Unit one review questions

Part one
1,Define economics from perspective of Wealth, Welfare, Scarcity, and Growth. Which
definition more suits for economics? Why?
Understanding how and why economic decisions are made in an economy, both individually
and collectively, is the focus of the social science field of economics. Microeconomics is the
study of the individual component of economics, while macroeconomics is the study of the
collective component.
Define economics from perspective of Wealth
The wealth component of the actions that create a nation was the definition's main point of
emphasis. He held that wealth creation, accumulation, and distribution should be the
ultimate goals of any nation seeking to achieve prosperity. When we talk about wealth, we're
talking about things that have monetary value and can be used to meet people's needs. He
claimed that a man makes decisions only out of self-interest and practicality. This man was
described as being a businessman. This notion was based on the idea that the desire for
wealth was a common issue. Every country can use economics to its advantage in trying to
tackle this issue.
The growth of riches may, to a significant extent, cure almost all personal issues.
Define economics from perspective of Welfare
In his book Principles of Economics, published in 1890, economist Alfred Marshall provided
the following definition of economics:
Welfare Concept Theodore Marshall What Adam Smith had suggested was altered by his
definition. He gave welfare the proper consideration while concentrating on the wealth-
related component of activities. He postulated that material success was merely a means to
the purpose of human welfare rather than the end in itself. He expanded the idea of a man
acting simply in his own best interests by taking into account how ordinary people make
decisions.
According to his definition, economics should examine the actions people do to acquire
wealth and make use of it in everyday life
Define economics from perspective of Scarcity.
This concept, which still reigns supreme today, has reached the naked and fundamental truth
of what economics seeks to accomplish. It asserts that despite having finite resources,
humans have limitless wants. There is room for other uses of these scarce resources as well.
Economics would not be necessary if resources were boundless, or if wants and uses were
constrained This implies that individuals must first decide which want to satisfy.
Then, individuals must decide how to allocate the scarce resources in a way that will
maximize their sense of fulfilment. They must also give up the opportunity to employ those
resources for alternative solutions.
Define economics from perspective of Growth

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 This is the broadest definition of economics available, incorporating both the welfare and
scarcity theories put forward by earlier economists. The inclusion of the time element then
enhances the shortcomings of each to present a well-balanced mix. By honing the costs and
benefits analysis, growth-oriented economics focuses on enhancing resource allocation and
utilization systems. It also aims to distribute those resources in the most just and equitable
way possible.
Which definition more suits for economics? Why?
Scarcity is better suited for economics because the field studies the effective distribution
of limited resources to satisfy the whole range of human needs.

2 Define scarcity, choice and opportunity cost. Can you link them in your day to day
lives?
 The inability of resources to meet the endless demands of humanity is called
scarcity.
 Choice: is an alternative (option) we make due to a lack of resources or other
constraints.
 Opportunity cost: The next best option sacrificed or passed up in order to gain
one more unit of a good.
3,Explain why economics deals with allocation and efficient utilization of scarce
resources only?
The wise distribution of limited resources is the main tenet.
Since labor, land, and capital are the three "factors of production" that are limited in each
economy, the most effective and comprehensive use of a society's resources will result in the
highest level of wealth creation. and also Economics is concerned with resource allocation and
efficient usage since it aims to satiate the insatiable need of the boundless human race.

4.Describe the four categories of economic resources. Which category of resources you and
your family owned?
The four categories of economic resources are:
1,Land
2,Labor
3,Capital
4,Entrepreneurship

category of land
Land is not just real estate. It is any natural resource found in nature that can be used to produce
goods and services. The land category includes things like trees, plants, livestock, wind, sun,
water and minerals.

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 category of labor
Labor refers to any human contribution, either physical or intellectual. Labor takes a natural
resource from its original condition and transforms it into a capital good.
Usually, when you think of labor, you think of physical labor like working in a factory, driving
a truck to make deliveries, constructing a building or stacking goods in a warehouse. These are
all activities that contribute to the production of goods or services. However, labor has come to
rely more on the intellectual contributions rather than physical labor.

category of capital
The first thing to understand about capital is that it is not money. Money is not a resource. By
economic definition, resources must be productive, and money does not do that. Money is a
means to move the economy, but by itself, it doesn't produce anything.
Money is used to acquire the productive resources that are used to produce goods and services.
As an example, refineries purchase oil, a natural resource, to make gasoline, a capital good.
Developers use funds to acquire property, a natural resource, to construct an office building, a
capital good.
category of entrepreneurship
Entrepreneurship is the creativity required to bring all of a company’s resources together to
produce a good or service that is sold in the marketplace. In a sense, entrepreneurship is a
special form of labor.
Which category of resources you and your family owned?
My family and I possess the following kind of economic resources:
 land
 labor and
 capital.

5,Discuss the economic system in Ethiopia over the recent three regimes (EPRDF, Derg
and imperial regime)

• Economic system of Ethiopia in EPRDF regime

✓ Ethiopia recently follows mixed economy which means businesses are
owed by both the public and the private sector.

• Economic system of Ethiopia in Derg regime

✓ Ethiopia during the Derg regime followed command economic system
which means the means of production was largely state owned or the
private sector was not allowed.

