Name Sawaira Kainat

Fathers Name M Ashfaq

Course Economics (9335)
Assignment 1
Q. No. 1. Discuss the scope and nature of economics. Also define economics in
the light of thoughts presented by Professor Robinson.

1. The Scope of Economics:

The scope of economics refers to the breadth and range of topics that it covers. It's
about understanding the "what" of economics—what areas of study fall under its
umbrella. Here's a detailed look:

 Microeconomics:
o This branch focuses on the behavior of individual economic agents,
such as:
 Households (consumers)
 Firms (businesses)
 Individual markets
o It analyzes how these agents make decisions regarding the allocation
of scarce resources.
o Key topics include:
 Supply and demand
 Price determination
 Market structures (e.g., perfect competition, monopoly)
 Consumer behavior (utility, demand)
 Firm behavior (production, costs, profits)
 Macroeconomics:
o This branch examines the economy as a whole.
o It focuses on aggregate variables, such as:
 Gross Domestic Product (GDP)
 Inflation
 Unemployment
 Economic growth
o It studies the effects of government policies (fiscal and monetary) on
the overall economy.
  Other Important Areas:
o International Economics: Studies trade and financial interactions
between countries.
o Development Economics: Focuses on economic growth and
development in less developed countries.
o Public Finance: Examines the role of government in the economy,
including taxation and public spending.
o Labor Economics: Studies labor markets, wages, and employment.
o Econometrics: Applies statistical methods to analyze economic data
and test economic theories.
o Environmental Economics: studies the economic impact of
environmental policies.

2. The Nature of Economics:

The nature of economics refers to its fundamental characteristics and how it

approaches its subject matter. It's about understanding the "how" of economics.

 Social Science:
o Economics is a social science because it studies human behavior and
its impact on society.
o It uses scientific methods, such as observation, hypothesis testing, and
data analysis, to understand economic phenomena.
 Study of Scarcity and Choice:
o A core concept in economics is scarcity—the idea that resources are
limited while human wants are unlimited.
o This scarcity forces individuals and societies to make choices about
how to allocate resources.
o Economics analyzes how these choices are made and their
consequences.
 Positive vs. Normative Economics:
o Positive economics deals with objective facts and cause-and-effect
relationships. It aims to describe and explain economic phenomena as
they are. (e.g. "If the government raises taxes, consumer spending will
likely decrease.")
o Normative economics involves subjective value judgments and
opinions. It focuses on what "ought to be" and often involves policy
recommendations. (e.g. "The government should raise taxes to reduce
income inequality.")
 Use of Models and Theories:
 o Economists use models and theories to simplify complex economic
phenomena and make predictions.
o These models are based on assumptions about human behavior and
market conditions.

3. Economics in the Light of Professor Lionel Robbins' Thoughts:

 Robbins' Definition:
o Lionel Robbins defined economics as "the science which studies
human behavior as a relationship between ends and scarce means
which have alternative uses."
o This definition emphasizes several key points:
 Ends: Human wants and desires.
 Scarce Means: Limited resources available to satisfy those
wants.
 Alternative Uses: Resources can be used in different ways.
 Choice: Economics is fundamentally about how individuals
make choices when faced with scarcity.

 Significance of Robbins' Definition:

o It broadened the scope of economics by moving away from a narrow
focus on wealth.
o It highlighted the universal nature of the economic problem—the
problem of scarcity and choice—which applies to all individuals and
societies.
o It provided a very clear and concise defintion that is still very widely
used.
 Focus on Human Behavior:
o Robbins' definition emphasizes the importance of understanding
human behavior in economic decision-making.

In summary, economics is a broad and dynamic social science that studies how
individuals and societies make choices in the face of scarcity. Robbins' definition
provides a clear and concise framework for understanding the core principles of
economics.

