ECONOMICS GROUP ASSIGNMENT

Review questions Chapter 1

Part I: Discussion questions
1. Define economics from perspective of Wealth, Welfare, Scarcity, and Growth.
Which definition more suits for economics? Why?
Answer.
Wealth Definition: Wealth definition is also called classical definition and it was given by
Adam Smith and his followers. He is universally regarded as the father of economics. In is most
celebrated book. "Wealth of Nations" published in 1776 Smith defines economics “as a since of
Wealth".

Wealth perspective: Economics is accumulation of valuable economic resource by producing

goods and services to generate income.

Welfare Definition: Welfare definition of economics was given by such well-known economics
as Alfred Marshall and others these economics belongs to Noe-classical definition. In their
definitions these economics shifted the emphasis of economics from wealth to welfare. That is
why it is called welfare definition of economics.

Welfare Perspective: Economics studies about efficient allocation of scarce resources to

satisfy unlimited human want and studies about income distribution and how this affects social
welfare.

Scarcity Definition: Marshall’s definition of economics was popular for nearly four decades.
But Lionel Robbins who published his famous book "The Nature and Significance of Economics
Science" in 1932 has not only criticized welfare definitions of Marshall but also has given his
own definition. His definition is popularly known as scarcity definition of economics.

Scarcity Perspective: Economics studies about how peoples limited resources efficiently to
satisfy unlimited human want.

Growth perspective: Economics studies about how people use scarce resources efficiently and
increase the production of goods and services of the economy.
More suits for Economics is scarcity because Economics study, about efficient allocation of
scarce resource to attain maximum unlimited human wants.

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2. Why we study economics? Have you gained anything from this chapter? Would you
discuss them please?
The study of economics helps people understand the world around them. It enables people to
understand people, businesses, markets and governments, and therefore better respond to the
threats and opportunities that emerge when things change.
From a personal perspective, the study of economics has provided me with a systematic
framework for analyzing, researching, writing, and teaching about a wide array financial and
regional economic issues..
Economic analysis, both theoretical and empirical, can generate important insights into
individual and aggregate behavior and relationships, and help in society's efforts to use scarce
resources in a more efficient manner.
 Economists are well known for advising the president and congress on economic issues,
formulating policies at the Federal Reserve Bank, and analyzing economic conditions for
investment banks, brokerage houses, real estate companies, and other private sector
businesses.
 They also contribute to the development of many other public policies including
healthcare, welfare, and school reform and efforts to reduce inequality, pollution and
crime.
 The study of economics can also provide valuable knowledge for making decisions in
everyday life.
 Alternative approaches to economics at UIC Our department structure its courses in order
to serve students with diverse interests.
 Some students may only want to take one or two courses in order to learn the basics,
while prospective majors might want to explore the field in much greater
depth.1. Students interested in one or two economics courses

3. Define scarcity, choice and opportunity cost. Can you link them in your day to day lives?
Answer.
1. Scarcity: -
 Is the limitation of resources to satisfy unlimited human want.
 Is a condition in which wants are greater than available resources.

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 The fundamental economic problem that any human society faces is the problem of
scarcity.
 Refers to the fact that all economic resources that a society needs to produce goods and
services are finite or limited in supply.
 But their being limited should be expressed in relation to human wants. Thus, the term
scarcity reflects the imbalance between our wants and the means to satisfy those wants
The following are examples of scarce resources.
 All types of human resources: manual, intellectual, skilled and specialized labor;
 Most natural resources like land (especially, fertile land), minerals, clean water,
forestsand wild - animals;
 All types of capital resources ( like machines, intermediate goods, infrastructure ); and
 All types of entrepreneurial resources.
2. Choice
 Is an alternative (option) we choose because of scarcity or limitation of resource.
 If resources are scarce, then output will be limited. If output is limited, then we cannot
satisfy all of our wants.
 Thus, choice must be made. Due to the problem of scarcity, individuals, firms and
government are forced to choose as to what output to produce, in what quantity, and
what output not to produce. In short, scarcity implies choice.
 Choice, in turn, implies cost. That means whenever choice is made, an alternative
opportunity is sacrificed. This cost is known as opportunity cost.
Scarcity → limited resource → limited output → we might not satisfy all our wants
→choice involves costs → opportunity cost
3. Opportunity cost
 The next best alternative that is scarified or forgone to obtain one more unit of a
product.
 Is the highest-valued alternative a person has to give up when making a choice .
 Is the amount or value of the next best alternative that must be sacrificed (forgone) in
order to obtain one more unit of a product.
When we say opportunity cost, we mean that:
 It is measured in goods & services but not in money costs

