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Assignment: Economics in Action

Case Study 1: Increase in Petroleum Prices The government of Pakistan recently increased the petroleum prices including the price of diesel. 1) Do you think that it could increase the prices of other goods as well? If yes, then, why it will increase the prices of other goods as well? Solution Petroleum prices will increase the cost of transportation and distribution of goods. Since any producer wants the price to be at least as much as the cost to produce it, hence the prices of all goods which ha e to be transported will increase. ) !hat impact will it have on cost of production for the producers? Solution Cost of production will increase as the industrial machineries re!uire fuels to operate. If the fuel prices increase, the cost of production increases. "o meet the increase in cost, the producers will increase the prices of goods they sell. ") !hat are the reasons why people may not decrease their demand much even after the petroleum prices have increased? #$plain it using the concept of elasticity. Solution People will not decrease their demand as there are few substitutes a ailable of petrol. Petrol operated ehicles cannot be run on other fuels. So, time re!uired to purchase the different ehicle or C#$ %it is longer. &ence, in the short run, the price elasticity of demand will be lower. Case Study ': (ango Season is approaching %ango &eason is approaching. 1) !hy %angoes will 'e costly during %ay? (ow could you e$plain it with demand and supply and theories of consumer 'ehavior that you have learnt like law of diminishing marginal utility and the concept of consumer surplus? Solution "he supply of (angoes will be lower in (ay as compared with later months. )ith lower supply, the prices will be higher initially. *sing law of diminishing marginal utility concept, we can say that initially the utility deri ed from eating mangoes first time in the season will bring higher utility for the consumers. So, they will be willing to pay higher price for them. "he consumer surplus, which is the alue deri ed from a good minus its price will be higher initially. Producers %nowing that supply is finite and consumers are aluing mangoes more in (ay will charge higher prices in (ay. ) !hy %angoes will 'e less costly during )une and )uly? (ow could you e$plain it with demand and supply and theories of consumer 'ehavior that you have learnt like law of diminishing marginal utility and the concept of consumer surplus? Solution

"he supply of (angoes will be higher in +une and +uly as compared with (ay. )ith increase in supply, the prices will get lower. *sing law of diminishing marginal utility concept, we can say that initially the utility deri ed from eating mangoes first time in the season will bring higher utility for the consumers. ,ut, later on, they will get lesser marginal utility and will be willing to pay lower price for them. "he consumer surplus, which is the alue deri ed from a good minus its price will be higher initially, but it will shrin% later on. )ith supply increasing, the mar%ets will become more competiti e and the prices will go down. ") !hy would %angoes 'e costly again in *ugust? (ow could you e$plain it with demand and supply and theories of consumer 'ehavior that you have learnt like law of diminishing marginal utility and the concept of consumer surplus? Solution "he supply of (angoes will be lower in August as compared with +une and +uly. )ith lower supply, the prices will be higher in August. *sing law of diminishing marginal utility concept, we can say that as the mango season will be ending, the utility deri ed from eating mangoes last time in the season will bring higher utility for the consumers. So, they will be willing to pay higher price for them. "he consumer surplus, which is the alue deri ed from a good minus its price will be higher in August. Producers %nowing that supply is finite as the season is ending and consumers are aluing mangoes more in August, will charge higher prices in August. Case Study -: .our Career Choices / Education &ome of you may get a +o' paying you ,s -,... to 1.,... per month. 1) !hy did you not take this kind of +o' than studying right now? (ow could you e$plain it using the concept of indifference curves and opportunity cost? Solution 0pportunity cost of studying is the salary forgone if you were instead wor%ing for informal employment, li%e wor%ing as salesperson, cashier or call center agent etc. ,ut, in later years in life, you want to en1oy more goods and ser ices than you ha e today. "hat is, you want to mo e to a higher indifference cur e, where you can ha e more of all goods and ser ices. 2or that, you need e3pansion in your budget line. .our budget line will e3pand when your purchasing power will increase after you get a high paid 1ob. +ust wor%ing as a salesperson, cashier or call center agent etc, you cannot ha e higher pay. So, you decided to increase your s%ills and then see% a well4paying 1ob which can mo e you to a higher indifference cur e. Case Study 5: Electricity crisis deepens /overnment has recently increased the price of electricity due to electricity shortage. *t the start of this summer, electricity crisis reached alarming proportions with a record shortfall of around 0,... %ega !att in the national grid. This has resulted in large1scale and fre2uent power load shedding countrywide that persists for -11 hours a day on a regular 'asis in some areas, even going up to 1- hours. 1) 3an you show a diagram 4ignore units) in which electricity shortage is graphically presented?

