Course: Economics (402)
Semester: Spring, 2024
Level: B.A/Associate
Degree
ASSIGNMENT
No. 1
Q.1 Discuss the scope and nature of economics.
Also define economics in the light of thoughts presented by professor Robinson.
Ans
: Scope and Nature of Economics
Economics is a vast and
multifaceted social science that explores how individuals, firms, governments,
and societies allocate limited resources to satisfy their unlimited wants. This
field encompasses both theoretical frameworks and practical applications,
addressing a wide range of topics and employing various interdisciplinary
approaches. Here is an expanded look at its scope and nature:
1.
Microeconomics and Macroeconomics
- Microeconomics:
- Scope: Investigates
the behavior of individual economic agents such as households, firms, and
markets.
- Nature: Focuses on
decision-making processes, price mechanisms, and resource allocation. Key
concepts include supply and demand, elasticity, utility, and market
structures like perfect competition, monopolies, and oligopolies.
- Applications: Used to
develop pricing strategies, analyze consumer behavior, optimize
production, and study market efficiency.
- Macroeconomics:
- Scope: Examines the
economy on an aggregate level.
- Nature: Deals with
broad economic indicators such as GDP, national income, unemployment
rates, and inflation. It also looks into economic growth, business
cycles, and the impacts of fiscal and monetary policies.
- Applications: Helps in
policy formulation, economic forecasting, managing inflation and
unemployment, and studying international trade and finance.
2.
Positive and Normative Economics
- Positive Economics:
- Scope: Centers on
objective analysis based on observable data.
- Nature: Describes and
explains economic phenomena without making value judgments, addressing "what
is" or "what will happen if" scenarios.
- Applications: Involves
empirical research, data analysis, and economic modeling.
- Normative Economics:
- Scope: Focuses on
subjective analysis based on values and opinions.
- Nature: Involves
prescribing economic policies and recommendations based on ethical
considerations, addressing "what ought to be" questions.
- Applications: Used in
policy advocacy, ethical debates in economics, and welfare economics.
3.
Economic Systems
- Capitalism:
- Scope: Emphasizes
private ownership and market-driven resource allocation.
- Nature: Focuses on
profit maximization, competition, and consumer choice.
- Applications: Includes
market regulation, competition law, and corporate governance.
- Socialism:
- Scope: Highlights
state ownership and planned resource allocation.
- Nature: Aims at
social welfare, equal distribution of wealth, and central planning.
- Applications: Encompasses
public sector management, welfare programs, and income redistribution
policies.
- Mixed Economies:
- Scope: Combines elements
of both capitalism and socialism.
- Nature: Integrates
both private and public sector roles in the economy.
- Applications: Strives to
balance market freedom with social welfare programs and regulations.
4.
Development Economics
- Scope: Concentrates
on enhancing economic conditions in developing countries.
- Nature: Tackles issues
such as poverty, inequality, economic growth, and human development.
- Applications: Formulates
development policies, poverty alleviation programs, and international aid
strategies.
5.
Behavioral Economics
- Scope: Explores the
psychological factors influencing economic decisions.
- Nature: Challenges the
classical assumption of rational behavior by incorporating insights from
psychology.
- Applications: Improves
economic models, public policy, and marketing strategies.
Definition of Economics in Light of Professor Joan Robinson's
Thoughts
Joan Robinson, a distinguished
economist, contributed significantly to our understanding of economics,
especially regarding the real-world imperfections and dynamic aspects of
economic systems. Her perspective offers a more nuanced view of the field.
Robinson's View on Economics:
- Dynamic Nature: Robinson
emphasized that economics is not static; it evolves with changes in
society, technology, and institutions. Economic theories must adapt to
reflect these changes.
- Imperfect Competition: She
highlighted that real-world markets often do not fit the idealized models
of perfect competition. Monopolies, oligopolies, and other market
imperfections are prevalent and must be studied to understand economic
phenomena accurately.
- Human Behavior: Robinson's
work underscored the importance of understanding human behavior, which is
often irrational and influenced by various social, psychological, and cultural
factors.
- Coordination of Wants and
Resources:
According to Robinson, economics is fundamentally about how humans
coordinate their desires and manage scarce resources. This involves
understanding decision-making mechanisms, social norms, and political
realities.
