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Principles of Microeconomics

Name

Institution
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Principles of Microeconomics

Qn. 1: Circular Flow Diagram

The circular flow diagram in microeconomics refers to the application of the financial

transactions between the supply market through which income is generated and the creation

market that is used toward the procurement goods/services. Therefore, it is a model which

illustrates the flow of money used to procure goods and services in the economy. The supply

market segment model, companies purchase services in the category of interest, rent, wages and

profit from the enterprise, labor as well as land to the family unit (Ghisellini, et. al., 2016). For

instance, suppose my family members depend only on what earned from the work I provide for

the company. Concerning the product market segment, the model of the household units

purchase end goods and services from the enterprises that are considering dispose-off what they

have created for instance my family present financial condition is the procurement of an

innovative phone from the phone retailers.

This model established would embody untainted financial economy while not seeking the

supervision of the government. In the circumstances in which there is a restriction will always be

reflected in the collection of the taxes to commercial facilities that include security, training, and

even organizations. Furthermore, the leakage from the model from assembling the portion of the

remunerations, other leakage connected with customers' reserves surplus finances in the banks

and reserves account (Ghisellini, et. al., 2016). Nonetheless, it is quite challenging to practicing

this phenomenon of making savings as a preference.

Qn. 2: Demand and Supply

Given that I live in the rural part where tomatoes and mangoes are broadly available to

the market, therefore cost that these fruits are small given that everyone picks their fruits.
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However, these fruits are usually scarce during the winter making their prices go up since few

people who have them are deemed to supply the market. As a result, the wholesale price will be

relatively high as compared to the normal price that the fruits go for when everyone has them.

Given this, it is evident to state that there is a close relationship between the supply and the

prices of the commodities in the market (Edler & Yeow, 2016). Therefore, it emphases to what

has been stated in textbooks that when the prices increases, the amount demanded will increase

and vice versa is also true.

From the grocery budget estimates and my desires to purchasing those items, the increase

in their prices greatly will have an impact on my buying behavior (Edler & Yeow, 2016). I

usually buy few fruits which are available and also relatively cheaper or substitute of the fresh

fruits in the market especially when I have a budget constraint which will not allow for

purchasing of large quantities of the fruits.

Qn. 3: Externalities

Positive externalities just refer to the correlation between two items where an increase in

one will results to an increase in the others as well as also when one element decreases the other

correspondently decreases in the same proportion. For instance, in circumstances where an

individual has many orange trees, these trees will in a way benefits the local who keep bees since

the orange trees usually have the nectar which the bees feed to be able to create the honey

(Stiglitz, 2015). On the other hand, negative externalities refer to the negative spillovers that

affect the third party to produce as well as definitely consumed goods. For example, I the

circumstances where I cut someone in the process of driving and therefore result cause them to

an accident.
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Therefore, the government should strive to eliminate externalities to ensure that the

market operates efficiently since the government may implement certain policies that will

provide regular assortment schedules on a basis which will affect mainly the creation and

consumption factors. This factors that facilitate externalities through taxes, subsidies, outright

prohibitions such as banning smoking in individual buildings, and even through demanding

people to guzzle definite merchandises, such as injections, training, and garbage reconditioning

(Stiglitz, 2015).

Qn. 4: Elasticity of demand

In economics, an elasticity of demand refers to the extent of the sensitivity of the products

and services to slightly change the goods and services whereas inelastic demand relates to a

situation where the request of the merchandise fluctuations the costs in a lesser proportionate

change in demand.

a. Bottled water: This has an inelastic demand since the necessities will always exist and

therefore people must acquire it so as to quench the thirst even if its price goes up.

b. Toothpaste: This qualifies to be inelastic since it adds in a little income and also it does

not have alternatives.

c. Cookie Dough Ice Cream: I consider this to be elastic. This is because several

alternatives are always available in the market. Therefore when there is a slightly increase

in the price of one commodity will result from them to switching to buying other

products. For example, if the price of chocolate goes up consumers can still purchase

cookie dough ice cream flavor as a substitute.

d. Fresh Green Beans: I consider this as elastic because there exist numerous options that

are available to choose from when the price of individual goods increases. If the price of
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the fresh green beans increases largely, consumers can as well pick peas, canned green

beans or even carrots for vegetable in a state of it.

e. Gasoline: I consider this inelastic. This is because it does not have a significant price

change as well as having almost no substitutes. Therefore, individuals will be restricted

by their wallets to fork in cash at the gas station if the price increases (Lin & Prince,

2013).

REFERENCES

Edler, J., & Yeow, J. (2016). Connecting demand and supply: The role of intermediation in

public procurement of innovation. Research Policy, 45(2), 414-426.

Ghisellini, P., Cialani, C., & Ulgiati, S. (2016). A review of the circular economy: the

expected transition to a balanced interplay of environmental and economic

systems. Journal of Cleaner Production, 114, 11-32.

Lin, C. Y. C., & Prince, L. (2013). Gasoline price volatility and the elasticity of demand for

gasoline. Energy Economics, 38, 111-117.

Stiglitz, J. E. (2015). Reconstructing macroeconomic theory to manage economic policy.

In Fruitful Economics (pp. 20-56). Palgrave Macmillan UK.