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 It should be in line with the principle of substitution. In conclusion, when opportunity
cost of an activity increases people substitute other activities in its place.

4. What do you understand by positive economics and normative economics?

Answer.
Positive Economics:
 Is related to the analysis which is limited to cause and effect relationship.
 Is based on facts about the economy.
 is concerned is analysis of facts and attempts to describe the world as it is out any value
judgment or it gives scientific explanation is out any value judgment.
 It tries to answer the questions what was; what is; or what will be?
 It does not judge a system as good or bad
 Any disagreement on positive statements can be checked by looking in to facts.
 Is a branch of economics that has an objective approach, based on facts.
 It analyses and explains the casual relationship between variables. It explains people
about how the economy of the country operates.
 Is alternatively known as pure economics or descriptive economics.
 When the scientific methods are applied to economic phenomena and scarcity related
issues, it is positive economics.

Normative Economics:

 Aims at examining real economic events from the moral and ethical point of view. It is
used to judge whether the economic events are desirable or not.
 Is value judgment based.
 It deals with the questions like, what ought to be? Or what the economy should be?
 It evaluates the desirability of alternative outcomes based on one‘s value judgments
about what is good or what is bad.
 is subjective in nature
 Any disagreement on a normative statement can be solved by voting.
 The economics that uses value judgments, opinions, beliefs is called normative
economics.

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 This branch of economics considers values and results in statements that state, ‘what
should be the things’.
 It incorporates subjective analyses and focuses on theoretical situations.
 Suggests how the economy ought to operate. It is also known as policy economics, as it
takes into account individual opinions and preferences.
 Hence, the statements can neither be proven right nor wrong

By, understanding the difference between positive and normative economics, you will learn
about how the economy operates and to which extent the policy makers are taking correct
decisions.

Point Positive economics normative economics

Meaning A branch of economics based on data and Branch of economics based on
facts is positive economics. values, opinions and judgment is
normative economics.
Nature Descriptive Prescriptive
What it does? Analyses cause and effect Passes value judgments.
relationship.
Perspective Objective Subjective.
Study of What actually is What ought to be.
Testing Statements can be tested using Statements cannot be tested.
scientific methods.
Economic issues It clearly describes economic It provides solution for the
issue. economic issue, based on value.

5. Explain why economics deals with allocation and efficient utilization of scarce
resources only?

Answer

Economics is the study of the allocation of scarce resources. We have infinite desires and wants
and only some limited amount of resources to satisfy them. We therefore wish to optimize the
production from those scarce resources. Originally a term from economics, an allocation refers
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to the distribution of existing resources to different purposes. The aim is to use resources
efficiently so that optimum results can be achieved even with scarce resources, in order to remain
competitive in the long term.

As scarce resources have a value greater than zero (a 'positive price tag'), they can be allocated
depending on who pays the most for them. One way of obtaining more scarce resources is
buying more of them using another scarce resource – money – which means it involves a trade-
off of value.

Thus economists classify them into based on the priority of the wants and needs that satisfy their
effective utilization.

Know more about the why the economic deals with the allocation and efficient utilization of the
scare resource only.

 Economics deals are allocation and efficient utilization of scarce resources because it
tries to satisfy the unlimited human want is limited resource.

6. in recent years, especially around big cities, there is the problem of air pollution and the
likelihood of poisoning is high. Given this scenario, do you think that air is free resource?
Justify your answer.
Answer.
Air is a free resource because we are not paying any price to breathe it. According to the given
scenario there is air population which is the negative externality of a business organization so
there may be a health problem therefore we are not paying for the air but we may pay for the
treatment.