Q.2 What
is law of satiable wants? Also write a note on the assumptions and exceptions
of this law in detail.
Ans: Law of
Satiable Wants
The
Law of Satiable Wants
refers to the economic principle that as consumers acquire more of a good,
their desire for additional units of that good decreases. This concept is
closely related to the Law of Diminishing Marginal Utility,
which states that the additional satisfaction (utility) gained from consuming
each additional unit of a good decreases as consumption increases. Essentially,
the more we have of something, the less we want more of it.
Assumptions
of the Law of Satiable Wants
Rational
Behavior:
Consumers are assumed to behave rationally, seeking to maximize their utility
or satisfaction from the goods and services they consume.
Cardinal
Utility:
Utility can be measured in numerical terms, allowing for the calculation of the
exact amount of utility derived from each unit of a good.
Independent
Utility:
The utility derived from one good is independent of the utility derived from
other goods. In other words, the satisfaction gained from consuming a good does
not affect the satisfaction gained from other goods.
Constant
Marginal Utility of Money: The utility of money remains constant as
consumers spend it on additional units of goods and services. This means that
the value of money does not change with changes in consumption levels.
Continuity: The utility
function is continuous, meaning there are no sudden jumps or drops in the
utility derived from consuming goods.
Diminishing
Marginal Utility:
The marginal utility (additional satisfaction) derived from each additional
unit of a good decreases as the quantity consumed increases.
Exceptions
to the Law of Satiable Wants
While
the Law of Satiable Wants generally holds true, there are several exceptions
where the principle may not apply or may apply differently:
Giffen
Goods:
These are inferior goods for which demand increases as the price increases, due
to the income effect outweighing the substitution effect. In this case,
consumers might purchase more of the good even as their satisfaction decreases.
Addictive
Goods:
For addictive goods like alcohol, cigarettes, or drugs, the utility derived
from additional consumption may not decrease. In fact, the desire for
additional units may increase with consumption.
Prestige
Goods:
Also known as Veblen goods, these are luxury items for which demand increases
as the price increases, because higher prices enhance their perceived status
and desirability.
Essential
Goods:
For certain essential goods, like water or basic food items, the decrease in
marginal utility may be very slow. Consumers may continue to derive significant
utility from additional units due to their essential nature.
Variety
Seeking:
In some cases, consumers might prefer variety and thus seek additional units of
a good or similar goods to increase overall satisfaction. For instance, a
person might enjoy trying different types of chocolates even if the utility
from each type individually diminishes.
Detailed
Note on Assumptions and Exceptions
Assumptions
The
Law of Satiable Wants relies on several key assumptions to hold true:
Rational
Behavior:
The assumption of rational behavior is fundamental to many economic theories.
It posits that consumers aim to maximize their satisfaction or utility from the
consumption of goods and services. Rational behavior implies that consumers
make informed decisions, weighing the costs and benefits of each additional
unit of a good.
Cardinal
Utility:
This assumption allows economists to assign numerical values to the utility
derived from goods, facilitating the calculation of marginal utility. Cardinal
utility assumes that we can measure utility in absolute terms, such as utils.
Independent
Utility:
The independence of utility means that the satisfaction derived from one good
does not affect the satisfaction derived from another. This simplification
allows for the isolated analysis of each good's utility.
Constant
Marginal Utility of Money: This assumption simplifies analysis by
treating the value of money as constant. In reality, the marginal utility of
money may change as consumers' income and wealth levels change, but the
assumption allows for more straightforward modeling.
Continuity: The assumption of
continuity ensures that the utility function is smooth, without abrupt changes.
This is essential for mathematical modeling and analysis of consumer behavior.
Diminishing
Marginal Utility:
This key assumption states that the additional utility gained from each
subsequent unit of a good decreases as more units are consumed. It forms the
basis of the Law of Satiable Wants and explains why consumers eventually stop
consuming more of a good.
Exceptions
Several
exceptions challenge the universality of the Law of Satiable Wants:
Giffen
Goods:
Named after Sir Robert Giffen, these goods defy the typical law of demand. For
example, in times of economic hardship, people might consume more of an
inferior good (e.g., bread) even as its price rises because they cannot afford
more expensive substitutes. This creates an upward-sloping demand curve,
contrary to standard economic theory.
