B.A Economics (402) ASSIGNMENT No. 1 Spring, 2024

 

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:

 

                        Q_s = 50 + 4p

                        Q_d = 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

 Price Elasticity of Demand (PED) is a measure used to assess how sensitive the quantity demanded of a good or service is to changes in its price. It reflects the percentage change in quantity demanded resulting from a one-percent change in price.

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.