Urban air contamination is a serious problem in many of the planet's big cities. Intense and
unremitting traffic, together with uncontrolled factory emissions, convert city air worldwide into
authentic clouds of smog. As urban air quality declines, the risk of stroke, heart disease, lung
cancer, and chronic and acute respiratory diseases, including asthma, increases for the people
who live in them. “Air pollution is a major cause of disease and death.

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Our growing population, increased urbanization, higher demands on transport (particularly air
transport), energy consumption and use of wood-burning heaters all contribute to higher levels of
air pollution.
Air pollution causes damage to crops, animals, forests, and bodies of water. It also contributes to
the depletion of the ozone layer, which protects the Earth from the sun's UV rays. Another
negative effect of air pollution is the formation of acid rain, which harms trees, soils, rivers, and
wildlife.
7. Describe the four categories of economic resources. Which category of resources you and
your family owned?
Answer
Economic resources are usually classified into four categories.
 Labour: refers to the physical as well as mental efforts of human beings in the
production and distribution of goods and services. The reward for labour is called wage.
 Land: refers to the natural resources or all the free gifts of nature usable in the
production of goods and services. The reward for the services of land is known as rent.
 Capital: refers to all the manufactured inputs that can be used to produce other goods
and services. Example: equipment, machinery, transport and communication facilities,
etc. The reward for the services of capital is called interest.
 Entrepreneurship: refers to a special type of human talent that helps to organize and
manage other factors of production to produce goods and services and takes risk of
making loses. The reward for entrepreneurship is called profit.
Entrepreneurs are individuals who:
 Organize factors of production to produce goods and services.
 Make basic business policy decisions.
 Introduce new inventions and technologies into business practice.
 Look for new business opportunities.
 Take risks of making losses.
The category of resources me and my family owned is land
8).What is a production possibility curve?
Answer
Production possibility curve

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The production possibility curve represents graphically alternative production possibilities open
to an economy. The productive resources of the community can be used for the production of
various alternative goods. But since they are scarce, a choice has to be made between the
alternative goods that can be produced. in business analysis, the production possibility frontier
(PPF) is a curve that illustrates the variations in the amounts that can be produced of two
products if both depend upon the same finite resource for their manufacture.
 Shows all the combinations of two ‘goods’ which can be provided if all resources are
being used efficiently.
 Is a visualization that demonstrates the most efficient production of a pair of goods.
 In economics measures the maximum output of two goods using a fixed amount of input.
 The input is any combination of the four factors of production: natural
resources (including land), labor, capital goods, and entrepreneurship.
 Is a curve that depicts all possible combinations of the maximum output that can be
produced in an economy with given resources and technology.
 Is a graph that shows all of the different combinations of output that can be produced
given current resources and technology.
 Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity
and tradeoffs.
 PPC shows the different combinations of goods and services that can be produced with a
given amount of resources.
 Any point inside the curve - suggests resources are not being utilized efficiently.
Any point outside the curve- not attainable with the current level of resources.
Useful to demonstrate economic growth and opportunity cost.
There is some Assumption in using PPF:
I) Fixed resources: factors of production are not changed.
II) Efficiency: there is state of full employment and no idle resource is left.
III) Two products: there are only two goods to be produced.
IV) Fixed technology: there is no advancement /change in technology.
V) Specialization: some inputs are better adapted to the production of one good
than to the production of the other.

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9).Discuss the economic system in Ethiopia over the recent three regimes (EPRDF, Derg
and imperial regime)
Answer
An economic system is a set of organizational and institutional arrangements established to
answer the basic economic questions. Customarily, we can identify three types of economic
system. These are capitalism, command and mixed economy.
I).The economic system of Ethiopia during the DERG regimes Command (socialist/
Marxism) economy.
So, Command economy (socialist);
Command economy is also known as socialistic economy. Under this economic system, the
economic institutions that are engaged in production and distribution are owned and controlled
by the state. In the recent past, socialism has lost its popularity and most of the socialist
Countries are trying free market economies.
Main Features of Command Economy:
 Collective ownership: All means of production are owned by the society as a whole, and
there is no right to private property.
 Central economic planning: Planning for resource allocation is performed by the
controlling authority according to given socio-economic goals.
 Strong government role: Government has complete control over all economic Activities.
 Maximum social welfare: Command economy aims at maximizing social welfare and
does not allow the exploitation of labour.
 Relative equality of incomes: Private property does not exist in a command economy,
the profit motive is absent, and there are no opportunities for accumulation of wealth.
 All these factors lead to greater equality in income distribution, in comparison with
capitalism.

