Running head: ECONOMICS DISCUSSION QUESTIONS

Economics Discussion Questions

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ECONOMICS DISCUSSION QUESTIONS

Question 1
Nature and Scope of Economics
In the world people face immeasurable wants from the cradle to the grave. In case one wants
satisfaction, other wants appear in chain (Powers, 1898). To satisfy theses wants individuals are
involved in different day to day operations in the society. The good news however is that ways to
satisfy these wants are unlimited. As a result, people are constantly striving to satisfy these unlimited
wants using limited ways. As a discipline, the science of Economics has been developed to
investigate and discuss different ways through which people are involved in resources management
and how they endeavor to satisfy unlimited wants with the use of limited means (Powers, 1898).
The word Economic is derivative of a Greek word Oikonomia meaning household
management. Economics was first studied in ancient Greece where it was termed as a science of
household management (Powers, 1898). It is from the enhancement of human life that we get the
definition of economics. Later on, Adam Smith, a man termed as the father of Economics in the 19th
century defined Economics as the science of Wealth. In this he meant that Economics is a science
that finds out the nature and causes of wealth owned by nations, implying how wealth is developed
and utilized. Later it was defined as study of human beings in the ordinary business of life
(Sappinen, 2003). Following these changes and developments, a realistic definition has emerged
based on scarcity of resources, unlimited wants and people engagements as they strive to satisfy
unlimited wants with limited resources (Powers, 1898). In this consideration, Economics is a social
science that studies how people use the limited resources to satisfy unlimited wants or a study on
how communities use limited resources to generate useful commodities and distribute them to
different people and in different geographical locations.

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Scope of Economics
The major aim of economics is to handle the analysis of economic problems facing a society
and try to come up with strategies to heighten satisfaction. From this point, economics is seen as a
social science. Due to increased community transformation and civilization the scope of economics
has widened. First is as a social science that handles economic operations of the people. To local
people, economics has a lot to do with their day to day earnings and expenditure. Such an issue as
nursing of children will not be treated as a subject matter in economics (Powers, 1898). Seconds is
that resources are required to satisfy individuals wants. This means that availability and use of
resources are major concerns in the field of economics.
Next is that wants are unlimited contrary to resources needed to satisfy these wants which
are usually scarce. In this regard, the subject matter of economics is to find ways through which
unlimited wants can be satisfied with the use of minimal resources. Fourth is that wants are
associated with production, exchange, distribution and consumption (Powers, 1898). Additionally,
currency, banking system, public finance, and trade among others are recognized in economics.
Economic planning is also an important matter in economics when taking into consideration mattes
related to economic development of a country. Last but not least is that economics argue on the
economic difficulties and economic activities and finds out good techniques to solve such problems.
Economics also argues on value judgment of human actions and behavior (Powers, 1898).
Importance of the study of Economics
Currently, the study of economics is of great importance not only because it offers knowledge
but also because it assists in solving of day to day life problems. For instance, people studying

ECONOMICS DISCUSSION QUESTIONS

economics will be able to handle the challenge of using limited resources to satisfy nagging wants
through the use of a preference list. Next is that, through economics one is able to learn proper use of
resource and thereby avoid misuse for output maximization. Thirdly, economics help in state
management (Powers, 1898). We cannot do without the use economics in economic planning and
development activities of the state. In this regard, the government, politicians and other officials
need to have proper knowledge in economics on such issues as currency system, banking system, tax
system, budgeting, among others so as to be in a position to manage state affairs. Economics can
also be used by social workers in the diagnosis of their related problems and find solutions to
problems related to poverty, unemployment, illiteracy, overpopulation, housing and medical facilities
among others (Sappinen, 2003).Last but not least is the use by labor leaders who use it during the
bargaining process on issues related to trade unions, raise of wage, working conditions among
others. Based on the discussed matters it is evident that economics is vital and it is needed in
different fields, and more so on the formulation and implementation of economic plans of a country.
Economic Analysis
Economic analysis is separated into two major branches namely; Microeconomics and
Macroeconomics.
Microeconomic is derived from two words Micro and economic. Micro is a Greek word
meaning small. Microeconomics calls for a learning of the decision of individuals and business and
the relationship of those decisions in the markets. The major aim of microeconomics is to clarify the
prices and quantities of specific goods and services. Additionally, this branch studies the impact of
government regulation and taxes on the prices and quantities of specific goods and services. An
example are the factors that establish prices and quantities of cement from a given cement factory.