Q. No. 2. What is the law of satiable wants? Also write a note on the
assumptions and exceptions of this law in detail.
1. The Law of Satiable Wants (Law of Diminishing Marginal Utility):

 Essentially, this law states that as an individual consumes more and more
units of a specific good or service within a given period, the additional
satisfaction (marginal utility) derived from each successive unit decreases.
 Think of it like eating slices of pizza. The first slice might be incredibly
satisfying. The second slice is still good, but perhaps not as intensely
enjoyable as the first. By the third or fourth slice, you might start feeling
full, and the additional satisfaction from each extra slice diminishes
significantly. Eventually, you might reach a point where you don't want any
more pizza at all.
 The core idea is that human wants, in relation to a specific good, can be fully
satisfied.

2. Assumptions of the Law:

For the law of diminishing marginal utility to hold true, certain assumptions must
be made:

 Rationality:
o It assumes that consumers are rational and aim to maximize their
satisfaction (utility).
o They make decisions based on what they believe will bring them the
most pleasure or benefit.
 Cardinal Utility:
o Traditionally, the law assumed that utility could be measured
cardinally, meaning it could be assigned numerical values.
o This is less emphasized now, with ordinal utility (ranking preferences)
being more common.
 Homogeneous Units:
o All units of the good or service are assumed to be identical in quality
and characteristics.
o If the quality changes, the law might not hold.
 Continuous Consumption:
o Consumption is assumed to occur continuously over a relatively short
period.
o Large time gaps between consumption might reset the level of
satisfaction.
 Constant Preferences:
 o The consumer's tastes and preferences are assumed to remain constant
during the consumption period.
o Changes in preferences can affect the level of satisfaction.
 Constant Income:
o The consumer's income is assumed to remain constant.
 Independent Utilities:
o The utility gained from one good, does not impact the utility gained
from another good.

3. Exceptions to the Law:

While the law of diminishing marginal utility generally holds true, there are some
notable exceptions:

 Money:
o The desire for money is often considered insatiable. People typically
want more money, regardless of how much they already have.
 Knowledge:
o The pursuit of knowledge can be an ongoing process, with each new
piece of information leading to a desire for more.
 Addictions:
o Addictive substances or behaviors can lead to increased craving,
rather than Q

. No. 3. (a) What is meant by point elasticity and arc-elasticity? Explain with
help of diagram and formula. (b) Given the supply and demand equations:
Estimate (i) Equilibrium price and quantity (ii) Elasticities of demand and
supply at equilibrium position.

(a) Point Elasticity and Arc Elasticity

 Point Elasticity:
o Definition: Point elasticity measures the responsiveness of quantity
demanded or supplied to a change in price at a specific, single point
on the demand or supply curve. It's used when we're dealing with very
small, almost infinitesimal changes in price.
o Formula:
 For demand: Ed = (dQd/dP) × (P/Qd)
 For supply: Es = (dQs/dP) × (P/Qs)
 Where:
 Ed = point elasticity of demand
  Es = point elasticity of supply
 dQd/dP = the derivative of the demand function with
respect to price (the slope at that point)
 dQs/dP = the derivative of the supply function with
respect to price (the slope at that point)
 P = price
 Qd = quantity demanded
 Qs = quantity supplied
o Diagram:
 Imagine a demand or supply curve. At a specific point on that
curve, draw a tangent line. The point elasticity is calculated
using the slope of that tangent line at that precise point.
 Arc Elasticity:
o Definition: Arc elasticity measures the responsiveness of quantity
demanded or supplied to a change in price over a range or "arc" of the
demand or supply curve. It's used when we're dealing with larger,
more significant changes in price.
o Formula:
 For demand: Ed = [(Q2 - Q1) / (Q2 + Q1)] / [(P2 - P1) / (P2 +
P1)]
 For supply: Es = [(Q2 - Q1) / (Q2 + Q1)] / [(P2 - P1) / (P2 +
P1)]
 Where:
 Q1 and P1 are the initial quantity and price.
 Q2 and P2 are the final quantity and price.
o Diagram:
 Imagine two distinct points on the demand or supply curve. The
arc elasticity is calculated using the average of the quantities
and prices at those two points.

