Economics Assignment # 1

Submitted By: Muhamaad Umair

Mohsin Mumtaz
M Shahzeb Khan
Submitted To :Mam Sadaf Alam

1) How would the supply and demand of basic item would be affected during the
current situation? Identify the factor that is going to affect the supply and
demand.

As we all know that there is a situation of Panic in the country Because of the
pandemic outcome of corona virus. Government and Posted the order of lockdown
in the country which is having an impact on country’s economy.

Demand will Increase:

In current condition Demand of Basic goods are high because peoples are
stockpiling food and basic consumption items as there might be a shortage in future.
People are willing to buy Products like rice, soaps, sanitizers, bread, powdered milk,
sugar and tea so that they can manage in the time of crisis.

Shortage in Supply:

And yes on the supplier side there is a shortage of basic items in Punjab now as
flour in not been supplied as it was been supplied earlier and groceries stores it is
not readily available now. Many stores had been emptied entirely of pasta, noodles,
bread and also rice. As for supplier point of view they are holding basic goods to
earn more profit.

Factors that are affecting:

Lockdown (Non Availability), Shortage of supply may lead to higher Prices. Willingness
to Purchase, Price of alternatives vegetables or bread can be replaced by pasta and
noodles that can be saved of longer period of time.
2) Apply basic economic principles to today's healthcare market keeping in view
of the current situation.

Although every society answers the three basic economic questions differently, in doing
so, each confronts the same fundamental problems: resource allocation and scarcity
and Tradeoff.

Resources are all of the ingredients needed for production, including physical materials
(such as land, coal, or timber), labor (workers), technology (not just computers but, in a
broader sense, all the technical ability and knowledge that is necessary to produce a
given commodity), and capital (the machinery and tools of production).

Scarcity refers to the essential fact that people’s wants or desires are always going to
be greater than the resources available to fulfill those wants. Simply put, scarcity means
that resources are limited. No country can produce everything, no matter how rich its
mines, how massive its forests, or how advanced its technology. Because of the
constraints of scarcity, then, decisions must be made about resource allocation (that is,
how best to allocate, or distribute, resources for the maximum benefit of the society).

In Current Situation Due to lockdown health sector is facing shortage of labor,

equipment and safety kits in Pakistan. We don’t even have Sufficient Testing kits to
Verify Corona Test. Health care resources are defined as all materials, personnel,
facilities, funds, and anything else that can be used for providing health care services.
Health care has long been a limited resource for which there has been an unlimited
demand; everyone needs health care.

Tradeoff In a Current health care system where increased costs will displace other
services then health care services already provided, Government deciding to Procure
Safety Kits, Masks and Corona virus detecting equipment they have to find a tradeoff
and lower their Budget in other sectors to fund more in Health care and take
Precautionary measures in health care.

3) Opportunity cost of increasing health sector budget

In a fixed budget health care system where increased costs will displace other services then
health care services already provided, the opportunity cost is measured as lost as a result of
the displacement of activities to fund the selected intervention.
Examples:
 Less Building Infrastructure.
 Less Education Budget.
 Less Defense Budget.

4) Opportunity cost of lock downs in different sectors

 Opportunity Cost of Lockdown is to let go off any Business’s Profit and earn
Maximum Revenue in every department( Agriculture, Industry) Which we as a
country are letting go off for the Sake of Better Health and Protection against Corona
Virus.
The Loss in GDP and Economy of Pakistan will be recorded as opportunity cost.

5) Basic economic questions: What…How…For Whom?

In order to meet the needs of its people, every society must answer three basic
economic questions:

 What should we produce?

 How should we produce it?
 For whom should we produce it?

What…?

As a society (or country) Pakistan might decide to produce N95 Masks, Covid Detection
Kits, Safety kits for Doctors and Paramedical staff( and Ventilators as well.

How…?

The goods might be produced by unskilled workers in privately owned factories or by

technical experts in government-funded laboratories. Scientists and Medical Team
Should Gear up to accomplish the tasks using economics four Major Factors Land,
Labor, Capital and Entrepreneurship.

Moreover if not possible to make these things can be imported from other countries But
this is the least Possible option if resources are not there to Produce these things Import
can be done.

For Whom?

Our Doctors, Nurses all the Paramedics, Army, Rangers, Police are on front line doing
their tough duties in the time of this pandemic disease to stop People from

Once they are made, the goods should be given out to these People so that they are
able to survive in this difficult time. Who have put their lives in danger to serve the
nation.

6) Discuss and critically evaluate three (3) determinants of price elasticity of

demand with reference to the manufacturing and service industry.
Determinant # 1. The Availability of Substitutes:

Of all the factors determining price elasticity of demand the availability of the number
and kinds of substitutes for a commodity is the most important factor. If for a commodity
close substitutes are available, its demand tends to be elastic. If the price of such a
commodity goes up, the people will shift to its close substitutes and as a result the
demand for that commodity will greatly decline.

