Tasmia Zakariah
ID:2025118660
BUS 525
Ans to the ques no. 5
The demand for a good or service is affected by the price level of its own or the
related products, the price elasticity of demand measures how sensitive a good or
service's quantity demanded is to changes in the price.
Here is the list of the three important factors that are relevant to the determination
of price elasticity of demand in the market.
1. Substitute Products:
If there are many substitutes of a product or service in the market, for example:
Pizza, Burger and so on; for a given percentage change in price of one product it can
affect the percentage change in quantity demanded of the products. If there are many
substitutes for pizza, and the price of pizza gets higher, then people will go to the
other substitutes, such as Burgers. So, when a product has many substitutes, it tends
to lead to more elasticity. In this case, consumers will be very sensitive to price.
On the other hand, if the product has a few substitutes, even if the price changes a
little higher, or a lot higher, then they might buy the similar quantity of the product.
In this case, this would be less elastic.
2. Income:
Income affects the quantity demanded for an Inferior product. For example: if
bubblegum sellers increase its price to 15 taka from 10 taka per packet. Higher prices
of these kinds of inferior goods would likely reduce the quantity demanded, but not
that significantly. So, the lower share of income, the less elastic the market.
On the other hand, if people spend 20% of their income on their smartphones, and
the smartphone increases its price to double, because of the high cost of the phone,
people won’t be able to demand the same amount of smartphones. In this case, their
income can't support it. So, the consumers will be highly sensitive to changes in
price, which will cause a more elastic market.
3. Luxury and Necessary products:
If something is a luxury product, for example, a pair of gold ear-ring; if the price of
the gold increases a bit, then a lot of consumers may think it's not needed for now.
So, luxury products will be more associated with high elasticity in this case.
Necessary products are something that we need on a day-to-day basis. So, if the price
will go up as long as consumers can afford it (ceteris paribus), they will go for it.
For example: medicines. If the pharmacies raise the price of medicines by 20%,
consumers will still buy the same quantity of medicines, because if something is of
necessity, people will be less price sensitive. So, the quantity is going to be less
sensitive to price. In this case, it would cause a less elastic market.
Ans to the ques no. 4
Supply and demand define the relationship between the quantity of a product that
producers wish to sell at a particular price and the quantity that consumers wish to
buy. Having a knowledge of supply and demand can be useful in regards to every
product/ service in every sector.
For example, in agricultural sector, a farmer wants to know how the price of his
corns will change, the best time to sell and store his corns, and how the factors related
with supply and demand will affect the price of his corns.
Many factors influence the price of an agricultural product like corns, wheat, etc.
such as:
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Crop’s supply and demand
Consumer’s choices
New uses of the crop
Substitute products etc.
Farmers usually grow corns and storing those at their houses after harvesting, this
represents the production or supply of the corns. Consumers buy popcorn as a food
item; this represents the consumption or demand of the corns. The harvested corns
(for making popcorns) are transported from the farmers’ side to the consumers’ side.
The supply and demand are often in balance in this case. But, if the production of
the corns is less, then there’s an imbalance between supply and demand of the
popcorns, which causes shortage/ under supply. As a result, the popcorn price will
go up when supply is lower than the demand.
On the other hand, when farmers harvest corns (for making popcorns) higher in
quantity, the price of the popcorns goes down because of the oversupply/ surplus.
As people continue to eat popcorns heavily, it reduces the oversupply of the corns.
As a result, supply and demand becomes equal at this point. Then the farmers can
select an equilibrium price for their corns. An equilibrium price is the price at which
the quantity demanded equals the quantity supplied.
Thus, having a knowledge of supply and demand can be useful for getting the market
trend of the particular product/service.
Ans to the ques no. 3
Economics is mainly divided into two categories: macroeconomics and
microeconomics. Microeconomics is the study of individuals and business decisions,
while Macroeconomics looks at the decisions of countries and governments as a
whole.
Macroeconomics talks about Economy as a whole and try to define its nature, where
Microeconomics studies the economical behavior of an individual person or firm,
like supply, demand and other factors related with price levels of an individual
product/ service.
Macro-economic follow a top-down approach, where Micro-economics follows a
bottom-up approach. Top-down investing approach involves the economic factors
of the Government as a whole to make investment decisions, while bottom-up
investing focus on company-specific financials, supply and demand, and the kinds
of goods and services offered by an individual company.
Where Macro-economic focus on a broader view, Microeconomics is specific and
smaller in scale. For example, Macroeconomics is an analytical tool to Government
for making economic policy for the particular period of time where, investors can
use Microeconomics in their investment decisions.
Macroeconomist might be interested for answering the global economic impact of
unemployment from Covid-19, whereas Microeconomist might be interested for
answering how an individual firm can maximize its profits by selling their best
product in a competitive market.
