Question

What is the importance of simplification when discussing the building of models?

What is the importance of positive versus normative statements in economic thinking?

What is the difference between the demand and quantity demanded?

What are the positive and negatives of a price ceiling?

Answer 1

Answer 1 : While developing a business model, in an economics it is graphical presentation of an economic variables by proper logical and quantity relationship. Simplication is an important tool of an economic model because as we know economics is deal with human being wheather it is micro, macro or world economy . So it is understandable by the common man who have basic knowledge of ecomonics. Business model should be used few parameters so that it does not create confusion. There are various reasons for which simplification has given utmost importance while preparing business models such as :

• Help to understand the model
• Easily applicable in the situation
• Proper variables should be used
• Fewer parameters has been used
• Result from the model has been easily available.

Answer 2 : Positive economic thinking has been based on the facts and objective behind it. There should be proper evidence related to the thinking. Positive economic thinking must be pass, reject or failed. It is entirely based on the fact and not in general view where as Normative economic thinking are objective and value based. They are not fail or reject. They are the statement which should show the obligation of doing something.

Example of Positive Economic Thinking is that if we decrease interest rate in the bank saving has been decreased.

Example of Normative Economic Thinking is that the government should spend more money on education of a country.

Answer 3 : Difference between Demand and Quantity demanded :

• Demand means willingness of the person to consume that items where as quantity demanded means that the units of goods particular person consumed at particular price.
• Demand means quantity that the person want to purchase where as quantity demanded means actual quantity purchased with a particular income at particular price.
• Demand changes due to increase or decrease in demand where as quantity demandedchanges due to expansion or contraction.
• Demand changes due to price of substitute or complementary , Tastes or preferences where as quantity demanded occured due to price of its own goods.
• Example : Price of Apple increases demand does not decrease where as quantity demand decreases.

Answer 4 : Price ceiling is price that imposed by the government on goods and services in order to maintian stability and welfare of an economy. If price ceiling is below the market price than the consumer can enjoy lower prices where as producer facing lower profit resulted in shortage.

Positive Price Ceiling :

• Help to prevent producer from charging higher prices
• During the period of high inflation cost of living is being affordable.
• Helps the consumer to maintian standard of living.

Negative Price ceiling :

• It causes shortage which result in black marketing of goods and services.
• Producers have lower the quality of goods and services.