MICRO AND MACRO ECONOMICS - Case Study Example

Question1 a-  The above figure shows that the equilibrium point is the point where demand and supply curves intersect. This indicates that equilibrium quantity is the quantity where quantity supplied of a particular product is equal to the quantity demanded of that product. The price where this intersection takes place is called the equilibrium price and is the price which is determined by the market forces (Investopedia). The market is said to be in equilibrium at this price.Question 1b:If prices of baseball bats are above equilibrium, there will be excess supply of baseball bats in the market and the quantity demanded of baseball bats will be lesser than the quantity supplied of baseball bats.

Since this will create an inequilibrium, market forces will push the prices downward until the equilibrium price is reached. Equilibrium price is the price where quantity demanded is equal to the quantity supplied. If prices of baseball bats are down, there will be excess demand of baseball bats in the market and quantity demanded of baseball bats will be higher than quantity supplied of baseball bats. This will again lead to inequilibrium in the market and hence the market forces will force the prices to adjust to reach equilibrium.

In this case, prices will increase until the equilibrium price is reached.Question 1c:Changes in price of a product do not cause a shift in the demand or supply curve. Changes in price causes movement along the demand or supply curve (Investopedia). Since the supply curve slopes upwards, an increase in price will increase the supply of BMW cars whereas a decrease in price will decrease the supply of BMW cars. This is in accordance with the law of supply which states that as the price of a product increases, the quantity supplied of that product also increases and vice versa.

Question 2A:I am assuming that the prices of shoes are relativitely elastic and has a price elasticity of demand of greater than 1. If price elasticity of demand is greater than 1, a reduction in price may lead to an increase in revenue and vice versa (Other things remaining constant) Andy, on the other hand, assumes that shoes have a low price elasticity of demand of less than 1. If the price elasticity of demand is less than 1, an increase in price results in an increase in revenue and vice versa (Other things remaining constant).

Question 2B:Economic growth depends on the amount of capital invested, labor employed and productivity of workers (Berkeley). Higher savings rate does have a profound effect on an economy. Savings are needed to provide financing for investment in a country and higher investment in a country leads to economic growth through providing employment opportunities to people. When savings increase, there is an increase in supply of funds for investment. If the capital is allocated efficiently through the financial intermediaries, higher savings will lead to an increase in the amount of capital invested and hence will lead to long-run economic growth in a country.

Works CitedBerkeley. "Long Run Economic Growth." 30 October 2011. berkeley.edu. 25 November 2012 .Investopedia. Definition of equilibrium. 30 September 2012. 25 November 2012 .