Answer to Question #248199 in Microeconomics for sayem

Question

1. If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to stay the same and the equilibrium quantity to fall. Illustrate with a graph.
2. Briefly discuss how greater consumption of a good affect utility

Answer 1

1.

The markets have two sides, the demand side, where the buyers, and consumers operate, and the other side is supply side, where the sellers, and firms operate. These two entities interact in the market, and get involved in trade with each other. 

 

The buyers, or the consumers tend to purchase various goods, and services from the variety which is offered by the sellers. The sellers on the other hand work with the profit motive, where they supply many goods, and services in the market. 

Step 2- Explanation

The elasticity of supply is used to determine how responsive is the quantity supplied of a good is when there is a change in the own price of the good. 

 

In the given case, we are given that the good has perfectly elastic supply. This implies that the supply curve is horizontal. 

Now, there is a decline in the demand, this will result into a leftward shift of the downward sloping demand curve. 

 

As the supply is perfectly elastic, there will be no impact on the price, while the equilibrium quantity of the good will decline. 

 

Figure:

 

The equilibrium price (P) remains the same. 

 

 

2.

The utility is the satisfaction which a consumer, or an individual gets from the consumption of a good. 

 

As the consumer increase consumption of a good, there is a decline in the marginal utility received by the consumer from every additional unit consumed. 

 

There comes a point when the marginal utility becomes zero, at this level of consumption, the total utility for the consumer is maximized. 

 

After this point, there is a fall in the total utility achieved by the consumer, as the marginal utility of the consumer becomes negative.