ECONOMICS ASSIGNMENT

NAME: ABRAHAM HABTAMU

DEPARTMENT: COTM 2nd YEAR

ID: UGR/8307/15

SECTION: 1

SUBMMITED TO: INSTRUCTOR

SUBMISSION DATE: NOV 13,2023 G.C
ADDIS ABABA, ETHIOPIA
1 Three Economic Problems
a) What to Produce: This involves deciding which goods and services should be produced in
a society, considering limited resources.
b) How to Produce: This pertains to determining the most efficient methods of production,
considering technology, labor, and capital.
c) For Whom to Produce: This involves allocating the produced goods and services among
the members of society.
Capitalism
 What to Produce: In capitalism, the market mechanism determines what goods and
services are demanded by consumers. The invisible hand of the market guides producers
to create what consumers want.
 How to Produce: Capitalism relies on competition and the profit motive to drive
efficiency in production. Businesses seek cost-effective methods to maximize profits.
 For Whom to Produce: In a capitalist system, those with purchasing power (money)
determine what they can buy. Income distribution is often unequal.
Command/Socialism:
 What to Produce: Central planning authorities in socialism decide on production
priorities based on societal needs. The focus may be on equitable distribution rather than
consumer demand.
 How to Produce: The state or central planning authority may own or control the means of
production, determining the methods to achieve societal goals.
 For Whom to Produce: Socialism aims for a more equitable distribution of resources,
often prioritizing basic needs. The state may play a role in ensuring access for all.
2 Scarcity, Opportunity Cost, and Efficiency
I. Scarcity: Resources are limited, and choices must be made. Scarcity is the fundamental
economic problem.
II. Opportunity Cost: The cost of choosing one option over the next best alternative. It
reflects the value of what must be foregone.
III. Efficiency: Using resources in a way that maximizes the production of goods and
services. Efficiency minimizes waste and ensures optimal resource utilization.
In economics, scarcity necessitates choices. Every choice involves opportunity cost, and
efficiency is the goal to use resources effectively to satisfy wants and needs.
3 Normal-vs-Inferior Good and Complementary-vs-Substitute Good
Normal vs. Inferior Good:
 Normal Good: Demand for normal goods increases as income rises. Examples include
luxury items.
  Inferior Good: Demand for inferior goods decreases as income rises. Examples include
generic or lower-quality products.
Complementary vs. Substitute Good:
 Complementary Good: Goods that are typically consumed together. When the price of
one increases, the demand for the other may decrease. Example: printers and printer ink.
 Substitute Good: Goods that can be used in place of each other. When the price of one
increases, the demand for the other may increase. Example: tea and coffee.
Understanding these distinctions helps in analyzing consumer behavior and market dynamics.
4. a. Opportunity Cost Calculation:
Opportunity Cost is calculated as the change in quantity of one good divided by the change in
quantity of the other good.
Opportunity Cost of Good X at each point:
1. From A to B: (Change in Good X / Change in Good Y) = (2 - 0) / (90 - 100) = -2 / -10 =
0.2
2. From B to C: (Change in Good X / Change in Good Y) = (4 - 2) / (60 - 90) = 2 / -30 = -
0.067
3. From C to D: (Change in Good X / Change in Good Y) = (6 - 4) / (20 - 60) = 2 / -40 = -
0.05
The trend in these values exhibits the law of increasing opportunity cost. As more resources are
shifted from producing one good to another, the opportunity cost of producing the additional unit
of the second good increases.