(b) Given the supply and demand equations: Estimate (i) Equilibrium price
and quantity (ii) Elasticities of demand and supply at equilibrium position.

To solve this part, we need to know the demand and supply equations. Since they
were missing from the prompt, I will reuse the previous example equations.

 Demand: Qd = 100 - 2P
 Supply: Qs = 10 + 4P
 (i) Equilibrium Price and Quantity:
 o At equilibrium, quantity demanded (Qd) equals quantity supplied
(Qs).
o Set Qd = Qs:
 100 - 2P = 10 + 4P
 90 = 6P
 P = 15 (equilibrium price)
o Substitute P = 15 into either the demand or supply equation to find the
equilibrium quantity:
 Qd = 100 - 2(15) = 70
 Qs = 10 + 4(15) = 70
 The Equilibrium quantity is 70.
 (ii) Elasticities of Demand and Supply at Equilibrium Position:
o Elasticity of Demand (Ed):
 Ed = (dQd/dP) × (P/Qd)
 dQd/dP = -2 (the derivative of the demand equation)
 Ed = -2 × (15/70) = -30/70 = -3/7 or approximately -0.4286
o Elasticity of Supply (Es):
 Es = (dQs/dP) × (P/Qs)
 dQs/dP = 4 (the derivative of the supply equation)
 Es = 4 × (15/70) = 60/70 = 6/7 or approximately 0.8571

Therefore, at the equilibrium point:

 The equilibrium price is 15.

 The equilibrium quantity is 70.
 The price elasticity of demand is approximately -0.4286 (inelastic demand).
 The price elasticity of supply is approximately 0.8571 (elastic supply).

Q. No. 4. What is perfect competition? Explain the working of this type of

firm when it earns normal and abnormal profit with the help of diagrams.

1. What is Perfect Competition?

Perfect competition is a theoretical market structure characterized by several key

features:

 Large Number of Buyers and Sellers:

o There are so many buyers and sellers that no single individual or firm
has the power to influence the market price.
 Homogeneous Products:
 o All firms produce identical products. There is no differentiation
between the goods or services offered.
 Free Entry and Exit:
o Firms can freely enter or exit the market without facing significant
barriers.
 Perfect Information:
o All buyers and sellers have complete and accurate information about
prices, products, and market conditions.
 Price Takers:
o Individual firms have no control over the market price. They must
accept the prevailing market price determined by the forces of supply
and demand.

2. Working of a Firm in Perfect Competition:

 Price Determination:
o The market price is determined by the intersection of the market
supply and demand curves.
o Individual firms are price takers, meaning they accept the market
price as given.
 Profit Maximization:
o Firms in perfect competition aim to maximize their profits.
o They achieve this by producing the quantity of output where marginal
cost (MC) equals marginal revenue (MR).
o In a perfectly competitive market, the marginal revenue is equal to the
market price. (MR=P)

3. Normal Profit:

 Definition:
o Normal profit is the minimum level of profit required to keep a firm in
business in the long run.
o It represents the opportunity cost of the resources used by the firm.
o It is included in the firm's average total cost (ATC).
 Long-Run Equilibrium:
o In the long run, firms in perfect competition earn only normal profit.
o If firms are earning abnormal profits, new firms will enter the market,
increasing supply and driving down the price.
o If firms are incurring losses, some firms will exit the market,
decreasing supply and driving up the price.
  Diagram:
o Market Diagram: Shows the market supply and demand curves
intersecting to determine the market price.
o Firm Diagram:
 A horizontal demand curve (representing the market price) is
drawn.
 The marginal cost (MC) curve intersects the average total cost
(ATC) curve at its minimum point.
 The firm produces where MC = MR (which is also the price).
 At normal profit, the ATC curve is tangent to the demand curve
at the point of production.