Ans to the ques no. 2
The production possibility frontier (PPF) is a curve that illustrates the variations in
the amounts that can be produced of two products if both depend upon the same
quantity of resource for their manufacturing process. That means within the available
inputs and technology, it’s impossible to produce more of one good without
decreasing the quantity of another good that’s produced with the same amount of
resource and technology.
In Economics, PPF can be used where a country’s economy is most efficiently
producing its various goods and services and, therefore, allocating its resources in
the best way possible. In economy, to achieve efficiency, Government must decide
what combination of goods and services can and should be produced. If the economy
is producing more or less of the quantities indicated by the PPF, resources can’t be
managed efficiently, as a result the economic instability will occur.
Here, one product (Computer) is represented on the X-axis and the other (Textbooks)
is represented on the Y-axis. Each point on the curve shows the most efficient
number of the two products that can be produced with available resources. Here, the
points within the curve, A, B, C, D, and F display the productive efficiency. If
production of computers increases and Textbooks decreases or vice versa, it will
show the productive efficiency as showing the maximum amounts of goods a society
can produce, given the resources it has. The PPF here demonstrates that the
production of one computer may increase only if the production of the Textbook
decreases.
However, any choice inside the production possibilities frontier (PPF) is
productively inefficient because it’s possible to produce more of one product, the
other product, or some combination of the both products. Wasting scarce resources
means the society is not producing as much as it could, so it is not operating on the
PPF. Thus, when the combination of products produced falls inside the PPF, then
the society is productively inefficient. In this example point R is productively
inefficient (Where C2 > C1 and T2 > T1)
By moving production from point A to B, the economy must decrease Textbooks
production by a small amount in comparison to the increase in Computer production.
But if the economy moves from point B to C, Textbook production will be
significantly reduced while the increase in Computer will be so small.
In the figure, A, B, and C all represent the most efficient allocation of resources for
the economy. If more textbook is in demand, the cost of increasing its output is
proportional to the cost of decreasing computer production. These can be easily
interpreted by looking at the PPF.
When the PPF shifts outwards, it implies growth in an economy. When it shifts
inwards, it indicates that the economy is shrinking due to a failure in its allocation
of resources and optimal production capability.
Ans to the ques no. 1
Economics is the study of how societies use scarce resources to produce valuable
products and distribute them among different people. There are two main concepts
in economics: 1. goods are scarce, 2. society must use its resources efficiently.
Indeed, economics is an important subject to the economists because of the fact of
scarcity and the desire for efficiency.
Throughout the world, economists are trying to collect data and improve the
understanding of economic trends. Also, economists are studying and trying to
explain a wide and expanding array of activities, ranging from consumer demand/
supply, surplus/ shortage, marginal, economic profit/loss, international trade,
unemployment and inflation etc.
Economists see the world through a different lens than other professionals. They
analyze issues and problems with economic theories that are based on particular
assumptions about consumer behavior. When an economist sees an economic issue or
problem, he/ she goes through the theories he/she knows to see if there’s any solution
to the problem. In economics, theories are expressed as diagrams, graphs, or even as
mathematical equations. Economists use the graph of the theory to help them figure out
the answer. Both micro and macroeconomics are explained in terms of theories and
models.
Three of the key concepts in economics that define how an economist views the world
are as following:
Scarcity
Economists has an understanding of scarcity. Scarcity explains the basic economic
problem that the world has limited or scarce resources to meet seemingly unlimited
wants. This reality forces people to make decisions about how to allocate resources
in the most efficient way possible so that as many of their highest priorities as
possible are met.
For example, there is only so much corns grown every year. Some people want
popcorn and some would prefer cereals. One way to solve this problem is a market
analysis driven by supply and demand, which can be done by the economists.
Costs and Benefits
The concept of costs and benefits is related to the theory of rational choice (and
rational expectations) that economics is based on. When economists say that people
behave rationally, they mean that people try to maximize the ratio of benefits to costs
in their decisions.
For example, if demand for mango juice is high, companies will hire more mangogrowers to grow more mangoes, but only if the price of mango juice and the number
of bottles they are selling justify the additional costs of the materials needed to grow
more mangoes. Similarly, the consumer will buy the best juice they can afford to
purchase from the market.
Supply and Demand
A market system is driven by supply and demand. The concept of supply and
demand helps to explain why last year's popular product is half the price the
following year.
For example, in a particular area, if many people want to buy biscuits, the demand
for biscuits is considered high. As a result, marketers can charge more price for
biscuits and make more money on average by using wheat to make biscuits than by
using wheat to make flour. This could lead to a situation where more firms start
making biscuits in that area and, after a few production cycles, there is many biscuits
in the market, as a result when the supply of biscuit increases, the price of biscuit
decreases.