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Principles of Micro-economics
Assignment(PMIC02-5/S1
05/2022)
Assignment due date: 07 Apr
2022 - 13:00PM
Exam date: 18 May 2022
Distance Learning
Section A
Question 1
1.1
With little economic growth and an economy that is almost collapsing
the country I decided to choose Is North Korea.
North Korea is a country with a population of some 25 million
people, located on the northern half of the Korean Peninsula
between the East Sea (Sea of Japan) and the Yellow Sea. Formally
known as the Democratic People’s Republic of Korea, or DPRK, it
was founded in 1948 when the United States and the Soviet Union
divided control of the peninsula after World War II. North Korea is a
highly secretive communist state that remains isolated from much of
the rest of the world. In recent years, leader Kim Jong Un and his
aggressive nuclear program have posed a growing threat to
international stability. History.com editors (September 28,2017)
According to Prableen Bajpai (June 29,2021) The country of North
Korea has an isolated and tightly controlled command economy. A
command economy is a standard component of any communist
country. In a command economy, the economy is centrally planned
and coordinated by the government.
The government of North Korea determines what goods should be
produced, how much should be produced, and the price at which the
goods are offered for sale; furthermore
Philip Mohr,Reno Seymore & Derek Yu (2018:35) states that in a
command system the participants are instructed what to produce
and how to produce it by a central authority, which also determines
how the output is distributed .Because the economy is governed and
coordinated by a central authority, command systems are also called
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centrally planned systems.
Even though North Korea is under a strict communist leader who
loves inciting propaganda and misuse of coercive power to instill fear
in his followers and leaders; one has to give credit to a command
system that in my opinion actually works for their country. Ruling with
an iron fist has its advantages and disadvantages.
Through difficult economic instability, natural devastating disasters
and international sanctions from ally countries this command system
has continue to prevail in spite of the poor economic instability the
country as well as its people are facing. They have developed a
system where the country doesn’t need much help from the rest of
the world even though there main trading partner are China and
Russia. All of this creates illicit black market gaps in economy and
the people are forced to make and sustain a living by this method.
North Korea according to an article by Victor Oluwole (May
21,2021) doesn’t even make the top 25 poorest countries in the
world. Burundi is number one.
If a country that is supposed to have a poor economical stature can
spend billions of dollars just investing in their military and missile
capability project; one has to ask yourself how does North Korea
they make their money?
North Korea’s economic goals have always been linked to the
general government policy of self-reliance. There main economic
resources industries are the:
•
Agriculture, forestry and fishing
•
Mining and Minerals
•
Resource and power
•
Manufacturing
So in a nutshell all these resources that is supposed to keep the
economy thriving is controlled by the government and its ruler and all
the people who works for these resource industries is also controlled
by the government making it a win situation for the controlling
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government by making use of cheap labor (minimum input) to
achieve maximum output and a loose situation for the people and
the country which resulted in international sanctions,
deindustrialization, propaganda enforcement and classification as a
world terrorist state. I doubt in the near future that change will occur
in this economic system because it seems the country is adopting
and incorporating the traditional system in its command system
meaning the next generation of communistic leader will just follow its
predecessor and so forth.
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Reference
1. Bajpai, P. 2021. How the North Korean economy
works.[Online] Available from :
https://www.investopedia.com/articles/investing/013015/h
ow-north-korea-economy-works.asp
[Accessed: 2022/04/03]
2. History.Com Editors. 2017. North Korea.[Online] Available
from : https://www.history.com/topics/korea/north-koreahistory#section_8
[Accessed: 2022/04/03]
3. Mohr, P., Seymore, R. & Yu, D. 2018. Understanding
Microeconomics, Second edition. South Africa: Van Schaik
Publishers.
4. Oluwole,V.2021. Mapped: the 25 Poorest Countries in the
World.[Online] Available from:
https://africa.businessinsider.com/local/markets/mappedthe-25-poorest-countries-in-the-world/f2tg0wr
[Accessed: 2022/04/03]
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1.2
Advantages

Borders with China and Russia- these countries remain the main trading partners for North Korea.

