‫( اعمایشت‬Economics)

Q.No.1: Define the law of demand and explain measurement of

price elasticity of demand.

Definition of the Law of Demand

The law of demand states that, other factors being constant, the quantity demanded of a good
decreases when its price increases, and vice versa. In simpler terms, there is an inverse
relationship between the price of a good and the quantity demanded by consumers. This principle
is fundamental to microeconomics and is depicted in a downward-sloping demand curve.

Key Assumptions of the Law of Demand

1. Ceteris Paribus: Other factors like income, tastes, and prices of related goods remain
constant.
2. Normal Goods: The law applies to normal goods, not inferior goods or Giffen goods.
3. No Change in Consumer Expectations: Consumers do not anticipate future changes in
price.

Exceptions to the Law of Demand

 Giffen Goods: These are inferior goods where an increase in price leads to higher
demand.
 Veblen Goods: Luxury goods that see increased demand as their price rises due to their
prestige value.

Price Elasticity of Demand (PED)

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a
change in its price. It is expressed as:
Types of Price Elasticity of Demand

1. Elastic Demand (PED > 1): Quantity demanded is highly responsive to price changes.
2. Inelastic Demand (PED < 1): Quantity demanded changes little with a price change.
3. Unitary Elastic Demand (PED = 1): Proportional change in quantity demanded to price.
4. Perfectly Elastic Demand (PED = ∞): Demand changes infinitely with any price
change.
5. Perfectly Inelastic Demand (PED = 0): Quantity demanded remains constant regardless
of price.

3. Total Expenditure Method

This method evaluates elasticity by observing the change in total expenditure (Price × Quantity):
  Elastic Demand: Total expenditure decreases when price increases.
 Inelastic Demand: Total expenditure increases when price increases.
 Unitary Elastic: Total expenditure remains constant with price change.

Factors Affecting Price Elasticity of Demand

1. Nature of the Good: Necessities tend to have inelastic demand, while luxuries have
elastic demand.
2. Availability of Substitutes: More substitutes lead to higher elasticity.
3. Proportion of Income Spent: Goods consuming a larger income share are more elastic.
4. Time Period: Demand is more elastic over a longer time period.

Conclusion

The law of demand establishes the fundamental relationship between price and quantity
demanded. The price elasticity of demand provides a quantitative measure of this relationship,
helping businesses and policymakers understand consumer behavior and make informed
decisions. These concepts are pivotal for setting prices, forecasting revenue, and assessing
market strategies.

Q.No.2: Explain the scope of economics.

Scope of Economics
Economics is a social science that studies how individuals, businesses, and societies allocate
scarce resources to meet their needs and desires. The scope of economics is vast and
encompasses various aspects of human activity, including production, consumption, distribution,
and exchange. It is broadly divided into two main branches: microeconomics and
macroeconomics, with several subfields that explore specific areas of economic activity.

Main Branches of Economics

1. Microeconomics
Microeconomics focuses on the behavior of individual economic agents, such as consumers,
producers, and firms. It examines how they make decisions regarding resource allocation and
price determination in specific markets. Key areas include:
 Demand and supply analysis.
 Pricing of goods and services.
 Market structures like monopoly, oligopoly, and perfect competition.
 Consumer behavior and utility maximization.
 Producer behavior and cost analysis.

2. Macroeconomics
Macroeconomics deals with the economy as a whole, studying aggregate variables and national-
level phenomena. Key areas include:
 National income and output.
 Unemployment and labor market dynamics.
 Inflation and price stability.
 Economic growth and development.
 Monetary and fiscal policy.

Subfields of Economics
1. Development Economics
Focuses on improving the economic well-being of developing countries by analyzing factors like
poverty, income inequality, and infrastructure development.
2. International Economics
Studies trade, globalization, exchange rates, and international financial systems.
3. Environmental Economics
Explores the economic impact of environmental policies, resource conservation, and sustainable
development.
4. Labor Economics
Examines employment, wages, labor market dynamics, and policies affecting workforce
productivity.
5. Public Economics
Analyzes government revenue, expenditure, taxation, and the impact of public policies on
economic welfare.

Nature of Economics
The nature of economics is dual, as it is both:
1. Positive Science: Describes and explains economic phenomena (what is).
2. Normative Science: Prescribes solutions and policy recommendations (what ought to
be).

Importance of Economics
1. Resource Allocation: Economics provides insights into the efficient use of limited
resources to maximize output.
2. Policy Formulation: Guides governments and policymakers in designing effective
monetary, fiscal, and trade policies.
3. Business Decision-Making: Helps businesses understand market trends, consumer
behavior, and competitive strategies.
4. Improvement of Living Standards: Aids in economic planning to address poverty,
unemployment, and inequality.
5. Global Trade: Enhances understanding of international trade relations and their impact
on national economies.

Conclusion
The scope of economics spans individual decision-making to global economic systems,
addressing fundamental issues like scarcity, production, distribution, and welfare. Its insights are
critical for tackling contemporary challenges such as climate change, inequality, and economic
instability. As a dynamic and evolving discipline, economics continues to influence every aspect
of human life.
Q.No.3: What is national income? Explain its measurement.

National Income

National Income refers to the total monetary value of all final goods and services produced
within a country during a specific period, typically a year. It represents the economic
performance of a nation and is a crucial indicator of its standard of living, resource utilization,
and economic growth.

Concepts of National Income

1. Gross Domestic Product (GDP): The total market value of all final goods and services
produced within a country’s borders in a specific time frame.
2. Gross National Product (GNP): GDP plus net income from abroad (e.g., income from
overseas investments minus payments to foreign investors).
3. Net National Product (NNP): GNP minus depreciation of capital assets.
4. National Income (NI): NNP minus indirect taxes; it represents the total income earned
by a country's citizens.
5. Personal Income (PI): Total income received by individuals, including wages, profits,
and rents.
6. Disposable Income (DI): Personal income after deducting taxes, available for
consumption and savings.

Importance of National Income

1. Economic Performance: Helps evaluate the economic progress of a nation.

2. Policy Formulation: Assists in designing monetary, fiscal, and trade policies.
3. Living Standards: Indicates the average income and standard of living of citizens.
4. Comparison: Allows comparison of economic performance between countries.
Challenges in Measuring National Income

1. Informal Economy: Exclusion of unreported transactions in the informal sector.

2. Non-Market Activities: Activities like household labor are not accounted for.
3. Price Fluctuations: Inflation or deflation can distort the measurement.
4. Data Reliability: Inaccurate or incomplete data can affect accuracy.
5. Environmental Costs: Depletion of natural resources and environmental degradation are
not factored in.

Conclusion

National income is a vital economic indicator that measures a country's economic health and
standard of living. Accurate measurement through methods like product, income, and
expenditure approaches helps policymakers formulate strategies to address economic challenges
and ensure sustainable growth.