Addictive
Goods:
Addictive substances, such as narcotics or tobacco, often exhibit increasing
marginal utility, at least initially. As individuals consume more, their
dependency grows, leading to a higher perceived utility from additional
consumption.
Prestige
Goods:
These goods, also known as status symbols, derive their utility from their
exclusivity and price. Higher prices increase their desirability because they
signal wealth and status. Examples include luxury cars, designer clothing, and
high-end watches.
Essential
Goods:
For goods necessary for survival, the marginal utility may decrease very
slowly. Water is a prime example; even though additional units may provide less
utility, they are still highly valued due to their essential nature.
Variety
Seeking:
Human preferences for variety can lead to situations where marginal utility
does not diminish as expected. For example, a person might enjoy trying new
types of food or beverages even if the additional satisfaction from each new
type does not strictly decrease.
Q.3 What
is meant by indifference curves? Explain with the help of diagram. Also write a
note on the properties of indifference curves.
Ans: Indifference Curves
Indifference
curves represent a fundamental concept in microeconomics used to analyze
consumer preferences and the choices they make. An indifference curve is a
graph that shows different combinations of two goods that provide the same
level of satisfaction or utility to a consumer. This means that the consumer
has no preference for one combination over another if they are on the same
indifference curve.
Explanation
with Diagram
Let's
consider a consumer who has preferences for two goods: apples (A) and bananas
(B). We can plot these preferences on a graph where the quantity of apples is
on the x-axis and the quantity of bananas is on the y-axis.
Diagram:
Here is a simple
representation of indifference curves:
B
| * *
| * *
| * *
| * *
| * *
|_________________________________
A
In this diagram:
Each
curve represents different levels of utility.
Points
on the same curve represent combinations of apples and bananas that yield the
same utility for the consumer.
Higher
curves represent higher levels of utility.
Properties of Indifference Curves
Downward
Sloping:
Indifference curves slope downwards from left to right. This reflects the
trade-off between the two goods. If a consumer consumes more of one good, they
must consume less of the other to maintain the same level of utility.
Convex
to the Origin:
Indifference curves are convex to the origin due to the assumption of
diminishing marginal rate of substitution (MRS). This means that as a consumer
substitutes one good for another, the amount of the good being given up
increases.
Non-Intersecting: Indifference curves
do not intersect each other. If they did, it would imply inconsistent
preferences, which violates the assumption of rational behavior in consumer
theory.
Higher
Indifference Curves Represent Higher Utility: Curves that are further from the
origin represent higher levels of utility. A consumer prefers combinations on
higher indifference curves to those on lower ones.
Continuous
and Smooth:
Indifference curves are typically drawn as smooth and continuous curves,
representing that small changes in quantities of goods lead to small changes in
utility.
Marginal
Rate of Substitution (MRS): The slope of an indifference curve at any point is
known as the marginal rate of substitution (MRS). It represents the rate at
which a consumer is willing to trade one good for another while maintaining the
same level of utility. Mathematically, it is the absolute value of the slope of
the indifference curve.
Detailed
Explanation and Diagram
Consider the
following graph:
Bananas (B)
|
| I3
| *
| *
| *
I2
| * *
| *
*
| *
*
| *
I1
| *
*
| * *
|_________________________________
Apples (A)
- I1, I2, and I3 are
indifference curves.
- I3 represents a
higher level of utility compared to I2, and I2 represents a
higher level of utility compared to I1.
Marginal Rate of Substitution (MRS)
The MRS is the rate
at which a consumer is willing to substitute one good for another while
maintaining the same level of utility. Mathematically, MRS is the absolute
value of the slope of the indifference curve. If a consumer moves along an
indifference curve, consuming more apples and fewer bananas, the MRS measures
how many bananas the consumer is willing to give up for one additional apple,
without changing their overall utility.
Properties of Indifference Curves in Detail
1.
Downward Sloping:
o Reason: If an indifference
curve were to slope upwards, it would imply that a consumer could consume more
of both goods and remain at the same utility level, which contradicts the basic
economic assumption of scarcity.
o Interpretation: As the consumer
increases the consumption of one good, they must reduce the consumption of the
other to maintain the same utility level.
2.