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Advantages of Command Economy:

 Absence of wasteful competition: There is no place for wasteful use of productive
resources through unhealthy competition.
 Balanced economic growth: Allocation of resources through centralized planning leads
to balanced economic development. Different regions and different sectors of the
economy can develop equally.
 Elimination of private monopolies and inequalities: Command economies avoid the
major evils of capitalism such as inequality of income and wealth, private monopolies,
and concentration of economic, political and social power.
Disadvantages of Command Economy
 Absence of automatic price determination: Since all economic activities are
controlled by the government, there is no automatic price mechanism.
 Absence of incentives for hard work and efficiency: The entire system depends
on bureaucrats who are considered inefficient in running businesses. There is no
financial incentive for hard work and efficiency. The economy grows at a relatively
slow rate.
 Lack of economic freedom: Economic freedom for consumers, producers,
investors, and employers is totally absent, and all economic powers are
concentrated in the hands of the government.
 Red-tapism: it is widely prevalent in a command economy because all decisions
are made by government officials.
II).The economic system of Ethiopia at the EPRDF regime capitalist economic system.
Capitalism is the oldest formal economic system in the world. It became widespread in the
middle of the 19th century. In this economic system, all means of production are privately
owned, and production takes place at the initiative of individual private entrepreneurs who work
mainly for private profit. Government intervention in the economy is minimal. This system is
also called free market economy or market system or laissez faire.
Advantages of Capitalistic Economy
 Flexibility or adaptability: It successfully adapts itself to changing environments.

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 Decentralization of economic power: Market mechanisms work as a decentralizing force
against the concentration of economic power.
 Increase in per-capita income and standard of living: Rapid growth in levels of
production and income leads to higher per-capita income and standards of living.
 New types of consumer goods: Varieties of new consumer goods are developed and
produced at large scale.
 Growth of entrepreneurship: Profit motive creates and supports new entrepreneurial
skills and approaches.
 Optimum utilization of productive resources: Full utilization of productive resources is
possible due to innovations and technological progress.
 High rate of capital formation: The right to private property helps in capital formation.
Disadvantages of Capitalistic Economy
 Inequality of income: Capitalism promotes economic inequalities and creates social
imbalance.
 Unbalanced economic activity: As there is no check on the economic system, the
economy can develop in an unbalanced way in terms of different geographic regions and
different sections of society.
 Exploitation of labour: In a capitalistic economy, exploitation of labour (for example
by paying low wages) is common.
 Negative externalities: are problems in capitalistic economy where profit maximization
is the main objective of firms. If economic makes sense for a firm to force others to pay
the impacts of negative externalities such as pollution.
Features of Capitalistic Economy
 The right to private property: The right to private property is a fundamental feature of
a capitalist economy. As part of that principle, economic or productive factors such as
land, factories, machinery, mines etc. are under private ownership.
 Freedom of choice by consumers: Consumers can buy the goods and services that suit
their tastes and preferences. Producers produce goods in accordance with the wishes of
the Consumers. This is known as the principle of consumer sovereignty.
 Profit motive: Entrepreneurs, in their productive activity, are guided by the motive of
profit-making.

