Engineering Economics 2018033800129196

Name: Stuti Jayswal

PRN: 201803380129196

ASSIGNMENT-1

Q1) HOW IS THE DISCIPLINE OF ECONOMICS RELATED TO SCARCITY?

ANS  Scarcity is central to economic theory. Economic analysis is fundamentally
about the maximization of something (leisure time, wealth, health, happiness—all
commonly reduced to the concept of utility) subject to constraints. These
constraints—or scarcity—inevitably define a tradeoff.
The production possibilities curve (PPC) demonstrates the effects of scarcity, which
exists to some degree in every country. Scarcity results from the fact that every
country has a limited amount of resources, and can produce only a limited
amount of goods and services.
This production output may be lower than the quantity desired by the country’s
populace. Since fewer goods are produced than are desired, the consumers must
choose which products are the most important to them. For every item they choose
to produce, they will have to sacrifice the potential production of some other
product. Producing a given item therefore has a hidden cost.
Examples of Scarcity
Example 1: With each pay check received, Jake buys two categories
of products: food and clothing. If Jake wishes to buy more food, he will have
to forego buying some clothing.
Example 2: Country A can produce only two categories of products:
food and weapons. If Country A wishes to increase the quantity of food it
produces, then it will have to give up some of its weapons production. To
make things simple, assume that Country A can produce only bread and guns.
Scarcity forces individuals, firms, and other members of society to decide how to
use the three factors of production: land, labor, and capital. Due to the concept of

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scarcity, every economy must address three main questions: What to make? How
to make it? And for whom should it be made?

Q2) EXAMINE WHY IS THE DEMAND CURVE DOWNWARD SLOPING?

ANS  A demand curve is a graphic representation of a demand schedule. The
downward slope of the demand curve shows the inverse relationship exists
between price of the product and quantity demanded.
For Example:
In the below table we can see that the demand of the baseball decreases as its
prices increases. Thus, price and quantity shows inverse relationship.

So, here in this example, the demand curve will be slopping downward.

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Now, this can be more clearly explained by the Law of Demand.

The law of demand expresses the functional relationship between price and
quantity demanded of a good. It is one of the most important laws of economic
theory.
According to this law, other things remaining constant (ceteris paribus), if the price
of a commodity falls the quantity demanded of it will rise and if price of the good
rises quantity demanded will fall. Thus, there is inverse relationship between price
and quantity demanded.
Assumptions of the law:
The law of demand assumes the following:
1. Incomes of consumers do not change. If consumer’s income increases or
decreases, the law will not hold good.
2. People’s tastes and preferences remain unchanged.
3. Prices of substitutes and complements do not change.

Q3) ANALYSE THE VARIOUS POSSIBLE SHAPES OF THE PPC ALONG WITH THE
REASONS.
ANS The full form of PPC is Production Possibility Curve. It is a graph that depicts
the trade-off between any two items produced. It is also known as Transformation
Curve or Production Frontier, which shows the maximum feasible quantities of two
or more goods that, can be produced with the resources available.
In other words, it indicates the opportunity cost of increasing one item’s production
in terms of the units of the other forgone. Prof. Samuelson analyzed the
economizing problem by the use of production possibility curve.
Thus, a PPC shows the maximum obtainable amount of one commodity for any
given amount of another commodity, given the availability of factors of production
and the society’s technology and management skills.
Points on the interior of the PPC are inefficient, points on the PPC are efficient, and
points beyond the PPC are unattainable. The opportunity cost of moving from one

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efficient combination of production to another efficient combination of production

is how much of one good is given up in order to get more of the other good.
The shape of the PPC also gives us information on the production technology (in
other words, how the resources are combined to produce these goods).
There are 3 types of PPC curves.
1) Linear PPC Curve
2) Concave PPC Curve
3) Convex PPC Curve
LINEAR PPC CURVE
Constant opportunity cost occurs when the production possibility curve is linear.
The relationship between opportunity cost and quantity supplied is the same.
Assuming that a factory wishes to increase their production of good T from 250
units to 500 units, the factory has to sacrifice 250 units of good R in order to
increase the production of good T. Thus, the ratio between opportunity cost and
quantity supplied is constant, 1:1.