Solution )hen the demand increases more than proportionately than the supply, the e!uilibrium le el of prices increase. 6emand for electricity increased ery rapidly, but the supply could not be increased by the go ernment. &ence, Pa%istan is e3periencing rise in electricity tariffs. ) 3an you e$plain how the increase in price 'rings e2uili'rium in market again after shortage? Solution )hen the mar%et price is lower than the e!uilibrium price, shortage occurs. "he shortage has to be filled by proportionate increase in supply. If supply does not increase, then, what will happen is that prices will increase which will bring e!uilibrium again in the mar%et but at higher prices. Case Study 7: "a3ing the rich &hould rich 'e ta$ed more than the poor? (ow would you e$plain this answer through law of diminishing marginal utility? Solution "he rich ha e lesser marginal utility of money of the last 189 of their income. "he poor ha e more marginal utility of money of the last 189 of their income. 2or instance, if a rich person earns :s -88,888 per month, then the amount of satisfaction he gets from the last :s -8,888 is much less. If a poor person earns :s -,888 per month, then the amount of satisfaction he gets from the last :s -88 is much more. &ence, it is better to ta3 rich more than the poor. Instead of ta%ing 189 from both the rich and poor. 0nly rich should be ta3ed. "o ta3 rich only and e3clude the poor, go ernment can ma%e a law that someone earning at least :s '78,888 will pay income ta3. So, the rich will ha e to pay and poor will not ha e to pay income ta3. Case Study ;: Pa%istan<s Economic Structure *'out 5.6 of our population is involved in *griculture. In 7&, only 6 population is involved in *griculture. !hy the production in 7& farms is much greater even if we employ greater units of la'or in production in our farms. (ow could you e$plain it using law of diminishing marginal returns? Solution 2or increase in production, labor is not the only factor of production. Increasing labor while land is not fertile, water is not a ailable and machinery is not used will not increase production according to law of diminishing marginal returns. *S has less labor employed in agriculture, but, they use more capital =machinery, modern tools, pesticides, efficient fertili>ers, temperature control systems etc? which increases their producti ity. )e say that producti ity increases when ratio of output to input increases. If more can be produced with les input used, then we say that producti ity is increasing. Case Study @: Software Companies: 6o "hey 2ace Supply Constraints If %icrosoft wants, it can write 0 'illion 3Ds for !indows 8P e2ual to total num'er of people in the world. !hy it does not produce such a 2uantity? !hy it produces only a

very limited num'er of copies? (ow could you e$plain it with demand and supply relationship? Solution Supply goes hand in hand with demand. #o one would produce and supply a good for which there is no demand. (icrosoft can supply ; billion C6s, but since there is not enough demand of C6s, especially the original C6s, it will supply much less C6s in the mar%et. Case Study A: 6ifference in Salaries of #urses and 6octors (ow will you e$plain the difference in salaries of 9urses and Doctors? #$plain it 'y using the concept of consumer surplus, law of diminishing marginal utility and demand and supply analysis. !hy would there 'e a difference 'etween the salary of a mason 4construction worker) and engineer or architect. #$plain it 'y using the concept of consumer surplus, law of diminishing marginal utility and demand and supply analysis. Solution Price of something is determined by its scarcity rather than its usefulness. )ater is an essential of life, but because of its abundance has a relati ely low price. 6iamonds, on the other hand, ha e little use in comparison with water, but because of their relati e scarcity command high prices. E3plaining this by way of consumer surplus, we can say that the 6octor %nows that he is scarce, so he e3tracts the ma1or portion of consumer surplus. Consumer surplus is the alue recei ed from a particular good or ser ice minus its price. 2or 6octors, the consumer surplus is ery low because the doctor charges almost the ma3imum price the patients can pay. ,ut, for nurses, high price cannot be charged because of abundance of nurses relati ely as compared with doctors. "he supply of nurses is elastic. &ence, the consumer surplus in the case of nurses is relati ely high. "he patients ha e to pay relati ely little price for ser ice of nurses because they are in abundance relati ely. Case Study B: 6ifference in Prices of Certain $oods in Certain Seasons !hy air1conditioner and 7P& are more costly in summer than in winter? #$plain through demand and supply analysis. Solution *PS and air4conditioner gi e more utility in Summer, that is why, producers charge higher prices for them in summer. Second reason is that the demand is higher in summer, so, when demand of a product increases, the price also increases. !hy 3oca13ola : Pepsi is offered at a discount in winter and in ,am;an? #$plain through demand and supply analysis. Solution Soft drin%s gi e more utility in summer, that is why, producers charge higher prices for them in summer. Second reason is that the demand is higher for soft

drin%s in summer, so, when demand of a product increases, the price also increases. !hy does price of certain items increase in ,am;an and Pre1#id season? #$plain through demand and supply analysis. Solution "hose certain items gi e more utility in summer, that is why, producers charge higher prices for them in summer. Second reason is that the demand is higher for those items in summer, so, when demand of a product increases, the price also increases. !hy would goats, cows and sheep 'e costly +ust 'efore #id1ul1*;ha and during two days of #id, 'ut ine$pensive during " rd day of #id? #$plain through demand and supply analysis. Solution "he demand is higher 1ust before Eid4ul4A>ha, so, when demand of a product increases, the price also increases. 0n third day, the demand decreases, hence prices go down. Case Study 18: 6ifference in )ages <or doing an ordinary +o' in restaurant and gas station, you can get higher salary in #urope than in Pakistan? #$plain the reason using demand and supply analysis? Solution Cabor is in abundant supply in Pa%istan. (ore people want 1ob than the 1obs a ailable in the mar%et. &ence, the wages are lower, demand for labor is lower and supply of labor is higher. Cabor is not in abundant supply in Europe. "he wages are higher, because demand for labor 1ust about matches with the supply of labor. Second reason is that in Europe, to afford the same goods, one needs more money than in Pa%istan. &ence, it balances out. "he purchasing power of wages is almost same. If the wage4earner earns more dollarsDpounds, then he also has to spend more dollarsDpounds to buy goods and ser ices.

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