Extensive mining resources (coal, iron and other minerals such as copper) that remain largely
untapped
Disadvantages

Economically and politically isolated- international and government domestic sanctions put a huge
strain on the country’s economy and created a metaphorical isolated wall from the rest of the world.

Black markets-Many people have to resort to this trade for survival by trading illegally to sustain their
lively hood.
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Reference
1. Coface for trade,2022. Economic studies and Country Risks/North Korea. [Online] Available
from :
https://www.coface.com/Economic-Studies-and-Country-Risks/North-Korea
[Accessed: 2022/04/03]
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Section B
1.1
Consumer's equilibrium refers to a situation when a consumer maximizes his satisfaction, spending his
given income across different goods and services.
In terms of IC analysis, a consumer attains equilibrium when:
(i) IC and the budget line are tangent to each other, i.e. when the slope of IC equals the price ratio of the
goods.
(ii) IC is convex to the origin, at the point of equilibrium.
In fig. AB is the budget or price line. IC1,IC2 and IC3 are indifference curves. A consumer can buy any of
the combinations, A, B, C, D and E of good X and good Y shown on the price line AB. He cannot attain any
combination on IC3 as it is above the price line AB. He can buy those combinations which are not only on
the price line AB but also coincide with the highest indifference curve which is IC2 in this case. Out of A, B,
C, D and E combinations, the consumer will be in equilibrium at combination 'E' because at this point, the
price line (AB) is tangent to the highest indifference curve IC2. No doubt, the consumer can buy `C' or D'
combinations as well but these will not give him maximum satisfaction as they are situated on lower
indifference curve IC1. It means that the consumer's equilibrium point is the point of tangency of price line
and indifference curve. At equilibrium, Slope of indifference curve = Slope of budget or price line
or MRSXY=PXPY Also, at point E, IC2 is convex to the origin. Accordingly, equilibrium is stable. In a state
of equilibrium, the consumer is buying OL amount of good Y and OM amount of good X. It is here that he is
maximizing his satisfaction. Any departure from this point would only mean lesser satisfaction.
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Reference
1. BYJU’S, 2022. Explain the conditions of consumer's equilibrium using indifference
curve analysis. [Online] Available from : https://byjus.com/question-answer/explain-theconditions-of-consumer-s-equilibrium-using-indifference-curve-analysis/
[Accessed: 2022/04/03]
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1.2
The assumption of completeness simply means that it is assumed that a consumer is able to rank all
possible combinations (or bundles) of goods and services in order of preference. Philip Mohr,Reyno
Seymore & Derek Yu (2018:152)
The assumption of consistency (or transitivity) simply means that consumers are assumed to act
consistently. Mohr et al. (2018:152)
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Reference
1) Mohr, P., Seymore, R. & Yu, D. 2018. Understanding Microeconomics, Second edition. South
Africa: Van Schaik Publishers.
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1.3
According to Philip Mohr,Reyno Seymore & Derek Yu (2018:152)

Cost-reducing improvements in technology will result in a right ward shift of the supply curve.

Number of firms(sellers); the more firms enter the market will result in a right ward shift of the
supply curve

Expected future price, non-perishable commodity(eg.gold); if a price is expected to increase,
this will cause a right ward shift of the supply curve.

Price of inputs decrease will result in a right ward shift of the supply curve.