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Concave PPC Curve

The production possibility curve of increasing opportunity cost is concave from its
origin. Increasing opportunity cost means the more units of good T produced, the
more the opportunity cost of good R.
Assuming that the factory has to forgoes 20 units of good R so that the factory is
able to produce 50 more units of good T. If the factory wishes to increase the
production of good T from 100 units to 150 units, they have to let go 60 units of
good R. In this case, it clearly shows us an increasing opportunity cost.

Convex PPC Curve

PPC curve can be convex to the origin when the opportunity cost decreases. This
can happen only when less and less units are forgone of first commodity for the
introduction of additional unit of another commodity.
For example, when you are about to produce 10000 units of food against an
estimation of 5000 units of cloth. But unfortunately you have only 4000 units of
cloth to forgo, so you will either forgo less units of cloth or forgo it proportionately.

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Further even when the opportunity cost is zero, you will continue to produce more
units of food maybe by the introduction of another commodity. This will lead the
Production Possibility Curve to be convex to origin.

Q4) DIFFERENTIATE BETWEEN ECONOMIC GROWTH AND DEVELOPMENT.

ANS
Economic Growth Economic Development
Definition
Increase in the monetary growth of a nation It refers to the overall development of the
in a particular period quality of life in a nation which includes
economic growth
Span of Concept
It is a narrower concept than Economic It is a broader concept than Economic
Development Growth
Scope
It is a uni-dimensional approach which deals It is a multi-dimensional approach that
with the economic growth of the nation looks into the income and as well as the
quality of life of the nation
Term
Short-term process Long-term process
Measurement
Quantitative Both Quantitative and Qualitative
Applicable to
Developed Economies Developing Economies

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Government Support
It is an automatic process that may or may It requires intervention from the
not require intervention from the government government as all the developmental
policies are formed by the government

Kind of changes expected

Quantitative changes Quantitative as well as qualitative changes
Examples
GDP, GNP HDI, Per capita Income, Industrial
Development

Q5) WHAT ARE ‘GIFFEN’ GOODS? WHY DO THEY HAVE NEGATIVE INCOME
ELASTICITY?
ANS Giffen Goods:
A Giffen good is a low income, non-luxury product that defies
standard economic and consumer demand theory. Demand for Giffen goods rises
when the price rises and falls when the price falls.
A Giffen good has an upward-sloping demand curve, which is contrary to the
fundamental law of demand which states that quantity demanded for a product
falls as the price increases, resulting in a downward slope for the demand curve.

Q6) WHAT ARE THE PRACTICAL USES OF PRICE ELASTICITY OF DEMAND?

ANS Price elasticity of demand is an economic measure of the change in the
quantity demanded or purchased of a product in relation to its price change.
Expressed mathematically, it is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

It is used by economists to understand how supply or demand changes given

changes in price to understand the workings of the real economy.
If the quantity demanded of a product exhibits a large change in response to
changes in its price, it is termed "elastic," that is, quantity stretched far from its
prior point. If the quantity purchased has a small change in response to its price, it
is termed "inelastic"; or quantity didn't stretch much from its prior point.

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The more easily a shopper can substitute one product with a rising price for
another, the more the price will fall – be "elastic." In other words, in a world where
people equally like coffee and tea, if the price of coffee goes up, people will have
no problem switching to tea, and so the demand for coffee will fall. This is because
coffee and tea are considered good substitutes to each other.
Inelastic examples include luxury items where shoppers "pay for the privilege" of
buying a brand name, addictive products, and required add-on products. Addictive
products may include tobacco and alcohol. Sin taxes on these types of products are
possible to introduce because the lost tax revenue from fewer units sold is
exceeded by the higher taxes on units still sold. Examples of add-on products are
ink-jet printer cartridges or college textbooks. These items are usually more
necessary (as opposed to discretionary) and lack good substitutes (only HP ink will
work in HP printers).
Now, speaking practically or taking a practical example,
The government takes into consideration the price elasticity of demand
while planning taxes. For example, tax on products having elastic demand generate
less revenue for the government as the taxes increase the price of products, which
results in decrease in demand.