B. Changes to Shift the PPF Outward:

An outward shift in the Production Possibility Frontier (PPF) represents economic growth,
indicating an increase in the economy's capacity to produce goods.
Possible changes for an outward shift:
 Technological Advancements: Improved technology can enhance productivity in the
production of goods X and Y, allowing more output with the same resources.
 Increase in Resources: If the economy acquires additional resources (such as labor,
capital, or natural resources), it can produce more of both goods.
 Efficiency Improvements: Enhancing the efficiency of resource utilization can lead to
higher output without additional inputs.
 Investments in Human Capital: Education and training programs that increase the skills
of the workforce can contribute to higher productivity.
Any factor that increases the economy's capacity to produce goods without a proportionate
increase in opportunity cost will result in an outward shift of the PPF.
5. To find the market demand curve, we sum up the individual demand curves of all consumers.
Given that there are 10 potential consumers, each with a demand curve ( P = 101 - 10Q_i ),
where ( P ) is the price in dollars per cup and ( Q_i ) is the quantity demanded by the ( i )-th
consumer, we can find the market demand curve by summing up the individual quantity
demanded at each price level.
Individual Demand Curve:
P = 101 - 10Q_i
Market Demand Curve:
P = 101 - 10(Q_1 + Q_2 + … + Q_10
Now, let's find the quantity demanded by each consumer and in the market as a whole when the
price is P = $1/cup .
Individual Quantity Demanded:
P=1
1 = 101 - 10Q_i
10Q_i = 100
Q_i = 10
So, each consumer demands 10 cups when the price is $1/cup.
Market Quantity Demanded:
P=1
1 = 101 - 10(Q_1 + Q_2 + … + Q_10)
10(Q_1 + Q_2 + … + Q_10) = 100
Q_1 + Q_2 + … + Q_10 = 10
Therefore, in the market as a whole, when the price is $1/cup, the total quantity demanded is 10
cups.
Now, you can draw the individual demand curve (where Q_i = 10 when P = 1 ) and the market
demand curve (where the total quantity demanded is 10 when P = 1 ). The market demand curve
will be a horizontal line at Q = 10 for P = $1/cup .
6. Price Elasticity of Demand:
The price elasticity of demand (E_d) is given by the formula:
E_d = %Quantity Demanded / % Price
Given the demand function D(p) = 200,000 - 10,000p, we can calculate the percentage change in
quantity demanded and the percentage change in price.
At p = 12 birr:
Q_1 = D(12) = 200,000 - 10,000  12
Q_1 = 200,000 - 120,000 = 80,000
At p = 12 - p birr (let's say p = 1):
Q_2 = D(12 - 1) = 200,000 - 10,000  11
Q_2 = 200,000 - 110,000 = 90,000
Now, calculate the percentage changes:
% Quantity Demanded = (Q_2 - Q_1/Q_1 + Q_2/2 )times 100
% Price = (p/p_1 + p_2/2) times 100
Substitute these values into the formula for E_d to find the price elasticity of demand.
7. Market Equilibrium:
The market equilibrium is found at the point where the quantity demanded (Q_d) equals the
quantity supplied (Q_s).
Given:
Q_d = 50 - P
P = Q_s + 5
 Set Q_d equal to Q_s and solve for P:
50 - P = P - 5
2P = 55
P = 27.5
Now that we have the equilibrium price, substitute it back into either the demand or supply
equation to find the equilibrium quantity. Using the demand equation:
Q_d = 50 - 27.5 = 22.5
So, the market equilibrium price is 27.5 and the equilibrium quantity is 22.5.
7. b. State of the Market at Birr 25 per unit:
Given the market demand Q_d = 50 - P and market supply P = Q_s + 5, if the market price is
fixed at Birr 25 per unit, we can find the quantity demanded and supplied at this price.
P = 25
From the demand equation:
Q_d = 50 - 25 = 25
Now, substitute Q_d into the supply equation to find Q_s:
25 = Q_s + 5
Q_s = 20
At a price of Birr 25 per unit, the quantity demanded (Q_d) is 25 units, and the quantity supplied
(Q_s) is 20 units. This creates a situation of excess demand or a shortage.
7. c. Price Elasticity of Demand at Equilibrium:
The price elasticity of demand (E_d) is given by the formula:
E_d = %  Quantity Demanded / % Price
At the equilibrium point, we've already determined P = 27.5 and Q_d = 22.5. To calculate E_d,
we can use small percentage changes, for example, let's consider a 1% change.
%  Quantity Demanded = (1% Q_d / Q_d )  100
%  Price = (1% of P / P)  100
Plug these values into the E_d formula to find the price elasticity of demand at the equilibrium
point.
8. a. Cross-Price Elasticity:
The cross-price elasticity of demand (E_{xy}) is calculated as:
E_xy = % Quantity Demanded of Good X / % Price of Good Y
 In this case:
% Quantity Demanded of Coffee = (5000 – 3000 / 5000 + 3000 / 2)  100
% Price of Tea = (15 – 10 / 15 + 10 / 2)  100
Plug these values into the E_xy formula to find the cross-price elasticity.
8. b. Relation Between Goods:
The sign of the cross-price elasticity indicates the nature of the relationship between the two
goods:
 If E_xy is positive, the goods are substitutes.
 If E_xy is negative, the goods are complements.
Interpret the sign of E_xy based on the calculated value.
9. a. Income Elasticity of Demand:
Income elasticity of demand (E_y) is calculated as:
E_y = % Quantity Demanded / % Income
For the first scenario, where income increases from Br.10,000 to Br.20,000:
% Quantity Demanded = (60 – 50 / 60 + 50 / 2)  100
% Income = (20,000 - 10,000 / 20,000 + 10,000 / 2)  100
Repeat the calculation for the second scenario where income increases from Br.40,000 to
Br.50,000.
B. Normal, Inferior, or Luxury Good:
o If E_y is positive, it's a normal good.
o If E_y is negative, it's an inferior good.
o If E_y is significantly greater than 1, it's a luxury good.
C. Proportion of Household Income Spent:
The proportion of household income spent on a good is given by the formula:
 Proportion Spent = Price  Quantity Demanded / Income
Check how this proportion changes as income increases. If the proportion decreases, it means the
good is a normal one.
10. Quantity of Salt Demand:
The quantity of salt demanded tends to be unresponsive to changes in its price due to its status as
a necessity. Salt is a basic staple in many households, and its demand is not highly sensitive to
changes in price. People tend to buy salt regardless of its price because it is an essential item in
cooking.
11. a. Cross-Price Elasticity:
The cross-price elasticity of demand (E_{xy) is calculated as:
E_xy = % Quantity Demanded of Coffee / % Price of Tea
11. b. Relationship Between Goods:
o If E_xy is positive, the goods are substitutes.
o If E_xy is negative, the goods are complements.
Interpret the sign of E_xy based on the calculated value.