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 Competition: In a capitalist economy, competition exists among sellers or producers of
similar goods to attract customers. Among buyers, there is competition to obtain goods.
 Among workers, the competition is to get jobs. Among employers, it is to get workers
and investment funds.
 Price mechanism: All basic economic problems are solved through the price mechanism.
 Minor role of government: The government does not interfere in day-to-day economic
activities and confines itself to defense and maintenance of law and order.
 Self-interest: Each individual is guided by self-interest and motivated by the desire for
economic gain.
 Inequalities of income: There is a wide economic gap between the rich and the poor.
 Existence of negative externalities: A negative externality is the harm, cost, or
Inconvenience suffered by a third party because of actions by others. In capitalistic
economy, decision of firms may result in negative externalities against another firm or
society in general.
10).What is the central problems of an economy?
Answer
The central problem of an economy is the production of goods and services, its distribution and
indisposition/sales. These problems arise mainly due to unavailability/scarcity of resources
which affects all the above systems.
Economic problems faced by an economic system due to scarcity of resources are known as
basic economic problems. These problems are common to all economic systems. They are also
known as central problems of an economy. Therefore, any human society should answer the
 Production, consumption, exchange and distribution of goods and services are the basic
activities of life.
 Every society has to face scarcity of resources which give rise to the problem of choice.
In other words, every society has to decide on how to use its scarce resources.
 Thus broadly the central problem of an economy is “allocation of resources”. Problem of
resource allocation is the need to economize the use of resources.
 By economizing the use of resources we mean that the available resources should be
allocated among the different uses in such a way that the resources are put to their best
possible use.

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Following three basic questions.
What to Produce?
What to produce is the problem of choosing which goods and services should be produced and in
what quantities.
 Which goods and services are to be produced i.e. consumer goods or capital goods, guns
or butter.
 In what quantity goods and services to be produced i.e. after a decision has taken on
types of goods, quantities of these goods should be decided.
This problem is in fact the problem of allocation of scarce resources among different competing
uses.
A B C D E

10,000 20,000 1, 00,000

Note: A, B, C, D and E refers to the goods. Numerical Values refer to their quantities.
How to Produce?
This problem is also known as the problem of choice of technique. Once an economy has
reached a decision regarding the types of goods to be produced, and has determined their
respective quantities, the economy must decide how to produce them - choosing between
alternative methods or techniques of production. For example, cotton cloth can be produced with
hand looms, power looms, or automatic looms. Similarly, wheat can be grown with primitive
tools and manual labour, or with modern machinery and little labour.
For Whom to Produce?
This problem is also known as the problem of distribution of national product. It relates to how a
material product is to be distributed among the members of a society. The economy must decide,
for example, whether to produce for the benefit of the few rich people or for the large number of
poor people. An economy that wants to benefit the maximum number of persons would first try
to produce the necessities of the whole population and then to proceed to the production of
luxury goods.
All these and other fundamental economic problems center on human needs and wants. Many
human efforts in society are directed towards the production of goods and services to

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Satisfy human needs and wants. These human efforts result in economic activities that occur
within the framework of an economic system.

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
B 2 90 -5
C 4 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?
Answer
At point B the opportunity cost will be;

= {90-100} = {-10} = -5
{2-0} {2}
At point C the opportunity cost will be;

= {60-90} = {-30} = -15

{4-2} {2}
At point D the opportunity cost will be;

= {20-60} = {-40} = -20

{6-2} {2}

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Considered from point D toward A, the value exhibits the law of increasing opportunity cost.
However considered from point A towards D, the values show a decreasing tendency and thus do
not obey the law of increasing opportunity cost.

(b) What changes are required for this economy to shift the PPF outward?
In order to shift the PPF outward, the following can be done:
Answer

 Increasing total amount of available production factors like labor and capital.
 Advancements in technology.
 If new technologies are developed that enable goods to be produced with fewer
production factors, the economy’s capital will essentially experience a rise in purchasing
power parity.
 Thus, the economy will be able to produce more at any point along the frontier, meaning
that the frontier has effectively shifted outwards

Chapter 2
Review questions
Part I: Distinguish between the following:
1. Normal goods and inferior goods
Answer
The goods whose demand tends to increase as the income of the consumer rises are called
normal goods. As against this, inferior goods are the goods which encounter a fall in demand as
the income of consumer rises. Income is the basic determinant of the market demand which
determines the purchasing power of the consumer. Therefore, the individuals who have higher
disposable incomes spend the larger part of their incomes on consumer goods and services as
compared to lower incomes.