On the contrary, a high rate of tax is levied on products having inelastic demand.
Apart from this, the government also considers the price elasticity of demand
before implementing any price control policy.

Q7) HOW IS MARKET EQUILIBRIUM ESTABLISHED?

ANS The equilibrium price reflects the price for a product in a free market. A
free market is one in which there are both many supplies and many buyers (the
supply and demand curves are aggregate curves).

The price of every product is determined by the point at which the supply and
demand curves intersect. This point is called the market equilibrium price.

In short, when the supply and demand curves intersect, the market is in
equilibrium. This is where the quantity demanded and quantity supplied are

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equal. The corresponding price is the equilibrium price or market-clearing price,

the quantity is the equilibrium quantity.

For example,

Putting the supply and demand curves together. These two curves will intersect at
Price = $6, and Quantity = 20. In this market, the equilibrium price is $6 per unit,
and equilibrium quantity is 20 units. At this price level, market is in equilibrium.
Quantity supplied is equal to quantity demanded (Qs = Qd). This means that the
Market is clear.

If the market price is above the equilibrium price, quantity supplied is greater
than quantity demanded, creating a surplus. Market price will fall.

If the market price is below the equilibrium price, quantity supplied is less than
quantity demanded, creating a shortage. The market is not clear. It is in
shortage. Market price will rise because of this shortage.

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Q8) DISCUSS THE DETERMINANTS OF PRICE ELASTICITY OF DEMAND WITH

EXAMPLES.

ANS Elasticity of demand differs from commodity to commodity. The various

factors upon which elasticity depends are the following:

 Substitute goods:
A commodity will have elastic demand if there are good substitutes for it. This
is because when price of a good rises, a consumer will not buy the good but
purchase its substitute.
If the prices of Coca Cola were to increase sharply, many consumers would turn
to other kinds of cold drinks, and as a result, the quantity demanded of Coca
Cola will decline very much. On the other hand, if the price of Coca Cola falls,
many consumers will change from other cold drinks to Coca Cola.

 Nature of commodity:

All necessities like salt, rice etc. that have no substitutes/or less substitutes will
have an inelastic demand. People have to purchase such commodities for their
sustenance.

Therefore, there will be some demand despite the changes in price. Demand
for luxury goods, on the other hand, will be elastic. If prices of such
commodities rise even a little, consumers refrain to buy. At the same time a
little lowering of price of such commodities attract a large number of
consumers.

For example, if the prices of Domino’s Pizza increases, many of its customers
will buy pizza from other pizza places like Pizza Hut. As a result the quantity
demand decreases. But if the prices of Domino’s Pizza declines, again the
people will turn to Domino’s for the pizza.

Thus, the demand for Domino’s Pizza is elastic. It is the availability of close
substitutes that makes the consumers sensitive to the changes in the price of
Domino’s Pizza and this makes the demand for Domino’s Pizza elastic. Likewise,
demand for common salt is inelastic because good substitutes for common salt
are not available.

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If the price of common salt rises slightly, the people would consume almost the
same quantity of salt as before since good substitutes are not available. The
demand for common salt is inelastic also because people spend a very little part
of their income on it and even if its price rises it makes only negligible difference
in their budget allocation for the salt.

 Number of uses of commodity:

The larger the number of uses to which a commodity can be put, the higher will
be its elasticity. Therefore the demand of such goods will have elastic demand.
For example, milk can be used for various purposes such as for making curd,
cake, sweets etc. When its price goes down, demand increases but a little rise
in its price makes demand fall greatly.