Convex to the Origin:
o Reason: Convexity is due to
the diminishing marginal rate of substitution. Initially, the consumer is
willing to give up a large quantity of one good to gain an additional unit of
another good. However, as they continue to do so, the willingness to substitute
diminishes.
o Interpretation: This curvature
indicates that consumers prefer balanced combinations of goods rather than
extremes. For example, they prefer a mix of apples and bananas rather than only
apples or only bananas.
3.
Non-Intersecting:
o Reason: If two indifference
curves intersect, it would imply that the same combination of goods yields two
different levels of utility, which is illogical.
o Interpretation: Consistent consumer
preferences ensure that each combination of goods lies on only one indifference
curve.
4.
Higher Indifference Curves Represent Higher Utility:
o Reason: Combinations of
goods on higher curves provide greater satisfaction to the consumer.
o Interpretation: A consumer would
always prefer a combination on a higher indifference curve to one on a lower
curve because it represents a higher level of utility.
5.
Continuous and Smooth:
o Reason: This property
reflects the assumption that utility functions are continuous and
differentiable.
o Interpretation: Small changes in
the quantities of goods lead to small changes in utility, which allows for a
smooth curve representation.
6.
Marginal Rate of Substitution (MRS):
o Reason: The MRS reflects
the consumer’s willingness to trade one good for another. It typically
diminishes as the quantity of one good increases because the consumer values
each additional unit of that good less.
o Interpretation: The slope of the
indifference curve becomes flatter as the consumer moves down the curve,
indicating that they are willing to give up fewer units of the second good to
gain additional units of the first good.
Q.4 (a)
What is meant by point elasticity and arc-elasticity? Explain with help of
diagram and formula.
(b)
Given the supply and demand equation:
Qs = 50 + 4p
Qd = 200 - 2p
Estimate:
Equilibrium price and quantity
Elasticities of demand and supply at equilibrium position.
Ans
Q.5 Write a
notes on the following:
a) Price
elasticity of demand.
b) Demand
curve in case of inferior good case.
c) Income
effect of a price changed.
d) Equilibrium
of a consumer and money.
Ans: a) Price Elasticity of Demand
b)
Demand Curve in Case of Inferior Goods
Inferior
Goods
are characterized by an increase in demand when consumer income decreases, and
a decrease in demand when income increases. This behavior contrasts with that
of normal goods, for which demand increases as income rises.
Diagram: The demand curve
for an inferior good typically slopes downwards, like other demand curves, but
the key difference is in how it shifts with changes in income. For inferior
goods:
- As income falls, the demand curve shifts
to the right, indicating increased demand at each price level.
- Conversely, as income rises, the demand
curve shifts to the left, reflecting decreased demand.
Example:
- Generic Brands: Consumers may
purchase more generic or lower-quality brands when their income decreases,
switching away from premium brands.
c)
Income Effect of a Price Change
Income
Effect
refers to the change in quantity demanded of a good resulting from a change in
the consumer's real income or purchasing power, caused by a change in the price
of that good.
Explanation:
- When the price of a good decreases, the
consumer's real income effectively increases because they can afford more
of the good with the same amount of money.
- For Normal Goods: The increased real
income leads to higher demand for the good.
- For Inferior Goods: The increased real
income may lead to reduced demand for the good as consumers switch to more
preferred alternatives.
Diagram: A decrease in the
price of a good rotates the budget line outward, reflecting an increase in
purchasing power. This change causes an upward movement along the indifference
curve, indicating a higher quantity demanded due to the income effect.
d)
Equilibrium of a Consumer and Money
Consumer
Equilibrium
is achieved when a consumer maximizes their utility given their budget
constraint. This involves allocating income in a manner that equalizes the
marginal utility per dollar spent across all goods.
Diagram: At consumer
equilibrium, the budget line is tangent to the highest possible indifference
curve. This tangency indicates that the consumer has allocated their budget
such that the marginal utility per dollar spent is equalized across all goods.
Note: An increase in
income shifts the budget line outward, allowing the consumer to potentially
reach a higher indifference curve. This shift represents a higher overall
utility. The equilibrium adjusts to this new budget constraint while
maintaining the equality of marginal utility per dollar spent.
 ASSIGNMENT No. 1 Spring, 2024){kind=link}
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