ECONOMICS DISCUSSION QUESTIONS

Macroeconomic on the other hand is derived from two words macro and economic in which
macro is a Greek word meaning big (Sappinen, 2003). Macroeconomics therefore is the study of the
national Economy and beyond boundaries as well as how an international economic system works.
The major aim of macroeconomics is to examine general price levels, national income, employment
rate, population and production. Additionally, it also deals with the impact of government actionstaxes, spending and deficit-on total incomes and price level. For example, the determinant of average
cost of living or determining the total value of production in a country (Sappinen, 2003).
Question 2: Supply and Demand
Supply and demand are major concepts of economics and a backbone to market economies.
Demand refers to how much, i.e. the quantity of a product or a service preferred by
customers. On the other hand, quantity demanded refers to the amount of product that buyers are
willing and able to purchase at a given price. Demand-relationship is the relationship between price
and quantity. On the other hand supply is what market can present. The quantity supplied refers to
the amount of goods that a producer is willing to supply at a given price. The relationship between
goods supply and price is referred to as supply-relationship. The forces that determine the
relationship between demand and supply are responsible for resource allocation.
The demand of a given product is anticipated using factors such as; tastes and preferences,
level of income, quantity of goods being offered and availability of substitutes. For the case of
demand one considers factors such as; production capacity, production costs and level of competition
(Brennan & Barnes-Murphy, 2013).
The Law of Demand

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The law of Demand states that, all factors remaining constant, the higher the price of goods
and services the lower the demand. The amount of goods bought by a buyer at high price is less due
to the high opportunity cost of buying for highly-priced goods.

Above is a demand curve. Point A, point B and point C lie on the curve. Each point shows a
relation between demanded Quantities (Q) and price (P). Quantity demanded at point A will be Q1
and the price will be P1. For points B and C will be Q2P2 and Q3P3 respectively. From the graph it
is evident that there is a negative relationship between price and quantity demanded. The higher the
price the lower the demanded quantity, (A) while lower price leads to high quantity demanded, (C).
The Law of Supply
This law states that the higher the price the higher the quantity supplied. The supply
relationship shows an upward slope. The supply is high at high prices due to the fact that selling high
quantity raises the level of revenue (Brennan & Barnes-Murphy, 2013).

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A, B and C are points on supply curve depicting the relationship between quantity supplied
(Q) and price (P). At point C quantity supplied will be Q3 and price will be P3, same for other points
(Henderson, 1958).
Supply and Demand Relationship
Supply and Demand has a lot of impact on the price. Taking for example a special CD edition
is sold at $20. Due to the fact that the analysis from the market indicate that consumers are not in
need of high cost CDs more than $20, only about ten CDs are released leading to high opportunity
cost for suppliers to produce more (Henderson, 1958). In case ten CDs are demanded by 20
individuals, the price will increase. In this case, the supply-demand relationship is that as demand
increases so are the prices and the higher the price the higher the quantity supplied.
On the other hand if 30 CDs are manufactured while demand remains at $20, the prices will
not rise due to the fact that now the demand is lower than the demanded quantity (Henderson, 1958).
In this regard, the 20 consumers will be satisfied and the remaining ten CDs will be disposed at
lower prices as the supplier tries to do away with it making it available to people who had viewed
opportunity cost of buying the CD at $20 was very high.

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Equilibrium
The supply and demand are said to be in equilibrium when the supply function and demand
function intersect. At this point goods allocation is efficient due to the fact that goods demanded are
exactly supplied making all people within the economy to be satisfied. At the given price, the
suppliers are selling all goods produced and consumers get all goods that they demand (Henderson,
1958).

From the graph it is evident that the equilibrium occurs at point of intersection of the demand and
supply curve whereby the price will be P* while quantity demanded will be Q*.
Question 3: Market Structures
Comparison of Market Structures
Perfect

Monopoly

Competition

Monopolistic

Oligopoly

Competition

No. of Firms

High in number

Single firm

High in number

A few

Freedom of Entry

Easy

Protected, very

Easy

Hard

hard

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Nature of Product

No product

Unique, no close

There is product

Are same or

differentiation

substitutes

Differentiation

differentiated

Implication of

Horizontal,

Downward

Downward

Downward

Demand curve

organization is a

sloping, too

sloping, too

sloping, elastic,

price taker

inelastic, price set

elastic in the long

inelastic and

in elastic region

run.

kinked

One large firm

High number

A few firm

Average Size of

High number of

the Firm

firms

small and
medium firms

Possible

Too elastic

Inelastic

Elastic

Elastic

Profit Making

Only normal

Profit

Normal profits

Normal profit and

Possibility

profits

maximization,

likelihood of

Economic profits

Economic profits

Consumer
Demand

Government

None

Intervention
Pricing Power

Heavily

Minimum

Unregulated

Low, setter/taker

Medium, setter

Regulated
Low, price taker

Too high, setter

Perfect Competition
Demand in this market is constant, since a buyer or a seller cannot affect the market. The
sellers and buyer are price takers and firms make normal profits (Machovec, 1995). Price is

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equivalent to marginal cost, as shown below, hence maximum efficiency achieved. Price is set below
the average cost curve therefore the organization is productively efficient.