 Possibility of postponement of consumption:

If there is a possibility of postponement of consumption of a commodity then

demand will be elastic otherwise inelastic. Demand for certain goods can be
postponed for some time such as computers, printers, scanners etc. People
may wait till they become cheaper. Therefore, their demand is elastic. But the
demand for food or electricity cannot be postponed. As such their demand is
inelastic.

 Percentage of income spent:

The elasticity of demand is also influenced by the percentage of income spent

on the purchase of a commodity. If the percentage is very less than the demand
will be inelastic. For instance, we spend a very less amount of our total money
income on things like agarbatties (incense sticks), matches, pens, pencils etc. If
prices of such commodities rise also, our demand is not reduced. Thus, demand
of such goods is inelastic.

 Fashion:

Commodities, which are in fashion, will have inelastic demand. Fashion minded
people do not compromise with price. Even if price is high, some people will
demand more just because goods are in fashion.

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For example, even if the price of “Lakme” lipstick increases, people will still not
mind to purchase it as it is the “trending” lipstick of the time.

 Change in taste:

A habitual commodity or a commodity for which consumers have developed a

taste will have inelastic demand.
For example, a chain smoker always requires a cigarette, whatever the price
may be. Likewise, a habitual paan (betel nut) chewer cannot leave his habit, in
spite of rise in price. In such cases, therefore, demand is elastic.

 Price of the commodity:

Very high priced or very low priced goods have low elasticity whereas
moderately priced commodities are quite high-elastic. If a good is very
expensive, demand will not increase much even if there is little fall in its price.
And demand will not increase even at very low prices, because people have
already purchased their requirement at low prices.

Q9) WHAT ARE THE BASIC ECONOMIC PROBLEMS. RELATE THEM WITH THE TYPE
OF ‘ECONOMIC SYSTEMS’.

ANS  These are the basic Economic Problems:

 What goods and services are to be produced?

The first major problem faced by an economy is what types of goods and
services to be produced. As resources are limited, we must choose between
different alternative collection of goods and services that may be produced. It
may also imply whether to produce capital/producer goods or consumer
goods. Moreover, we have to decide about the quantity of the goods to be
produced in the economy.

 How to produce these goods and services?

The next problem we have to tackle is the problem of how to produce the
desired goods in the economy. Thus the question of techniques to be used in

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the production comes in the mind. Whether we should use labour-intensive

technique or capital – intensive technique. Labour-intensive method of
production implies more use of labour per unit than capital whereas; capital-
intensive technique indicates more use of capital per unit than labour. The
choice depends on the availability of resources. A labour surplus economy can
well use the labour–intensive technology.

 For whom these goods and services are to be produced?

Once we have decided what goods to be produced and what techniques to
be used in the production of goods, we are encountered with another problem,
i.e., the problem of distribution of goods in the economy. This is the problem of
sharing of national income.

 Are the resources efficiently used?

We have also to see that scarce resources are efficiently utilized. This is the
problem of economic efficiency or welfare maximization.

 Are the resources fully employed?

An economy must also try to achieve full employment of all its resources.

 How to attain growth in the economy?

An economy is to ensure that it is attaining sufficient growth rate so that it
is able to grow larger and larger and develop at faster rate. It should be able
not only to make a structural change from agrarian to industrial sector but also
to increase per capita and national income of the country. An economy must
not remain static. Its productive capacity must increase continuously. It is clear
that the basic problem of an economy is the economizing of resources. The
economizing problem arises in every type of economic society owing to the fact
that resources are scarce in relation to multiple wants/ends.

Now, there are 4 types of Economy Systems:

1. Traditional Economy
2. Command Economy
3. Market Economy
4. Mixed Economy
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These different Economy system deals with these basic problems differently.

1. TRADITIONAL ECONOMY:

In traditional economy, the basic problems are solved by traditions

and custom rules every aspect of behavior. It produces exactly to its
consumption requirements. It is a subsistence economy. There is not
much of sales as there is only small scale production. The same
product will be produced by every generation. The production
techniques are traditional.