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• Economic system of Ethiopia in Imperial regime
✓ Ethiopia during the imperial regime followed feudal economic system
which means the resources were largely owned by aristocrats and the
church
Part II: Work out items
1. Assume that a certain simplified economy produces only two goods, X and Y, with given
resources and technology. The following table gives the various possible combinations of
the production of the two goods (all units are measured in millions of tons).
Production Possibility Good X Good Y Opportunity Cost
of Good X
A 0 100 0
B 2 90 5
C 1 60 15
D 6 20 20

a) Calculate the opportunity cost of the production of good X at each point. What law
does the trend in those values exhibit?
 OC at point A = 0
 OC At point B = |(90-100)/(2-0)| where OC means Opportunity cost
=|(-10)/2|
=|-5|
=5
Therefore the opportunity of Good X Gives up 5 Good Y to produce 1 Good X
60−90
 OC at point C =¿ ∨¿
4−2
−30
=¿ ∨¿
2
=|- 15|
=15
Thus means that the opportunity cost of Good X Gives up 15 Good Y to produce 1 Good X
20−60
 OC at point D = ¿ ∨¿
6−4
−40
=¿ ∨¿
2
= |-20|
= 20
Therefore Opportunity cost of Good X Gives up 20 Good Y to produce 1 Good X
b) What changes are required for this economy to shift the PPF outward?

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Changes required to shift the PPF outward are: -
1. Increase in the quantity or / and quality of economic resources.
2. Advancement in technology.

Unit two review questions

Part One: Distinguish between the following

1, Normal goods and inferior goods

Normal goods
A normal good is one whose demand rises as a result of an increase in consumer income.
In other words, rising salaries result in higher demand for everyday items, while falling
wages or job losses result in lower demand.
• A normal good has an elastic relationship between income and demand for
the good. In other words, changes in demand and income are positively
decorrelated or move in the same direction.
• A normal good is a good that experiences an increase in its demand due to a
rise in consumers' income.
• Normal goods have a positive correlation between income and demand.
• Examples of normal goods include food staples, clothing, and household
appliances.
inferior goods
Inferior goods are the opposite of normal goods. Inferior goods are goods
that see their demand drop as consumers' incomes rise. In other words, as
an economy improves and wages rise, consumers would rather have a more
costly alternative than inferior goods. However, the term "inferior" doesn't
refer to quality, but rather, affordability.
• In economics, the demand for inferior goods decreases as income increases
or the economy improves. When this happens, consumers will be more willing
to spend on more costly substitutes. Some of the reasons behind this shift
may include quality or a change to a consumer's socio-economic status.
• Conversely, demand for inferior goods increases when incomes fall or
the economy contracts. When this happens, inferior goods become a more
affordable substitute for a more expensive good. Most often than not, there
is not a quality difference.

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2,Market demand and individual demand

Market demand
• Market demand provides the total quantity demanded by all consumers. In
other words, it represents the aggregate of all individual demands. There are
two basic types of market demand: primary and selective.
• Primary demand is the total demand for all of the brands that represent a
given product or service, such as all phones or all high-end watches.
• Selective demand is the demand for one particular brand of product or
service, such as the iPhone or a Michele watch.
• Market demand is an important economic marker because it reflects the
competitiveness of a marketplace, a consumer’s willingness to buy certain
products and the ability of a company to leverage itself in a competitive
landscape.
• If market demand is low, it signals to a company that they should terminate
a product or service, or restructure it so that it is more appealing to
consumers.

Individual demand
• The individual demand is the demand of one individual or firm. It represents
the quantity of a good that a single consumer would buy at a specific price
point at a specific point in time.
• While the term is somewhat vague, individual demand can be represented by
the point of view of one person, a single family, or a single household.

3.Excess demand and excess supply

Excess demand
• Excess demand is the situation where the price is below its equilibrium price.
• The quantity supplied is lower than the quantity demanded by the consumers.
• When we have lower prices and excess demand, there will shortage of goods,
putting an upward pressure on the price as there will be more buyers chasing
the available goods.
• As price increases the suppliers will start producing more but the demand
from buyers will decrease. This will drive the price and quantity to its
equilibrium level.

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Excess Supply
• Excess supply is the situation where the price is above its equilibrium price.
• The quantity willing supplied by the producers is higher than the quantity
demanded by the consumers.
• When we have higher prices and excess supply, manufacturers will have
excess inventories and the competition among manufacturers will put the
downward pressure on price as there will be some suppliers who will be
willing to supply at lower prices.
• As prices fall, the consumer demand will increase until it finally settles at
the equilibrium price.

Part Two: Short answer and workout

1.Why does the quantity of salt demanded tend to be unresponsive to changes in its
price?
 salt comes under the category of inelastic demand where the people shows less
response to its rise or fall of its price.
 Salt is a product which has less number of substitutes and the people may not
spend much money for the salt and they never feel upset if there is a rise in the
prices of salt.
2, To get the market demand curve for a product, why do we add individual demand
curves horizontally rather than vertically?
Because the market demand is made up of the total quantity demanded by each individual,
for any given price. As quantity demanded is measured on the horizontal axis, you have to
add the individual curves horizontally.
It wouldn't make sense to add vertically, as the market price is the same for any individual
as it is for the whole market.

3,The demand for tickets to an Ethiopian Camparada film is given by D(p)= 200,000-
10,000p, where p is the price of tickets. If the price of tickets is 12 birr, calculate price
elasticity of demand for tickets and draw the demand curve

Given Reruired
Qd = 200,000 -10,000P EDP drive curve =?
∆Q
P = 12 EDP =
∆P