Questions
1a. "Other things being equal," Q = f(p) > 0. Using appropriate graphs, explain the statement and identify the "other things."
b. The market demand and supply schedules for a commodity are given by:
Qd = 800 − 40p
Qs = 200 + 60p
c. Sketch the supply and demand curves and calculate the equilibrium price and quantity.
2. Discuss the importance of the theory of cost to a business firm.
3. Production Possibility Curves can assume various shapes depending on the opportunity cost of switching between two goods. Discuss.
4a. Define what is meant by a budget line in consumer theory.
b. Write explanatory notes on the following:
i. Marginal physical product.
ii. Total revenue.
5a. Who is a manager?
b. What functions does a manager perform in a firm?
6a. Why is economics sometimes regarded as a social science rather than a natural science?
b. What are the strengths of studying economics scientifically?
Answers
Question 1
a) "Other things being equal," Q = f(p) > 0
This expresses the Law of Supply: quantity supplied (Q) is a function of price (p), and the relationship is direct (positive) — as price rises, quantity supplied rises, and vice versa, provided all other factors influencing supply remain constant (the ceteris paribus assumption).
Graphically, this is represented by an upward-sloping supply curve, with price on the vertical axis and quantity on the horizontal axis, sloping from lower-left to upper-right, reflecting the direct relationship between price and quantity supplied.
The "other things" (ceteris paribus factors) held constant include:
- Cost of inputs/factors of production
- Technology of production
- Prices of related goods (that could be produced instead)
- Number of sellers in the market
- Government policy (taxes and subsidies)
- Producer expectations about future prices
- Weather/natural conditions (for agricultural goods)
If any of these change, the entire supply curve shifts, whereas a change in the price of the good itself causes only a movement along the existing supply curve.
b) & c) Equilibrium price and quantity
Given:
Qd = 800 − 40p
Qs = 200 + 60p
At equilibrium, Qd = Qs:
800 − 40p = 200 + 60p
800 − 200 = 60p + 40p
600 = 100p
p = 6
Substituting into Qd:
Q = 800 − 40(6) = 800 − 240 = 560
Verification using Qs:
Q = 200 + 60(6) = 200 + 360 = 560 ✓
Equilibrium price = 6; Equilibrium quantity = 560.
The demand curve slopes downward (negative slope, −1/40), the supply curve slopes upward (positive slope, 1/60), and they intersect where P = 6 and Q = 560.
Question 2: Importance of the theory of cost to a business firm
- Guides pricing decisions: Cost theory helps a firm set prices that cover costs and generate a profit margin.
- Basis for output decisions: Understanding marginal cost and average cost allows a firm to determine the profit-maximizing level of output (where marginal cost equals marginal revenue).
- Distinguishes short-run and long-run behaviour: Cost theory explains how fixed and variable costs behave differently, helping firms plan for different time horizons.
- Aids in break-even analysis: It helps a firm identify the point at which total revenue equals total cost, informing viability decisions.
- Guides plant size and scale decisions: Long-run average cost curves help firms decide the most efficient scale of operation.
- Supports resource allocation: By comparing costs across alternative production methods, firms can choose the least-cost combination of inputs.
- Aids in competitive strategy: Knowledge of cost structure helps a firm compete effectively, especially in pricing against rivals.
Question 3: Shapes of the Production Possibility Curve (PPC) and opportunity cost
A Production Possibility Curve shows the maximum combinations of two goods an economy can produce with given resources and technology. Its shape depends on the behaviour of opportunity cost as production shifts between the two goods:
1. Straight-line (linear) PPC — constant opportunity cost
When resources are equally suited to producing either good, the PPC is a straight line, implying a constant opportunity cost — each additional unit of one good always costs the same amount of the other good.
2. Concave (bowed-out) PPC — increasing opportunity cost
This is the most common and realistic case, where resources are not equally suited to both goods. As more of one good is produced, increasingly larger amounts of the other good must be sacrificed, reflecting the law of increasing opportunity cost, because resources are gradually shifted away from uses to which they are best suited.
3. Convex (bowed-in) PPC — decreasing opportunity cost
A theoretical case where specialization leads to increasing efficiency as more resources are devoted to one good, so opportunity cost falls rather than rises. This is rare in practice, since it implies increasing returns as resources are reallocated.
4. Kinked PPC
Occurs when resources are only partially adaptable between the two goods, producing a curve with distinct segments of differing slope, reflecting varying degrees of resource specialization at different points.
Conclusion: The shape of the PPC reflects how substitutable resources are between the two goods; equal suitability produces a straight line, while unequal suitability (the norm) produces a concave curve showing rising opportunity cost.
Question 4
a) Budget line
A budget line (or price line) shows all the possible combinations of two goods that a consumer can purchase with a given income, given the prices of the goods. It is represented as a straight line, with its slope equal to the negative ratio of the goods' prices, and its position determined by the consumer's income and the prices of the goods. A change in income shifts the budget line parallel to itself, while a change in the relative price of one good changes its slope.
b) i) Marginal physical product (MPP)
Marginal physical product refers to the additional output produced by employing one more unit of a variable factor of production, while other factors are held constant. It is calculated as the change in total physical product divided by the change in the quantity of the variable factor. MPP typically rises initially, reaches a maximum, and then falls, consistent with the law of diminishing marginal returns.
b) ii) Total revenue (TR)
Total revenue refers to the total amount of money a firm receives from selling its output, calculated as:
TR = Price × Quantity sold
It represents the firm's total earnings before costs are deducted and is a key determinant, along with total cost, of the firm's profit level.
Question 5
a) Who is a manager?
A manager is an individual responsible for planning, organizing, directing, and controlling the resources and activities of an organization or business unit in order to achieve specific objectives efficiently and effectively.
b) Functions of a manager in a firm
- Planning: Setting objectives and determining the best course of action to achieve them.
- Organizing: Arranging resources (human, material, financial) and assigning tasks to achieve set goals.
- Staffing: Recruiting, training, and placing suitable personnel in appropriate roles.
- Directing/Leading: Motivating and supervising employees to ensure tasks are carried out effectively.
- Controlling: Monitoring performance against set standards and taking corrective action where necessary.
- Coordinating: Ensuring different departments and activities work together harmoniously toward common goals.
- Decision-making: Making choices regarding resource use, strategy, and problem-solving within the organization.
Question 6
a) Why economics is regarded as a social science
Economics is regarded as a social science because:
- It studies human behaviour in relation to the use of scarce resources, which involves social interaction, choice, and decision-making rather than purely physical phenomena.
- Its subject matter — consumers, producers, markets, and institutions — is shaped by social, cultural, and psychological factors that differ from the fixed laws of the natural sciences.
- Economic outcomes depend on human motives and expectations, which can change over time and across societies, unlike the constant laws of nature.
- It shares its focus on human society and behaviour with other social sciences such as sociology, political science, and psychology.
b) Strengths of studying economics scientifically
- It brings order and structure to the analysis of complex economic phenomena through theories and models.
- It allows for the formulation of testable hypotheses that can be checked against real-world data.
- It uses quantitative tools (statistics, mathematics, graphs) to add precision to analysis and forecasting.
- It enables comparison of economic performance across time periods and countries using consistent measures.
- It provides a logical framework for policymakers to predict the likely effects of economic decisions and interventions.