Price of alternative products decrease will result in a right ward shift of the supply curve.
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Reference
1) Mohr, P., Seymore, R. & Yu, D. 2018. Understanding Microeconomics, Second edition. South
Africa: Van Schaik Publishers.
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Question 2
2.1
The supply curve would shift to the left
Explanation: An increase in the wage is an increase in the cost of an input because labour is an input
in orange production. Therefore, the equilibrium price of oranges will rise, but the equilibrium quantity
of oranges will fall. It's worth noting that an increase in salaries does not always imply an
improvement in worker productivity, which would have had the opposite effect on supply.
The oranges are picked by the workers. The wage(w) is the price(P) of input(I) where labour(L) is an
input(I). The wage(w) of labour(L) has increased. Thus, producing orange has become costlier. The
producer has to pay more to produce one orange. The producers will reduce the production of orange
for minimizing the cost(C). The market supply(SS) of orange will reduce for which the supply(SS)
curve of orange will shift leftward. The demand(DD) for orange will not decrease and will remain the
same as before. Hence, the producers will increase the equilibrium price of oranges to cover up the
increased production cost and will reduce the equilibrium quantity of oranges.
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Reference
1) Assignment expert. Answers to question #296099 in microeconomics for Anike Todd.
[Online] Available from : https://www.assignmentexpert.com/homeworkanswers/economics/microeconomics/question-296099
[Accessed: 2022/04/03]
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2.2
A minimum price also known as the price floor, refers to the lowest possible price that can be legally
set by the government, that producers are permitted to charge consumers for the goods or services
produced or sold. It is normally set above the equilibrium price in order to have an impact on the
market.
A minimum price is usually set up to assist producers or suppliers of essential goods and services
such as bread, milk, and wheat. Examples include most agricultural products and minimum wage.
A maximum price also known as price cap or price ceiling refers to a limit or cap on a price set by the
government. It is the highest possible price that producers are permitted to charge consumers for
their goods and services established by the government. It is normally set below the equilibrium price
in order to have an impact.
A maximum price is normally established with the intention of reducing prices below the market
equilibrium price to make the products or services affordable to the consumers. Examples include
caps on prescription drugs costs, medical tests, energy costs, and rent controls.
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References
1) Assignment Expert. Answers to question #226485 in Microeconomics for Montana.
[Online] Available from : https://www.assignmentexpert.com/homeworkanswers/economics/microeconomics/question226485#:~:text=A%20minimum%20price%20is%20usually,price%20set%20by%2
[Accessed: 2022/04/03]
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Question 3
3.1
e = _changes(Q)_
X Y
changes(Y)
(1000-900)
(6500-5000)
X
Q
5000
1000
e=0,06x 5
e= 0.3
The income elasticity of demand is 0.3. Even though the quantity of shoes decreased from 2020 to
2021 by a 100 units while the income between 2020 to 2021 increased by 1500. So the quantity of
shoes was not important purchasing factor so therefore it was inelastic.
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3.2

Little competition.

Bought infrequently.

A small percentage of income.

Short-run.
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3.3
Price elasticity of demand describes how changes in the price for goods and the demand for those
same goods relate. As those two variables interact, they can have an impact on a firm’s total
revenue. Revenue is the amount of money a firm brings in from sales—i.e., the total number of units
sold multiplied by the price per unit. Therefore, as the price or the quantity sold changes, those
changes have a direct impact on revenue.
The function of total revenue is graphed as a downward opening parabola due to the concept of
elasticity of demand. When price goes up, quantity will go down. Whether the total revenue will grow
or drop depends on the original price and quantity and the slope of the demand curve.
For example, total revenue will rise due to an increase in quantity if the percentage increase in
quantity is larger than the percentage decrease in price. The percentage change in the price and
quantity determine whether the demand for a product is elastic or inelastic.
When demand is inelastic, an increase in supply will lead to a decrease in total revenue while a
decrease in supply will lead to an increase in total revenue.
When demand is elastic, an increase in supply will lead to an increase in total revenue while a
decrease in supply will lead to a decrease in total revenue.
Rational people and firms are assumed to make the most profitable decision, and total revenue helps
firms to make these decisions because the profit that a firm can earn depends on the total revenue
and the total cost.
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Question 4
Units
Total Fixed
cost
Total
variable
cost
Total Cost
Average(total) Marginal
Cost
Cost
0
65
-
65
-
-
1
65
90
155
155
90
2
65
150
215
107.5
60
3
65
175
240
80
25
4
65
195
260
65
20
Internal use only
Question Mark
Internal
External
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Total
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