 An inferior good is a good whose demand decreases when consumer income rises (or
demand increases when consumer income decreases), whereas normal goods are goods for
which the opposite is observed. Normal goods are those goods for which the demand rises as
consumer income rises.

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2. Complementary goods and substitute goods
We all know that demand for a product is mainly affected by its price, but there are some other
factors which can also affect its demand. One such factor is ‘Price of Related goods’, wherein the
term ‘related goods’ means complements and substitutes. In simple words, Complementary
Goods are the goods that complete each other. This means that such goods are used in
conjunction with one other, which enhances their value. In other words, these goods have no
value when they are consumed alone. On the other hand, substitute goods are those goods that
compete with each other. Meaning that these goods can be used as a replacement for another
good. The relationship depicted by complements and substitutes are covered under ‘Cross
Demand‘.

 Complementary Goods refers to those goods which are consumed together to satisfy a
particular want. For example, SIM card and mobile phone apparatus, or a DVD and a DVD
player car and fuel. On occasion, the complementary good. If two goods are complements,
then price of one and the demand for the other are inversely related
Substitute Goods refers to the goods which can be used in place of one another to satisfy a
particular want. For example, tea and coffee or Pepsi and Coca-Cola. is absolutely necessary
. If two goods are substitutes, then price of one and the demand for the other are directly
related.

3. Market demand and individual demand

Market demand is influenced by the same factors, but on a broader scale – the taste, habits
and expectations of a community and so on.

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Individual demand refers to the demand for a good or a service by an individual (or a
household). It comes from the interaction of an individual’s desires with the quantities of
goods and services that he or she is able to afford. It is influenced by an individual's age, sex,
income, habits, expectations and the prices of competing goods in the marketplace.
Thus market demand is all the individual demands
4. Individual supply and market supply
Individual Supply

Individual supply describes the willingness of an individual firm to provide a specific quantity of
a good or service to the market over a given period of time. It depends on a number of different
factors, such as the price of the product, cost of production, government policies and regulation,
etc. (for more information see also factors that cause a shift in the supply curve). In most cases
(i.e. for normal goods) supply increases as the price of a good or service rises.

Market Supply

Market supply describes the quantity of a specific good or service that all sellers in a market
combined are willing to sell. In other words, it represents the sum of all individual supplies for a
particular good or service.

 The major difference in both terms is that Individual supply refers to the quantity
supplied by the single seller whereas Market supply refers to the quantity supplied by all
sellers in the market
 Individual supply is the supply of an individual producer at each price whereas market
supply of the individual supply schedules of all producers in the industry.
5. Excess demand and excess supply
 Excess Demand occurs when the Price of a good is lower than the Equilibrium Price,
meaning more consumers will want to buy the good than suppliers are willing to sell. The
difference between the Quantity Demanded (QD) and the Quantity Supplied (QS) is the
Excess Demand
 Excess supply in economics is a situation in which the market supply of a commodity is
greater than the market demand for it, thus causing its market price to fall. It is called
economic surplus ,market surplus or briefly supply is a situation in which the quantity of a

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good or service supplied is more than the quantity demanded, and the price is above the
equilibrium level determined by supply and demand. That is, the quantity of the product that
producers wish to sell exceeds the quantity that potential buyers are willing to buy at the
prevailing price
Part II: Short answer and workout
1. Why does the quantity of salt demanded tend to be unresponsive to changes in its price?
 The quantity of salt demanded tends to unresponsive to change in its price because salt
comes under the category of inelastic demand on which the consumers show less response to
the rise or fall of the product.
2. Why is the quantity of education demanded in private universities much more
responsive than salt is to changes in price?
 The demand of education is much responsive when compared to the salt price because
education is considered more important for the students and if the quality of education
decreases, many private universities need to be shut down. Education needs high quality
teachers and standard syllabus.
3. To get the market demand curve for a product, why do we add individual demand
curves horizontally rather than vertically?
 The market demand for private goods is obtained through horizontal addition because you
need to look at the price level and the quantities of goods demanded at each level and obtain
the total quantity that the two buyers demanded at the price level.
4. The market for lemon has 10 potential consumers, each having an individual demand
curve
P = 101 - 10Qi, where P is price in dollars per cup and Qi is the number of cups demanded
Per week by the with consumer. Find the market demand curve using algebra. Draw an
Individual demand curve and the market demand curve. What is the quantity demanded
by
Each consumer and in the market as a whole when lemon is priced at P = $1/cup?
 The individual demand curve is given as follows
P = 201 – 100Qi
The market demand is the sum total of individuals demand in the market. On taking
summation of all 100 individual demand curves, one will get the following:

