Elite Academic Institute 068 053 8213 /0717 513 144/ 061 262 1185
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Educating the world for a better change
,Elite Academic Institute 068 053 8213 /0717 513 144/ 061 262 1185
WARNING: PLEASE NOTE THAT PLAGIARISM IS A SERIOUS ACADEMIC
OFFENSE, therefore, the documents provided here including past assignments, tests
and notes are intended SOLELY for educational purposes and as a guide to help
students understand academic concepts and improve their writing skills. These
materials should not be submitted as final work, as doing so may constitute academic
dishonesty. Students are encouraged to use them as reference points, develop their
own understanding and produce original work that reflects their knowledge and critical
thinking. Students are also encouraged to regenerate their own (personalized)
solutions paying particular attention to module contents as prescribed by module
facilitators, lecturers and supervisors. If this document is plagiarized by the users and
fails, ELITE ACADEMIC INSTITUTE should not be rendered accountable since the
contents in this document only give learners a kick-start on what is expected of them
from their areas of specialty.
CAUTION: STUDENTS ARE NOT MANDATED TO USE ALL THE INFORMATION IN
THIS DOCUMENT IN WRITING THEIR ASSIGNMENTS
Educating the world for a better change
, Elite Academic Institute 068 053 8213 /0717 513 144/ 061 262 1185
Question 1
1.1 In your own words, explain how you understand the working of the market
mechanism. (2)
The market mechanism refers to the process through which prices and quantities of
goods and services are determined through the interaction of demand from consumers
and supply from producers in a competitive market. In a free market system, buyers
seek to maximise satisfaction while sellers aim to maximise profit, and their
interactions determine the equilibrium price and quantity (Mankiw, 2021). This process
is known as the operation of “invisible hand”.
When the price of a product is above the equilibrium level, the quantity supplied
exceeds the quantity demanded, resulting in a surplus. Producers then lower prices in
order to sell excess stock. Conversely, when the price is below equilibrium, the
quantity demanded exceeds the quantity supplied, creating a shortage, which drives
prices upward as consumers compete for the limited product. Through these
adjustments, the market naturally moves toward an equilibrium point where demand
equals supply, ensuring efficient allocation of resources (Parkin, 2020).
Thus, the market mechanism acts as a self-regulating system that coordinates
economic activity without direct government intervention, using price signals to guide
producers and consumers in their decision-making.
1.2 Differentiate between any two of the following concepts
(a) Completeness and Transitivity in Relation to Consumer Choices
Completeness refers to the assumption in consumer theory that individuals are able
to compare and rank all possible combinations of goods. For any two consumption
bundles, the consumer can either prefer one bundle over the other or be indifferent
between them. This assumption ensures that consumers are capable of making
rational decisions when faced with different consumption alternatives (Varian, 2019).
Transitivity, on the other hand, relates to the consistency of consumer preferences. It
states that if a consumer prefers bundle A to bundle B, and prefers bundle B to bundle
C, then the consumer must also prefer bundle A to bundle C. This assumption ensures
Educating the world for a better change
ademic In
Ac sti
te
tu
Eli
te
W
er
de
a
h
eG M
raduates Ar e
Educating the world for a better change
,Elite Academic Institute 068 053 8213 /0717 513 144/ 061 262 1185
WARNING: PLEASE NOTE THAT PLAGIARISM IS A SERIOUS ACADEMIC
OFFENSE, therefore, the documents provided here including past assignments, tests
and notes are intended SOLELY for educational purposes and as a guide to help
students understand academic concepts and improve their writing skills. These
materials should not be submitted as final work, as doing so may constitute academic
dishonesty. Students are encouraged to use them as reference points, develop their
own understanding and produce original work that reflects their knowledge and critical
thinking. Students are also encouraged to regenerate their own (personalized)
solutions paying particular attention to module contents as prescribed by module
facilitators, lecturers and supervisors. If this document is plagiarized by the users and
fails, ELITE ACADEMIC INSTITUTE should not be rendered accountable since the
contents in this document only give learners a kick-start on what is expected of them
from their areas of specialty.
CAUTION: STUDENTS ARE NOT MANDATED TO USE ALL THE INFORMATION IN
THIS DOCUMENT IN WRITING THEIR ASSIGNMENTS
Educating the world for a better change
, Elite Academic Institute 068 053 8213 /0717 513 144/ 061 262 1185
Question 1
1.1 In your own words, explain how you understand the working of the market
mechanism. (2)
The market mechanism refers to the process through which prices and quantities of
goods and services are determined through the interaction of demand from consumers
and supply from producers in a competitive market. In a free market system, buyers
seek to maximise satisfaction while sellers aim to maximise profit, and their
interactions determine the equilibrium price and quantity (Mankiw, 2021). This process
is known as the operation of “invisible hand”.
When the price of a product is above the equilibrium level, the quantity supplied
exceeds the quantity demanded, resulting in a surplus. Producers then lower prices in
order to sell excess stock. Conversely, when the price is below equilibrium, the
quantity demanded exceeds the quantity supplied, creating a shortage, which drives
prices upward as consumers compete for the limited product. Through these
adjustments, the market naturally moves toward an equilibrium point where demand
equals supply, ensuring efficient allocation of resources (Parkin, 2020).
Thus, the market mechanism acts as a self-regulating system that coordinates
economic activity without direct government intervention, using price signals to guide
producers and consumers in their decision-making.
1.2 Differentiate between any two of the following concepts
(a) Completeness and Transitivity in Relation to Consumer Choices
Completeness refers to the assumption in consumer theory that individuals are able
to compare and rank all possible combinations of goods. For any two consumption
bundles, the consumer can either prefer one bundle over the other or be indifferent
between them. This assumption ensures that consumers are capable of making
rational decisions when faced with different consumption alternatives (Varian, 2019).
Transitivity, on the other hand, relates to the consistency of consumer preferences. It
states that if a consumer prefers bundle A to bundle B, and prefers bundle B to bundle
C, then the consumer must also prefer bundle A to bundle C. This assumption ensures
Educating the world for a better change
