+ +
+--------+-----E C SE! 6 D1~
t t t I t +
ASSIGNMENT 1 SEMESTER 1
-~l!.L QUES t HINtS Flllltl \i AN~WER~D +
1
DUE: 19 MARdH 20 2~
DISCLAIMER: 1
THI' DOCUMEN IS FDR REFERENCE AND GUIDf'N E PURP SEs---------..i---
DNLY. I DD NOT TAKE RESPDNSIBIUITY !FDR AN~ PLAG ARl~M. ~MISUSE. DR
ACADEMIC MIS DNDUCT RESULTING FROM THSIR USE. IT IS YDURi j ~
===
RESPONSIBILITY TO ENSU~E ORIGINALITY AN~ CDMPL!IAN E WITH
- RELEVANT GUlr LINES DR t TAND, RDl . r l r
1
, PLEASE USE THIS DOCUMENT AS A GUIDE TO ANSWER YOUR ASSIGNMENT
Question 1
1.1. In your own words, explain how you understand the working of the market mechanism.
The market mechanism refers to the way in which supply and demand interact to determine the
prices and quantities of goods and services in a market. When the demand for a good increases, the
price rises, which incentivizes producers to supply more of the good. Conversely, when demand
decreases, prices fall, and suppliers reduce their output.
This dynamic process helps to allocate resources efficiently without the need for central planning.
Through this system, prices act as signals to both consumers and producers, guiding their decisions
regarding consumption and production. In the absence of government intervention, the market
mechanism tends to achieve equilibrium where the quantity supplied equals the quantity demanded
at a specific price.
1.2. Differentiate between any two of the following concepts:
(a) Completeness and transitivity in relation to consumer choices
Completeness and transitivity are two properties of consumer preferences. Completeness means that
a consumer can compare any two bundles of goods and either prefer one over the other or be
indifferent between them. For example, if a consumer is choosing between two types of apples and
oranges, they can either prefer apples, oranges, or be indifferent. Transitivity, on the other hand,
states that if a consumer prefers bundle A to bundle B and bundle B to bundle C, then they must
prefer bundle A to bundle C. These two properties are crucial for ensuring consistent
decision-making in consumer choice theory (Pindyck & Rubinfeld, 2018).
(b) Inferior product versus a Giffen good
An inferior product is one for which demand decreases as income rises. For example, when people's
incomes increase, they may choose to buy less of a certain low-cost brand of food in favor of more
expensive options. A Giffen good, however, is a special type of inferior good where a price decrease
leads to a higher quantity demanded due to the overwhelming effect of the income effect,
outweighing the substitution effect. This behavior leads to an upward-sloping demand curve, a rare
phenomenon in economics. Giffen goods typically occur in situations where the income effect is
particularly strong, such as with staple foods like bread in a very poor economy (Pindyck &
Rubinfeld, 2018).
(c) Infinite elastic and complete inelastic demand
Infinite elasticity refers to a situation where a tiny change in price causes an infinite change in
quantity demanded, represented by a horizontal demand curve. This means that consumers will only
buy at a particular price, and any increase in price will lead to zero demand. Complete inelasticity,
on the other hand, refers to a situation where price changes have no effect on the quantity demanded,
represented by a vertical demand curve. In this case, the demand for a good is constant regardless of
its price (Pindyck & Rubinfeld, 2018).
+--------+-----E C SE! 6 D1~
t t t I t +
ASSIGNMENT 1 SEMESTER 1
-~l!.L QUES t HINtS Flllltl \i AN~WER~D +
1
DUE: 19 MARdH 20 2~
DISCLAIMER: 1
THI' DOCUMEN IS FDR REFERENCE AND GUIDf'N E PURP SEs---------..i---
DNLY. I DD NOT TAKE RESPDNSIBIUITY !FDR AN~ PLAG ARl~M. ~MISUSE. DR
ACADEMIC MIS DNDUCT RESULTING FROM THSIR USE. IT IS YDURi j ~
===
RESPONSIBILITY TO ENSU~E ORIGINALITY AN~ CDMPL!IAN E WITH
- RELEVANT GUlr LINES DR t TAND, RDl . r l r
1
, PLEASE USE THIS DOCUMENT AS A GUIDE TO ANSWER YOUR ASSIGNMENT
Question 1
1.1. In your own words, explain how you understand the working of the market mechanism.
The market mechanism refers to the way in which supply and demand interact to determine the
prices and quantities of goods and services in a market. When the demand for a good increases, the
price rises, which incentivizes producers to supply more of the good. Conversely, when demand
decreases, prices fall, and suppliers reduce their output.
This dynamic process helps to allocate resources efficiently without the need for central planning.
Through this system, prices act as signals to both consumers and producers, guiding their decisions
regarding consumption and production. In the absence of government intervention, the market
mechanism tends to achieve equilibrium where the quantity supplied equals the quantity demanded
at a specific price.
1.2. Differentiate between any two of the following concepts:
(a) Completeness and transitivity in relation to consumer choices
Completeness and transitivity are two properties of consumer preferences. Completeness means that
a consumer can compare any two bundles of goods and either prefer one over the other or be
indifferent between them. For example, if a consumer is choosing between two types of apples and
oranges, they can either prefer apples, oranges, or be indifferent. Transitivity, on the other hand,
states that if a consumer prefers bundle A to bundle B and bundle B to bundle C, then they must
prefer bundle A to bundle C. These two properties are crucial for ensuring consistent
decision-making in consumer choice theory (Pindyck & Rubinfeld, 2018).
(b) Inferior product versus a Giffen good
An inferior product is one for which demand decreases as income rises. For example, when people's
incomes increase, they may choose to buy less of a certain low-cost brand of food in favor of more
expensive options. A Giffen good, however, is a special type of inferior good where a price decrease
leads to a higher quantity demanded due to the overwhelming effect of the income effect,
outweighing the substitution effect. This behavior leads to an upward-sloping demand curve, a rare
phenomenon in economics. Giffen goods typically occur in situations where the income effect is
particularly strong, such as with staple foods like bread in a very poor economy (Pindyck &
Rubinfeld, 2018).
(c) Infinite elastic and complete inelastic demand
Infinite elasticity refers to a situation where a tiny change in price causes an infinite change in
quantity demanded, represented by a horizontal demand curve. This means that consumers will only
buy at a particular price, and any increase in price will lead to zero demand. Complete inelasticity,
on the other hand, refers to a situation where price changes have no effect on the quantity demanded,
represented by a vertical demand curve. In this case, the demand for a good is constant regardless of
its price (Pindyck & Rubinfeld, 2018).
