ECO402 Short Notes

1. How does opportunity cost relate to problem of

Q2. scarcity?

Answer: The problem of scarcity exists because of limited production. Thus, each society must make choices about what to produce and how to produce. The opportunity cost of what to produce consists of the goods and services which are sacrificed in order to produce the selected combination of goods and services. For example, the opportunity cost of producing military goods is the quantity of consumer goods that is not available because of decision to produce military goods.

2. What is the difference between a shift in demand(supply) and a movement along the demand (supply) curve?

Answer: Change in price of a good or service leads to Change in quantity demanded. It causes the movement along the demand curve. Change in income, preferences, or prices of other goods or services leads to Change in demand. It causes the shift of demand curve.

3. What is the difference between 'scarcity' and 'shortage'? ' Scarcity' and 'shortage' have different definitions. In reality, when most of the goods and resources are scarce goods, we called this phenomenon 'scarcity'. On the other hand, 'shortage' is defined as the situation where the quantity demanded is greater than the quantity supplied because the market price is lower than the equilibrium price.

Why does Excess Demand tend to raise the price of a good while Excess of Supply tends to reduce prices? Excess Demand is a situation in which the quantity demanded exceeds the quantity supplied. This situation is created when prices are below the equilibrium. Thus, price tends to rise until it reaches the equilibrium where the quantity demanded equals the quantity supplied. Excess Supply is a situation in which the quantity supplied exceeds the quantity demanded, that happens when prices are above the equilibrium. Therefore, price tends to reduce until it reaches the equilibrium.

1. Define demand.

Answer: Desire refers to people's willingness to own a good. Demand is the amount of a good that consumers are willing and able to buy at a given price. 2. Is the indifference curve be upward sloping?

Answer: Indifference curve cannot be upward sloping because if it sloped upward it would violate the assumption that more of any commodity is preferred to less.

3. Differentiate between arc Elasticity of demand and

Answer: Point Elasticity of demand. Numerical value of price elasticity of demand at a point of a demand curve is