Micro Economics

Assignment-1

Prepared for,

Nazrul Islam NZM1

Lecturer
North South University

Prepared by,

Name : Tarika Zaman Khan Tathapy ID: 2012100630

Course Code: ECO 101 Sec: 39
Course Title: Micro Economics
Semester: SPRING 2021
PART: A
Answer to the question no: 1
NO: AIR, WATER and RICE aren`t economic goods. The production of such goods requires
scarce resources having alternative uses. For example, land is scarce and is capable of
producing rice or sugarcane. Examples of non-economic goods are air, water, sunshine, etc. An
economic good is a good or service that has a benefit to society. Also, economic goods have a
degree of scarcity and therefore an opportunity cost. This is in contrast to a free good like air, sea,
water where there is no opportunity cost but abundance. Free goods cannot be traded because
nobody living by the sea would buy seawater there is no point.However, with economic goods
where there is some scarcity and value, people will be willing to pay for them in some
form.Another feature of an economic good is that if it can have a value placed on the good, it can
be traded in the marketplace and valued using a form of money.An economic good will have some
degree of scarcity in relation to demand. It is the scarcity that creates a value people become willing
to pay for.

Answer to the question no: 2

Price mechanism:
In economics, a price mechanism is the manner in which the profits of goods or services affects
the supply and demand of goods and services, principally by the price elasticity of demand. A price
mechanism affects both buyer and seller who negotiate prices. A price mechanism, part of a market
system, comprises various ways to match up buyers and sellers.

The price mechanism is an economic model where price plays a key role in directing the activities
of producers, consumers, and resource suppliers. An example of a price mechanism uses
announced bid and ask prices. Generally speaking, when two parties wish to engage in trade, the
purchaser will announce a price he is willing to pay the bid price and the seller will announce a
price he is willing to accept the ask price.
Answer to the question no: 3

Trade-off: In economics, trade-off means the exchange, in which a person sacrifices one or more
things for getting a particular product, service or experience. It refers to all the courses of action
which could be employed, other than the present one. It is a deal, that arises as a compromise,
wherein to obtain a certain aspect we have to lose another aspect. For example: Suppose a
company wants to start a project, which requires huge investment and other resources, so the trade-
off entails the reduction in certain expenses, in order to invest more in the new project. Hence,
tradeoff implies the way of forsaking one or more desirable alternatives, in return for obtaining a
specified outcome.

Opportunity cost :Opportunity cost or alternative cost, as the name suggest, is the cost of
opportunity lost, i.e. an opportunity to generate revenue is lost, because of the scarcity of resources
such as labor, material, capital, plant and machinery, land and so on. It is the actual return of the
forsaken alternative, which cannot be obtained, due to the scarcity of resources. For example:
Suppose after pursuing MBA you have two options available to you. One, to start your own
business and earn 10 lakhs per annum or join a company and get 12 lakhs per annum. So, if you
commence your own business you will earn 10 lakhs per year, but you will not get 12 lakhs. This
12 lakhs is your opportunity cost, which you will get for serving the company and not starting your
own business.

Answer to the question no: 4

Acting irrational, we tend to want to behave in ways that are predictable, sensible, and logical.
This type of behavior is known as rational behavior. To behave rationally, we make decisions
and act in ways that best achieve our needs. In this way, rational behavior is goal oriented.
Rational behavior facilitates decision making that may not always give the best possible returns
materially. It strives to achieve benefits that are most optimal in nature to the decision maker, be
it monetary or non-monetary. Economists, while developing any theory of economics, make the
fundamental assumption that entities, which are part of the theory, exercise rational behavior while
making decisions. For example, if a person chooses a job with a profile of his liking instead of a
high paying job, then it would be also termed as rational behavior.

Answer to the question no: 5

This production possibility frontier PPF graph shows a tradeoff between devoting social resources
to healthcare and devoting them to education. At A all resources go to healthcare and at B, most
go to healthcare. At D most resources go to education, and at F, all go to education.

HealthCare Y

A
B
C

PPF

F
Education

In the graph, healthcare is shown on the vertical axis and education is shown on the horizontal
axis. If the society were to allocate all of its resources to healthcare, it could produce at point A.
But it would not have any resources to produce education. If it were to allocate all of its resources
to education, it could produce at point F. alternatively, the society could choose to produce any
combination of healthcare and education shown on the production possibilities frontier. In effect,
the production possibilities frontier plays the same role for society as the budget constraint plays
for Alphonso. Society can choose any combination of the two goods on or inside the PPF. But it
does not have enough resources to produce outside the PPF.
PART: B
Answer to the question no: 1

(A)An increase in resources or an advance in technology that can lead to more of both goods
being produced can increase the production capabilities of an economy, leading to economic
growth and a shift outward in the production possibilities frontier.

Y
W 50
h
e 40
a
t 30
U
n
20
i
t 10
s

0 X
10 20 30 40 50 60
Rice units
(B) If the advance in technology leads to the greater production of only one good such as civilian
goods in our exhibit, then the PPF shifts outward, as shown below.

W
50
h
e
40
a
t 30
U
n 20
i
t 10
s
X
0 10 20 30 40 50 60
Rice units

(C) A PPF will shift inwards when an economy has suffered a loss or exhaustion of some of its
scarce resources. This reduces an economy's productive potential. This PPF shifted because of
natural disasters, Unemployment, fall in economy.
Answer to the question no: 2

(A) The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity
costs of choices when faced with the possibility of producing two goods or services. Points on the
interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are
unattainable.

80

70

60 A G

G
50
o
o
40
d
B
30
Y
20
F
10

C
X
0 10 20 30 40 50 60 70 80
Good X

The opportunity cost of moving from one 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
goods. 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. The bowed out shape of the PPC
in Figure 1 indicates that there are increasing opportunity costs of production.
(B)

Y
Good Y

Scarcity &
C
Growth

d
Unemployment

b
Efficiency

X
0
Answer to the question no: 3

(A)

Y
Production
of shoes

200

100

X
0 160 320 Production of bags

(B) The opportunity cost of

Mohammad producing shoes is 0.5
Mohammad producing bags is 2
Ahammad producing shoes is 1.6
Ahammad producing bags is 0.625

(C) Mohamad has comparative advantage in producing shoe because he is more efficient and can
produce more shoes than ahammad and opportunity cost for producing shoe is less
Ahammad has comparative advantage on producing bag as he is more efficient in producing bag
than Mohammad and the opportunity cost for producing bag is less.
Answer to the question no: 4 true false

(A) False

(B) False

(C) False

Answer to the question no: 5

Graph: (A)

Price
Y

Supply
20

16
Consumer
surplus
12 Equilibrium
Producer
surplus
8

4
Demand

X
0
8 16 24 32
Quantity
(B) Equilibrium price = $12

Equilibrium quantity =16

(C) Shortage of 16

(D) Surplus of 16

(E) Consumer surplus = 0.5*h*w

= 0.5*8*16

= 64

Producer surplus = 0.5*h*w

= 0.5*8*16

= 64

Total surplus = CS + PS

= 64 + 64

= 128