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Answer
Q = Ei10 = 1qi
= q1 +q2 +q3 +… + q10

(101-p) 1+ (101-p) 2 + (101 - p) 3 +… + (101-p) 10

10 10 10 10
(10.1 - 0.1p) 1+ (10.1 - 0.1p) 2 + (10.1 - 0.1p) 3 +… + (10.1 - 0.1p) 10
10 (10.1 - 0.1p)
101- pp
101-Q
This is the market demand curve for lemonade
give this individual demand curve & the market demand curve is flatter then the individual
demand curve.
Give the price of one cup of lemonade, the individual demand calculate as follows:
P = 101 -10Qi
Qi = 101 -1 = 10
10
Hence the individual demand for lemonade is 10 cups at $1
the market demand is calculate as follows:
P = 101× 10Q Q =101- 1 =100

101 Price

10.1 101 Cups

Given the price of one cup of lemon, the individual demand is calculated as follows
P = 201 – Qi
Qi=201-1/200–1 = 2

Hence, the individual demand for lemonade is 2 cup at $1.

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The market demand is calculated as follows:

P = 201 – Q

Q = 201 – 1

Q = 200

The market demand for lemonade is 200 cup at $1.

5. 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.
Answer

A. the price elastic of demand for tickets -1.50

explanation
the price elastic of demand for tickets

Given
p = 12D (p) = D= 200,000- 10,000p……………………………………………… (1)
subsisting p =12 in to equation (1) to find the value of D we have:
D= 200,000 – ( 10,00 *12 ) = 200,000 – 120,000 = 80,000
differentiating equation (1) we respect to P, we have: dD/dp= -10,000
to calculate elastic of demand, we use the formula for calculating the elastic demand as follows:
E = Elastic of demand =( P/D) *(dD/dp) ……………………………………………...(2)
substituting the relevant value in to equation (2) we have
E = 12/80,00 *(- 10,000= 0.00015*(10,000) = -1.50
therefore the price of elastic demand for tickets = -1.50 since the absolute value of e i.e |1.50is
gather then ,it therefore implies that the demand for tickets in elastic

B.Draw the demand curve

Draw the demand curve we need to obtain the new price quantity demand as follows we start
buy assuming that the price tickets decrease from 12 birr to11birr therefore the percentage

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change in price((new price - old price *100=11-12 = -8.33
old price100

E- Percentage change in Demand / Percentage change in price…………………..3 since from

part a above, E = - 1.50
Percentage change Percentage change = -8.33 or 0.0833 Substitute the value in to equation (3)
and solve for the percentage change in demand we have: -1.50 = percentage change in quantity
demand = (-0.0833) * (-1.50) = 0.12495 or 12.495%
approximating to 2 decimal place, we have: percentage change in quantity demand 12.50%
since that answer is positive this implies that the demand for tickets D increase by 12.50 when
price for tickets decrease by 8.33. These confirm that the demand for ticket is truly elastic as the
percentage change in demand for ticket of 12.50 is greater than the percentage change in price of
– 8.33%.
The new D can therefore calculate as follows:
New D= D + (D percentage change IN Demand demanded ) =80,000+ (80,000* 12.50%)
=90,000.
From the calculate above we have:
initial price =12 birr
new price = 11 birr
initial quantity = D= 80,000
new quantity = new D = 90,000 since there is a negative relationship between price & quantity
demand in economics, the curve in the attached excel file show as the effect of a decrease in the
price of tickets form 12 birr to 11 birr (as shown by the arrow ) on the quantity demand for
tickets that increase from 80,000 to 90,000 (as shown arrow ).
Since the demand for tickets is elastic as obtain in the part a above, it implies that the percentage
change in quantity demanded for ticket is greater than the percentage change in the price of
tickets . The demand curve for ticket is flatter and the gap between the initial quantity demanded
80,000 and the new quantity demand 90,000 is wider than the gap between the initial price of 12
birr the new price 11 birr. This indicate that the percentage change in the quantity demanded of
12.50% which is an increase from 80,000 to 90,000 is higher than the percentage in the price for
tickets of 8.33% which is decrease form 12 birr to 11 birr.