Here, everything is mostly based on what is popular, production

responds to what is in demand from the people.

An example of this would be in the prehistoric times where farmers

grazed animals and produced food. Enough food would be produced
for the people living in the area. A farmer would produce the food for
the people and the farmer would get something in return.

Although this economic system is rather old fashioned it is still

available in some locations such as South America including the
nations of Papa New Guinea and Brazil. It is also available in a number
of African and Asian countries.

2. COMMAND ECONOMY:

In a command system, there is a dominant, centralized

authority usually the government – that controls a significant portion
of the economic structure. Also known as a planned system, the
command economic system is common in communist societies since
production decisions are the preserve of the government.

If an economy enjoys access to many resources, chances are that it

may lean towards a command economic structure. In such a case, the
government comes in and exercises control over the resources.
Ideally, centralized control covers valuable resources such as gold or
oil. The people regulate other less important sectors of the economy,
such as agriculture.

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In theory, the command system works very well as long as the central
authority exercises control with the general population’s best
interests in mind. However, that rarely seems to be the case.
Command economies are rigid compared to other systems. They react
slowly to change because power is centralized. That makes them
vulnerable to economic crises or emergencies, as they cannot quickly
adjust to changed conditions.

3. MARKET ECONOMY SYSTEM:

Market economic systems are based on the concept of free markets.

In other words, there is very little government interference. The
government exercises little control over resources, and it does not
interfere with important segments of the economy. Instead,
regulation comes from the people and the relationship
between supply and demand.

The market economic system is mostly theoretical. That is to say, a

pure market system doesn’t really exist. Why? Well, all economic
systems are subject to some kind of interference from a central
authority. For instance, most governments enact laws that regulate
fair trade and monopolies.

From a theoretical point of view, a market economy facilitates

substantial growth. Arguably, growth is highest under a market
economic system.

A market economy’s greatest downside is that it allows private entities

to amass a lot of economic power, particularly those who own
resources of great value. The distribution of resources is not equitable
because those who succeed economically control most of them.

4. MIXED ECONOMY

Mixed systems combine the characteristics of the market and

command economic systems. For this reason, mixed systems are also

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known as dual systems. Sometimes the term is used to describe a

market system under strict regulatory control.

Many countries in the West follow a mixed system. Most industries

are private, while the rest, comprised primarily of public services, are
under the control of the government.

Mixed systems are the norm globally. Supposedly, a mixed system

combines the best features of market and command systems.
However, practically speaking, mixed economies face the challenge
of finding the right balance between free markets and government
control. Governments tend to exert much more control than is
necessary.

Q10) HOW IS THE SUBJECT OF ECONOMICS USEFUL IN DECISION MAKING?

ANS The study of economics may help to make better decisions. As with most
things, the more informed a person is, the greater the chance that wise decisions
will be made. If a person study economics, he will learn how supply and demand
affect things such as price, wages, and the availability of goods. If he knows that
certain products that he use and need will be lower in price at certain times of the
year, he can wait to make his purchases until that time.

For example, Southwest Airlines is known to have their best sales in June and in
October. If you can make reservations during those three-day sale periods in those
months, you will save money. Buying winter clothes as the winter season is ending
may lead to lower prices for that kind of clothing. If you know what job fields are in
need of workers, you might be able to increase your chances of getting a job and
getting a higher-paying job if you enter that job field.

A study of economics will help to understand how our money system works. This
may help a person maximize his income. If you understand the principles of
compound interest, your money will grow faster than with simple interest or no
interest. If you understand the principles of the stock market, you might make wise
investment decisions. If you understand how credit works, you might be able to
avoid debt or keep the debt payments low. If you understand how to make a budget
and stick to it, you may be more able to avoid debt. Economics will teach how to
analyze the costs and benefits of any decision you have to make.

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Economic issues impact us every day. If you understand various economic

principles, you may be able to save money, have an increased income, and improve
your overall financial picture.

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