Worksheet 1

1.) How is the discipline of economics related to scarcity?

Ans.) Scarcity refers to the most basic economic problem of limited or scarce resources
but their unlimited demand.

In Economics, there are various factors determining the price of a certain product. Scarcity
Is one of the factors. Scarcity of any product leads to its rise in price. Hence it affects the
demand of the commodity. Hence affecting the economy. To handle such problems
families, towns, governments, Nations have to decide where to spend money and decide
their budgets as well. Money and Time are quintessentially scarce resources. Most people
have too little of one or both of them. If any commodity or labor has a price it is a scarce
resource. And so it does affect the economy.

2.)Examine why is the demand curve downward sloping?

Ans.) The Following are some causes explaining why demand curve always slopes
downwards:

a.) The law of Diminishing the marginal utility:

According to this principle, the marginal utility of a commodity reduces when
quantity of goods is more. Hence when quantity is more, the prices will fall and
demand increase. Hence slope curves downwards.

b.) Substitution Effect:

Consumers mainly switch or substitute products based on their availability or prices.
E.g. When price of coffee rises people tend to substitute coffee with available
options like tea as it becomes relatively cheaper comparing to coffee. Also if price of
Coffee decreases then demand may increase. Hence due to this effect the demand
curve slopes downwards.

c.) Income Effect:

The real income of people increases when the prices of commodities reduce. This
happens because they spend less in case of falling prices and end up with more
money. Hence with more money they spend more. Hence the demand curve is
downwards sloping.
d.) Change in Consumer Quantity (Addition of new Consumers):
 When the price of certain product falls new consumers which weren’t able to buy
before become capable of buying. Hence increasing the demand. Hence demand
curve is downward sloping.

4.)Differentiate between economic growth and economic development.

Ans.)
Growth Development
It refers to increase in monetary It refers to overall development of
growth of a nation in a particular quality of life in a nation.
period.
It is a narrower concept than It is a broader concept than
Economic Development. Economic Growth.
It is unidimensional approach. It is multidimensional approach.
It is short termed. It is a long term process.
It is a quantitative approach. It is both quantitative as well as
qualitative approach.
It is seen mostly in Developed It is seen mostly in Developing
Economies. Economies.

5.)What are ‘Giffen’ goods? Why do they have negative income elasticity?

Ans.) A Giffen is a low income, non-luxury product that defies standard economic and
consumer demand theory. The reason of these goods to have negative income elasticity
Is that when consumers of such a product have a rise in their income they tend to
purchase lesser & lesser of these goods. Demand of Giffen goods rises when price of such
goods rises and hence results in upward sloping demand curve. For E.g. let’s take
example of bread. When poor people don’t have money they tend to buy bread but if
they get an increase in their income they do not buy such products and go for more
expensive products. But if the price of such a bread increases it is taken into
consideration as an expensive product and hence its demand also rises.

6.)What are practical uses of price elasticity of demand?

Ans.) The government takes into consideration the price elasticity of demand while
planning taxes as well as creating budget. E.g. Tax on product having elastic demand
generates less revenue for government as tax increases the price of product increases
which leads to decrease in demand.

Price discrimination refers to practice charging different prices for same product from
different buyers at same time.
It is used for commodities with low price elasticity. The change in price will bring about
less change in quantity demanded. Hence producers will increase the price. Hence earn
more in profits.

7.)How is the market equilibrium established?

Ans.) If a market is not at equilibrium market forces tend to move to equilibrium. If

market is above equilibrium value, there is an excess supply in the market which means
there is more supply than demand. In this situation, sellers will tend to reduce the price of
their goods or services to clear their inventories. They probably will also slow down
production. The lower price entices more people to buy which will reduce the supply
further. This process will result in demand increasing and supply decreasing until the
market price equals the equilibrium.

If the market price is below equilibrium value, then there is excess in demand. In this case
buyers will bid up the price of goods to obtain it. As the price goes up some will quit
buying. Additionally, sellers getting more demand will try to sell more and supply more.
Eventually upward pressure on price and supply will stabilize at market equilibrium.

8.)Discuss the Determinants of price elasticity of demand with examples.

Ans.)
a.) The availability of close substitute.
If a product has many close substitute for example fast food, then people tend to
react strongly to a price increase of one firm’s fast food. Thus, the price elasticity of
demand of this firm’s production is high.
 b.) Product’s cost in one’s budget:
If a product, such as salt is very inexpensive consumers are relatively indifferent
about a price increase. Therefore, has low price elasticity. Cars are expensive and
even 10% increase in the price of a car may make the difference whether people will
buy it or not.

c.) Number of uses of a Commodity:

To illustrate, milk has several uses. If its price rises to very high level it will be used
only for essential purposes such as feeding the children and sick people. If the price
of milk falls it will be devoted to other uses such as curd, ghee, cream, sweets, etc.

d.) Time and Elasticity:

For instance, if the price of fuel oil rises, it may be difficult to substitute fuel oil by
other types such as coal or gas. But given sufficient time, people will make
adjustment and use coal or gas instead of fuel oil whose price has increased.

e.) Complementary between Goods:

For running car besides petrol, lubricating oil is also used. Now if price of oil goes up
it will mean a very small increase in total cost of car. Hence it behaves inelastic.

f.) Demand of product:

For instance, if demand of product is high in the market buyers are ready to pay
more for the product. Hence the price increases.

9.)How is the subject of Economics useful in decision making?

Ans.) Economics is concerned with optimal distribution of resources in society.

- It helps in understanding what happens in market and the macroeconomics.
- Examining statistics about the state of the economy and explaining their significance.
- Understanding different policy options and evaluating their likely outcomes.
- It provides a mechanism for looking at possible consequences as we run short of raw
materials such as petroleum, trees, land, etc.
- It shows us to what extent should the government intervene in the economy.
- It also shows us distribution of resources in society, principle of opportunity cost, how
to deal with economic crisis and Applying economics in everyday life.
- It also helps in decision making by showing what to produce, how to produce, how
much to produce and more importantly when to produce.