The greater the possibility of substitution, the greater the price elasticity of demand for
it. If for a commodity substitutes are not available, people will have to buy it even when
its price rises, and therefore its demand would tend to be inelastic.

For instance, if the prices of Head & Shoulders were to increase sharply, many
consumers would turn to other kinds of Shampoo, and as a result, the quantity
demanded of Head & Shoulder will decline very much. On the other hand, if the price of
Head & Shoulders falls, many consumers will change from other Shampoo to Head &
Shoulders.

Thus, the demand for Head & Shoulder is elastic. It is the availability of close substitutes
that makes the consumers sensitive to the changes in the price of Head & Shoulders
and this makes the demand for Head & shoulders elastic.

Likewise, demand for common salt is inelastic because good substitutes for common
salt are not available. 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.

Determinant # 2. The Proportion of Consumer’s Income Spent:

Another important determinant of the elasticity of demand is how much it accounts for in
consumer’s budget. In other words, the proportion of consumer’s income spent on a
particular commodity also influences the elasticity of demand for it. The greater the
proportion of income spent on a commodity, the greater will be generally its elasticity of
demand, and vice versa.

The demand for common salt, soap, matches and such other goods tends to be highly
inelastic because the households spend only a fraction of their income on each of them.
When the price of such a commodity rises, it will not make much difference in
consumers’ budget and therefore they will continue to buy almost the same quantity of
that commodity and, therefore, the demand for them will be inelastic.
On the other hand, demand for cloth in a country like Pakistan tends to be elastic since
households spend a good part of their income on clothing. If the price of cloth falls, it will
mean great saving in the budget of many households and therefore they will tend to
increase the quantity demanded of the cloth. On the other hand, if the price of cloth
rises many households will not afford to buy as much quantity of cloth as before, and
therefore, the quantity demanded of cloth will fall.

Determinant # 3. Complementarity between Goods:

Complementarity between goods or joint demand for goods also affects the price
elasticity of demand. Households are generally less sensitive to the changes in price of
goods that are complementary with each other or which are jointly used as compared to
those goods which have independent demand or used alone.

For example, for the running of automobiles, besides petrol, lubricating oil is also used.
Now, if the price of lubricating oil goes up, it will mean a very small increase in the total
cost of running the automobile, since the use of oil is much less as compared to other
things such as petrol. Thus, the demand for lubricating oil tends to be inelastic.

Similarly, the demand for common salt is inelastic, partly because consumers do not
use it alone but along with other things.

It is worth mentioning here that for assessing the elasticity of demand for a commodity
all the above three factors must be taken into account. The three factors mentioned
above may reinforce each other in determining the elasticity of demand for a commodity
or they may operate against each other. The elasticity of demand for a commodity will
be the net result of all the forces working on it.

7) Suppose you lend $1000 to a friend and he pays you back after one year later.
What is the actual cost of lending this money?

I could have invested this amount somewhere else to earn Profit or to Purchase
something that I need. So Opportunity Cost is investing somewhere and to earn
Profit or could have Purchased something which I could have needed.
8) If a shopkeeper opens his shop for 8 hours a day his total revenues are $100
and he pays $ 30 in expenses. If he wants to open the shop for 2 more hours
his expected revenue is $ 140 and expected expenses are $ 50. Is the decision
to extend the shop timings by 2 more hours feasible? Why or Why not?

In Economics We will do Marginal Cost vs Marginal Benefit Analysis

Marginal Benefit= TB/ Q =(140-100)/(8-6)=40/2=20

Marginal Cost= TC/ Q= (50-30)/(8-6)=20/2=10

Since Marginal Benefit is greater than Marginal Cost Decision of Opening the shop for
two more hours is feasible/

9) Suppose you have been offered a choice of two part-time jobs: 15 hours a
week stacking shelves at the medical store for Rs.150 per hour with one cup of
tea per day; or 20 hours a week working in your own university as teaching
assistant for Rs.180 per hour plus free medical insurance. If you can take only
one of the jobs, calculate:

(i) The opportunity cost of taking the University job.

(ii) The opportunity cost of taking the medical store job.

Medical Job: 15 hours 150 Rs Per hour 15*150=2250 Rs with one cup of daily
tea.
UNI Job: 20*180=3600 Rs and free medical insurance.

(i) Opportunity cost of doing job at university is a cup of daily tea and 5 hours
less work and 2250/3600=0.625 Rs .
(ii) Opportunity cost of taking a job at medical store is 3600/2250=1.6Rs and
medical insurance benefit.