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6. Given market demand Qd = 50 - P, and market supply P = Qs + 5
A) Find the market equilibrium price and quantity?
 Qd= 50 - P, P = Qs + 5 -> Qs = P - 5.

The market equilibrium price and quantity are:

Qd = Qs,

50 - P = P - 5,

2P = 55,

P = $27.5.

Q = 27.5 - 5 = 22.5 units.

B) What would be the state of the market if market price was fixed at Birr 25 per unit?
 If market price was fixed at $25 per unit, then there will be a shortage (Qd > Qs).
C) Calculate and interpret price elasticity of demand at the equilibrium point.

 Price elasticity of demand at the equilibrium point is:

.
Ed = 1 .
= -1.22

Ed = 1×22.527.5 = 1.22 so the demand is elastic.

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7. based on the following table which indicates expenditure of the household on a
commodity, answer the questions that follow (The price of the good is Br.10)
Income ( Br. / month) Quantity Demanded ( units / month )
10,000 50
20,000 60
30,000 70
40,000 80
50,000 90

A) Calculate income elasticity of demand, if income increases from Br.10, 000 to Br.
20,000 and if income increases from Br.40, 000 to Br. 50,000.
Answer
Solution

Ed = Qd2 - Qd1 / 12-I1

midpoint Qd midpoint1

Ed=income elasticity of demand

Qd= quantity demanded

I = income

(i) I midpoint = 10,000 +20,000/2 =15,000

Qd midpoint = 50+60/2 = 55
60-50/55

= (60 50)/55 / (20000 10000)15000 = (20000-10000)15000(60 50)/55

=0.182/0.67 = 0.670.182

= 0.273= 0.273

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(ii)

I midpoint = 50000+40000/2 = 45000 = 250000+40000 = 45000

Qd midpoint = 90+80/2 = 85= 290+80=85

= (90 80)85 / (50000 40000)45000 = (50000 40000)45000(90 80)85

=0.118/0.222 = 0.2220.118

0.531 = 0.531

B) Is this a normal or an inferior or a luxury good? Justify.

 This is a normal good. This is because the income elasticity of demand is positive and less
than 1.
C) Does the proportion of household income spent on this good increase or decrease as income
increases? .Why?

 The proportion of household income spent on this good increase as income increases. This is
because normal goods experience an increase in demand when consumer’s income rises.

8. When price of tea in local café rises from Br. 10 to 15 per cup, demand for coffee rises
From 3000 cups to 5000 cups a day despite no change in coffee prices.
Answer
Solution
A) Determine cross price elasticity.
 percentage change in price of tea = × 100 = 100 = 100%

Percentage change in quantity demanded of coffee = ×100 = 66.6 = 66.6 %

Cross price elasticity (XED) = (% change in quantity demanded of good A) / (% change in

price of good B) (% change in price of good B)
.
XED =

XED = 0.66
B) Based on the result, what kind of relation exists between the two goods?

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 Cross price elasticity is positive so these goods are substitute.

References
Samuelson, Paul A., and William D. Nordhaus. 1998. Economics. Boston, the McGraw-Hill
Companies, Inc., Chapter 1, pages 3-7.
Baumol, William J., and Alan S. Blinder. 1988. Economics: Policy and Principle. Harcourt Brace
Jovanovich, Inc., Chapter 1.
Personal Financial Education, Federal Reserve Education.org, 2003

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