4. Abnormal Profit (Supernormal Profit):

 Definition:
o Abnormal profit is profit above and beyond normal profit.
o It is also called economic profit.
 Short-Run Possibility:
o Firms in perfect competition can earn abnormal profit in the short run.
o This can occur if there is a temporary increase in demand or a
decrease in costs.
 Diagram:
o Market Diagram: Shows the market supply and demand curves.
o Firm Diagram:
 A horizontal demand curve (representing the market price) is
drawn.
 The marginal cost (MC) curve intersects the average total cost
(ATC) curve.
 The firm produces where MC = MR (which is also the price).
 At abnormal profit, the demand curve (price) is above the ATC
curve at the point of production. This shows that the average
revenue is greater than the average total cost.

Key Points:

 Perfect competition is a theoretical ideal, and real-world markets rarely

perfectly match its characteristics.
 The concept of perfect competition provides a benchmark for analyzing
other market structures.
  The long-run tendency in perfect competition is for firms to earn only
normal profits.

Q. No. 5. Define organization and explain its importance and different

characteristics necessary for working of a firm.

1. Definition of Organization:

 An organization is a structured social entity. This means it's not just a

random gathering of people, but a group with a defined structure and
purpose.
 It comprises individuals working together. These individuals have roles and
responsibilities that contribute to the overall goals.
 The purpose of an organization is to achieve common goals. These goals can
be anything from producing goods and services to providing social services
or conducting research.
 Key aspects of an organization include:
o Structure: A defined framework of relationships and responsibilities.
o Purpose: A clear set of goals and objectives.
o People: Individuals who contribute their skills and efforts.
o Coordination: Mechanisms for aligning individual efforts.

2. Importance of Organization for a Firm:

 Efficiency:
o A well-organized firm can optimize the use of its resources (labor,
capital, materials).
o Clear processes and procedures reduce waste and improve
productivity.
 Coordination:
o Organizations provide a framework for coordinating the activities of
different departments and individuals.
o This ensures that everyone is working towards the same goals.
 Specialization:
o Organizations enable the division of labor, allowing individuals to
specialize in specific tasks.
o This leads to increased expertise and efficiency.
 Goal Achievement:
o A structured organization provides a clear path for achieving the
firm's objectives.
 o It facilitates planning, implementation, and monitoring of progress.
 Stability and Continuity:
o Organizations provide a stable framework for operations, even when
individuals leave or change roles.
o This ensures the firm's long-term sustainability.
 Adaptability:
o A well organized company is more able to adapt to changing market
conditions.
o Clear communication channels, and defined responsibilities help a
firm to quickly alter course when needed.

3. Characteristics Necessary for the Working of a Firm:

 Clear Structure:
o A defined hierarchy of authority and responsibility.
o Clear lines of communication.
o Well-defined roles and responsibilities.
 Effective Communication:
o Open and transparent communication channels.
o Regular feedback mechanisms.
o Clear and concise communication of information.
 Goal Orientation:
o A clear understanding of the firm's mission and objectives.
o Alignment of individual and team goals with overall organizational
goals.
o Regular monitoring of progress towards goals.
 Division of Labor and Specialization:
o Tasks divided into manageable units.
o Individuals assigned to tasks based on their skills and expertise.
o A system of professional development to constantly improve
employee skill sets.
 Coordination and Integration:
o Mechanisms for coordinating the activities of different departments
and individuals.
o Integration of different functions to achieve synergy.
o Team building exercises and cross functional work groups.
 Adaptability and Flexibility:
o Ability to respond to changes in the external environment.
o Flexibility in processes and procedures.
o A culture of innovation.
  Effective Leadership:
o Leaders who can motivate and inspire employees.
o Leaders who can make sound decisions.
o Leaders who can guide the firm through challenges.
 Resource Management:
o Efficient allocation and utilization of resources.
o Effective management of finances, personnel, and materials.
 A positive organizational culture:
o A culture that promotes teamwork, respect, and ethical behavior.
o A culture where employees feel valued.
o A culture that encourages innovation.

In essence, a well-organized firm is one that has a clear purpose, a structured

framework, and effective mechanisms for coordinating the efforts of its members.
These characteristics are essential for achieving efficiency, effectiveness, and long-
term success.