Monopoly
Neither close substitute nor competition exists making the firm the price setter while buyers
are price takers. Due to fact that price is high than average cost and set in the elastic region, firms
gets supernormal profits. Price is set above the marginal cost, hence efficiency is not achieved.

Monopolistic Competition
Both long and short run of this market are shown below. In the short run, monopolistic
competitive organization earn supernormal profits since the price is higher than average cost

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however in the long run the organization earns normal profits since the price is equivalent to the
average cost. In both case the productivity efficiency is not achieved since the price is not below
average cost curve (Machovec, 1995).

Short Run Graph

Long Run Graph

Oligopoly
Formally and informally agreed price exists and market is managed by very few firms and
who control prices (Fellner, 1949). Kinked point is created when demand curve D1 and D2 intersect
as shown below where D1 is elastic while D2 is inelastic. Between points a and b of the marginal
cost, price does not change. From the graph it is evident that efficiency is not achieved due to higher
price than marginal cost (Fellner, 1949).

Question 4: Negative Externalities

Externalities are words defined as a third party effects as a result of production and
consumption of goods and services with no compensation. It worth noting that this occurs outside

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the market in that, it does affect individuals not directly involved in production and consumption of
goods or services. Economic activity develops spill over benefits and spill over costs. Dealing with
negative externalities one focuses on the spill-over costs (Hackett, 1998). Negative externalities take
place when production or consumption leads to the external costs on the third parties which are not
usually compensated. As a result of this the government usually intervenes in the economic sphere.
The externalities bring about discrepancy between private and social costs of production and the
private and social benefits of consumption. Social cost is given by Private Costs and external cost
combined while social benefit is private benefit and external benefit combined. Therefore, for
negative production externalities to exist, social costs exceeds private cost which in turns
characterized by over-production (Bartolini & Bonatti, 1999). To correct the negative externalities
the government has come with various interventions. For instance the government has ensured that
there is private property right. Other option dealing with this is through negotiation between the
involved. This is best technique since it lead to lasting and mutual solution.
To illustrate this situation in real life, take into consideration water pollution. In this consider
a water treatment plant and a pig farmer. The likelihood that the farmer will release the pigs wastes
into the river which in turn will increase the cost of water treatment by the plant. AB depicts the
marginal benefit to the pig farmer while the OE marginal damaged incurred by the plant. Not taking
into consideration the external effect of the plant, the pig farmer will generate OB pigs maximizing
his profits equivalent to OAB (Hackett, 1998). On the other hand OBE depicts the damages incurred
by treatment plant. Finding out the difference between the two represent net gain to social welfare
from the pig farmers activity.

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To maximize social welfare, the pig farmer should reduce his output of pigs to OD since at
this point the marginal benefit of an additional pig is equivalent to marginal cost of additional
pollution increasing the social welfare depicted by OAC (Siemens & Kosfeld, 2009)
The government deals with these negative externalities by taxing the polluter on the bases of
the degree of pollution. For instance in the graph below X represent the degree of pollution that is
acceptable and therefore ignored and K is socially optimal level. The government could impose a flat
rate tax QZ on output to reduce the capital injected in production to increase beyond the sociallyoptimal level K. Flat rate can be considered unjust in that it is levied on levels OZ which and does
not generate external costs, has same effect to all output YK. A tax system not considering these is
represented by curve RK (Bartolini & Bonatti, 1999).

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References
Bartolini, S., & Bonatti, L. (1999). Endogenous growth and negative externalities. Milano, Italy:
Fondazione Eni Enrico Mattei.
Bird, D. (1984). Internalizing negative externalities: Pigovian taxes versus the Coase theorem.
(Brennan & Barnes-Murphy, 2013). Supply and demand. Mankato, MN: The Child's World.
Fellner, W. (1949). Competition among the few: Oligopoly and similar market structures. New York:
A.A. Knopf.
Hackett, S. C. (1998). Environmental and natural resources economics: Theory, policy, and the
sustainable society. Armonk, N.Y: M.E. Sharpe.
Henderson, H. D. (1958). Supply and demand. Chicago: University of Chicago Press.

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Machovec, F. M. (1995). Perfect competition and the transformation of economics. London:

Routledge.
Powers, H. H. (1898). Wealth and welfare: A study in subjective economics, the nature and scope of
economic inquiry. Philadelphia: s.n
Sappinen, J. (2003). Stretching the scope of economics, on the nature and impact of Gary S. Becker's
economics imperialism. Lappeenranta: Lappeenrannan teknillinen yliopisto, Kauppatieteiden
osasto.
Siemens, F. ., & Kosfeld, M. (2009). Negative externalities and equilibrium existence in competitive
markets with adverse selection. Bonn: Forschungsinst. zur Zukunft der Arbeit.