. The country's
pharmaceutical sector is heavily regulated, with the government controlling the prices of essential
drugs and providing incentives for local production. The production of pharmaceuticals is
influenced by factors such as the availability of raw materials, technology, and government
policies. The cost of raw materials such as active pharmaceutical ingredients (APIs) is subject to
global market forces, and fluctuations in prices can impact the profitability of manufacturers. The
government's regulation of drug prices also affects the profitability of the industry. The demand
for pharmaceuticals is influenced by factors such as population growth, disease prevalence, and
government healthcare policies. As the population grows and ages, the demand for

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 pharmaceuticals is expected to increase. The government's healthcare policies, such as universal
health coverage, can also impact the demand for pharmaceuticals.
• Jute: Jute is a natural fiber used for a variety of products, including textiles, paper, and packaging.
Bangladesh is the world's largest producer of jute, and the industry contributes significantly to the
country's economy. The production of jute is influenced by factors such as weather conditions,
technology, and government policies. Weather conditions such as rainfall and temperature can
impact the quality and quantity of jute produced. The use of technology, such as improved
harvesting and processing methods, can increase efficiency and productivity in the industry. The
government's policies, such as subsidies and export incentives, can also influence the profitability
of jute producers. The demand for jute products is influenced by factors such as consumer
preferences, global economic conditions, and government policies. As consumers become more
environmentally conscious, there has been increasing demand for eco-friendly packaging and
textiles, which has benefited the jute industry.

Make Microeconomics Analysis of Employment Situation of Business in

Bangladesh
Microeconomics analysis of the employment situation of businesses in Bangladesh involves examining
the factors that influence the labor market, such as labor supply, labor demand, and government policies.
In this analysis, we will focus on the employment situation of businesses in Bangladesh, particularly in
the context of small and medium-sized enterprises (SMEs).

• Labor Supply: The labor supply in Bangladesh is influenced by several factors, including
population growth, education levels, and migration patterns. The country has a large and growing
population, with a significant portion being young and working age. However, the education
levels of the workforce are relatively low, and many workers lack the necessary skills to meet the
demands of modern industries. Additionally, there is a significant level of rural-to-urban
migration, which can impact the labor supply in certain regions.
• Labor Demand: The demand for labor in Bangladesh is influenced by several factors, including
economic growth, technology, and government policies. The country has experienced significant
economic growth in recent years, particularly in the manufacturing and service sectors, which has
increased the demand for labor. However, many businesses, particularly SMEs, face challenges in
finding qualified workers with the necessary skills to meet their needs. Additionally, the adoption
of new technologies, such as automation and artificial intelligence, can reduce the demand for
labor in some industries.
• Government Policies: The government of Bangladesh has implemented several policies to
support the growth of SMEs and improve the employment situation in the country. These policies
include tax incentives, access to credit, and infrastructure development. However, there are also
challenges related to labor regulations, such as minimum wage laws and the difficulty in
terminating workers, which can make it challenging for businesses to adapt to changing market
conditions.

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 • Impact of COVID-19: Although for a time being, the COVID-19 pandemic has had a significant
impact on the employment situation in Bangladesh, particularly for SMEs. The lockdown
measures and reduced economic activity have resulted in job losses and reduced hours for many
workers. The government has implemented several policies to support businesses and workers
during this time, such as providing financial assistance and wage subsidies.

At present, SMEs are facing challenges in finding qualified workers and adapting to changing market
conditions, particularly in the context of the COVID-19 pandemic. Understanding these factors is
essential for policymakers and industry leaders to make informed decisions and ensure the sustainable
growth of the country's economy.

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