MICRO ECONOMICS essay

In a market economy, individuals own most of the resources available, labor, land, and capital, and use voluntary decisions, made in self-interest, to control the marketplace. In this type of system, the government plays a small role and the economy is shaped by two forces, self-interest and competition. People respond predictably to positive and negative incentives. Both affect people’s choices and behavior. Changes in incentives cause people to change their behavior in predictable ways. ” Self-interest and competition are very important economic forces. Self-interest is the motivator of economic activity. Competition is the regulator of economic activity. Together they form what Adam Smith called the invisible hand, which guides resources to their most valued use. Question 2 Demand means an effective desire or want for a commodity, which is backed by the ability that is either money or purchasing power and willingness to pay for it.

The law of diminishing marginal utility directly impacts on the pricing and the consumer behavior because the price charged for an item must correspond to the consumer’s marginal utility and willingness to consume or utilize the good (Thaler 203). The other components of demand include net export whereby Positive net exports tend to increase demand because some of the produced goods and services are purchased by buyers outside the country and are not available to internal consumers. Question 3 Income elasticity of demand can be defined as a measure of the responsiveness of the demand for a particular good or service, as a result of a change in income of the target market (Nagle 17). Elasticity considers relative, or percent, changes. Slopes consider absolute unit changes.

• Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. Firms can use the concept of elasticity in determining the prices of their commodities that is they can increase the prices of commodities that are inelastic that is a small change in their prices do not lead to a proportionate change in the quantity demanded and at the same time use the concept of elastic commodities by keeping their prices to be determined by the market forces. II Application portion 1. The pricing strategy is good. It basically relies on psychological pricing, which takes into account the excitement and emotional responses customers feel toward a product, and the willingness to pay more than it generates. Price elasticity of demand of the company at its current price is 1 I do agree because the current price is unitary.