Analyzing Economic Problems
Solutions to Review Questions
Microeconomics studies the economic behavior of individual economic decision
makers, such as a consumer, a worker, a firm, or a manager.
studies how an entire national economy performs, examining such topics as the
aggregate levels of income and employment, the levels of interest rates and prices,
the rate of inflation, and the nature of business cycles.
While our wants for goods and services are unlimited, the resources necessary to
produce those goods and services, such as labor, managerial talent, capital, and
raw materials, are “scarce” because their supply is limited.
This scarcity implies
that we are constrained in the choices we can make about which goods and
services to produce.
Thus, economics is often described as the science of
Constrained optimization allows the decision maker to select the best (optimal)
alternative while accounting for any possible limitations or restrictions on the
The objective function represents the relationship to be maximized or
For example, a firm’s profit might be the objective function and all
choices will be evaluated in the profit function to determine which yields the
The constraints place limitations on the choice the decision maker
can select and defines the set of alternatives from which the best will be chosen.
If the price in the market was above the equilibrium price, consumers would be
willing to purchase fewer units than suppliers would be willing to sell, creating an
As suppliers realize they are not selling the units they have made
available, sellers will bid down the price to entice more consumers to purchase
their goods or services.
By definition, equilibrium is a state that will remain
unchanged as long as exogenous factors remain unchanged.
Since in this case
suppliers will lower their price, this high price cannot be an equilibrium.
When the price is below the equilibrium price, consumers will demand more units
than suppliers have made available.
This excess demand will entice consumers to
bid up the prices to purchase the limited units available.
Since the price will
change, it cannot be an equilibrium.
Page 1 - 1