Name: Ahmad Munyem

ID: 2012374630

Question 1

a) Using the given situation show that specialization and trade can benefit individuals
and societies.Explain in detail

You can assume that the terms of trade are 4 units of butter for 10 units of cheese.

Economic theory says ‘specialize in the good which you can produce at a lower opportunity
cost as compared to the other producer.

Opportunity Cost of city Z: of producing 1 butter (B) = 2 cheese (C).Hence opportunity cost
of 1 C = 1/2 B.

Opportunity Cost of city G: of producing 1 B = 5 C. Hence opportunity cost of 1 C = 1/5 B.

So Z specializes in Butter and G in Cheese. Z has a comparative advantage over G in

producing butter. Since, Z can produce it at a lower opportunity cost and G has a comparative
advantage in producing Cheese. Since, G can produce it at a lower opportunity cost.

City of Z and City G decide that the terms of trade are 4 units butter and 10 units cheese.

Name No Specialization Gains from

specialization and trade specialization
and no trade and trade
Consumption of 4 4 0
City of Z butter
Consumption of 8 10 2
cheese
Consumption of 2 4 2
City of Y butter
Consumption of 10 10 0
cheese

In the table above, after specialization and trade , Z and G are better off. Because they can
consume more butter and cheese. Z and G decision to specialize and trade makes them better
off individually (consumes more butter and cheese). However, their action has also increased
the total production of butter and cheese in the society as well (more butter and cheese for
everyone!). Before specialization and trade, Z was producing 4 units butter and G was
producing 2 units butter. Therefore total butter production was 6. After specialization, Z
produced 8 units butter and G 0 unit butter.

Therefore, total production is 8 units butter after specialization. Similarly, After

specialization, G produced 20 units cheese and Z 0 unit cheese. Therefore, total production is
20 units cheese after specialization.

Specialization and trade can make individuals and societies better-off. Because now they get
to enjoy more butter and cheese as well as people share their specialized things in the society
through trade then all the people in the society could enjoy more goods and products.

b) Is city Z facing the law of increasing opportunity costs? Explain and show your
working.

Yes, city Z faces the law of increasing opportunity costs.

Here we can see that when city z doing no specialization they produce both butter and cheese
which are 4 and 8.Here the level of opportunity cost not going up and down. But when city Z
does specialization on butter they sacrifice the unit of cheese. City Z uses their all resources
on butter that is why the production of cheese is 0 and production of butter is 8.Similarly,
when city z focus on specializing their cheese they sacrifice their butter production. Because
city z uses their all resource on cheese that is why the production of butter is 0 and production
of cheese is 16 units. Here we can conclude that deployment of all resources in production of
butter increases the opportunity cost of cheese and vice versa.

Question 2

Use your own example to explain the reason why, in the real world, business firms and
societies face the law of increasing opportunity costs?

If we look in our present society, we can see that the demand for BCS jobs is so high. That’s
why a large number of job seekers sit for BCS every year. If we look, these job seekers
complete their graduation in science, some are completed their education in business studies
and some are completed their graduation in arts. But we all know that these BCS jobs are not
science and business related. These science and business studies graduates do not use science
and business studies knowledge and resources in BCS jobs. They sacrifice their science and
business studies knowledge when they join a BCS job. In the future we will see that there will
be no science work occurring in our country. If this scenario continues the science related
activities will face a lack of competent manpower in our country. That means the science
related works opportunity cost will increase.

Question 3

Assume that the following is the market demand curve of tea in the NSU cafeteria:

What are all the information you can obtain from the given the given graph?

Discuss how the behavior of buyers will be affected if the price of coffee decreases.
Explain briefly.
From here we found that if the price of tea increases then the rate of buying cups of tea is
decreasing. Here we can assume income as ceteris paribus. Because if we do not constant the
income of students then the relation of price and income might be balanced.

Here through demand the behavior of buyers will be affected if the price of tea decreases.
Demand of definition says 3 things here which are 1. The willingness and ability of buyers to
purchase differently , 2. At different prices, 3. During a specific period of time .So according
to the definition of demand, if the price of tea decreases then the rate of buying cups will
increase. Here income is ceteris paribus

Question 4

In this question you have to investigate your household’s (family’s) buying behavior and
decisions.

You can use your own experience, observation and/or interview your parents.

1) Does the law of demand apply to all the goods (products) and services that your
household consumes? Discuss briefly.

Identify at least one product that which does not follow the law of demand.

No. The law of demand does not apply to all goods (products) and services that my
household consumes. The normal products, inferior products and neutral products actually
maintain the law of demand. But substitute and complement products do not maintain the law
of demand.

Substitute products do not follow the law of demand. For example: my family eats rice. But
now in the present market the price of bread is cheaper that’s why my family started to eat
bread instead of rice. So here bread is substitute for rice.

2) Identify two products which are normal goods in your household. How did you
indentify the products? Discuss briefly.
A good the demand for which rises as income rises is called a normal product. In my house
bread and apples are normal product. Because when my family income increases; we increase
the consumption of bread and apples. That's why I can say that bread and apple are normal
products for my family.

3) Identify two products which are inferior goods in your household. How did you
indentify the products? Discuss briefly.

A good the demand for which falls as income rises is called inferior product.In my house
sugar and salt are inferior product.Because, when our family income rises,we actually buy
less sugar and less salt. Thats why we can say that sugar and salt is an inferior product for our
family.

4) Identify some products which are substitutes in your household. How did you identify
the products? Discuss briefly.

Two goods that satisfy similar needs or desires is called substitute. If two goods are
substitutes, the demand for one rises as the price of other rises. In my house bread is
substitute of rice and chicken is substitute of fish. In last week suddenly the price of bread
and fish are decreased in the market. That’s why my family started to eat bread and fish
instead of rice and chicken.

5) Identify some products which are complements in your household. How did you
identify the products? Discuss briefly.

Two goods that are used jointly in consumption is called complements. If two goods are
complements, the demand for one rises as the price of the other falls for the demand for one
falls as the price of other rises. In my house rice-daal and bread-butter are complements
goods. Recently, the price of daal and butter are increased. That’s why my family eat less
daal with less rice and less butter with less quantity of bread.
6) Discuss how the preferences of your household has changed due to the COVID
pandemic.

Our preference are mostly affected by information. In the time of COVID we know that
vitamin c is very helpful against covid. That’s why in that time my family bought a lot of
fruits, vagetablea etc means which contains vitamin c. Beside in the time of covid we
maintain our hygiene factor very seriously. So, that is why our family bought a lot of hand
sanitizer, savlon and mask etc.

7) Try to obtain and draw the demand curve of eggs in your household. Explain in
detail how you obtained the graph.

From my house hold I came to know that when the price of egg decreased ,the quantity of
buying egg is increased .Moreover, here one outside factor affect our buying which is
income. When our house income increases we buy more eggs.

Here this graph indicates negative relationship. We can see that if the price of egg is
increasing then the quantity of demand of my family is decreasing. Moreover, here my family
income is outside factor which is constant. Here, we can assume my family income is ceteris
paribus. When my family income increases, our demand of buying egg also increase. For that
reason demand curve shift to the right.