June 2013 Part B Question 1 a) Using appropriate examples of each, explain the difference between microeconomics and macroeconomics.

Answer: Microeconomics means examines the functioning of individual industries and the behavior of the individual decisions making. Other meaning is a study of the small units in the economy. While macroeconomics means the focuses on the determinants of total national income, deals with aggregate s such as aggregate consumption and investment. Other meaning for macroeconomics is a study of the economy as a whole aggregate (total). The difference between microeconomics and macroeconomics are looked at the way the economy behave.

b) Define demand. With the help of appropriate diagrams, distinguish between a change in demand and a change in quantity demanded. Answer:

Demand is define as the amount or number of units of a product or service that people or a household willing and able to buy or pay at a particular time and at a given range of prices in a given market. Law of demand states that the higher the price the smaller the quantity demanded for that good and vice versa where the lower the price for a certain good or service the higher the quantity demanded for that good or service while ceteris paribus where it means that other things remain constant or being equal. The demand curve produced the negative relationship between price and quantity demanded as shown in the graph below. There are two level of demand which is individual demand and market demand. Market demand is the aggregate of individual demand.

Price (Ice-cream) D P1 P0 B A

D Q1 Q0
Graph 1

Quantity (Ice-cream)

Change in quantity demanded refer to a movement along a given demand curve or change in quantity demanded. It is due to changes in the price of the good itself. Changes in the price of a product affect the quantity demanded per period. For instance, based on the Graph 1 above, we can say that an increase in the price of ice-cream from P0 to P1 is likely to cause a decrease from Q0 to Q1 whereas it change movement of the demand curve from point A to point B in the quantity demanded for ice-cream.

Price (Coca-Cola) D1 D0

D1

D0 Quantity (Coca-Cola)

Graph 2

Change in demand refer to a shift in the demand curves whether it shift to the left or it shift to the right where demand increase or demand decrease. It is due to other factor other than the price of the product itself which includes income, price of related goods, taste and preferences, number of consumer, expectation, seasonal factor, and government policy that includes tax and subsidy. For example, based on Graph 2 above, the demand curve for CocaCola product will shift to the left which is from D0 to D1 as a result on price of related product such as Pepsi in which it is a substitute product of Coca-Cola. So, if the price of Coca-Cola increases customer will shift to Pepsi as its price is lower than Coca-Cola. Therefore, it will decrease the demand for Coca-Cola product.

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