Question

2. Write short notes on any three of the following:

i) Opportunity Cost

ii) Marginal Analysis

iii) Change in Demand

iv) Economies of Scale

v) Scarcity

3. To what extent do externalities cause inefficiencies in the production and consumption of goods and services?

Answer 1

Answer 2 :-

(1).Opportunity Cost:-

The Opportunity Cost is when in making a decision the value of the best alternative is lost.

For example : Choosing electricity over gas, the opportunity cost is what you've lost from not picking gas. Firms take decision about what economic activity they want to be involved in.

Governments also have to make this important choice like deciding to devote more resources to the NHS would mean that those resources weren't spent in other sectors like defense. Economic analysis helps explain how choices are made and how they could be improved.

(2).Marginal Analysis :

Marginal Analysis is the Study of a firms pricing and output decisions using extra revenue and extra cost.

Marginal Cost : The addition to total costs of an extra unit of output.

Marginal cost pricing : When government regulates firms to where P=MC/S=AR/D.

Marginal revenue: The additional earnings made by a firm by selling an extra unit of output.

(3).Change in Demand :-

The Change in quantity demanded refers to the change in the amount of a commodity as a result of change in the price of it.Amount demanded rises or falls according to the fall or rise in price.

The demand function or the demand curve never changes. The change takes place in the same demand curve. The existing demand curve contains the changes in the different price-quantity combination. In case of change in quantity demanded movement takes place along the existing demand curve.

(4).Economies of Scale:

There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as diseconomies of scale.

Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of:

• purchasing economies - when large businesses often receive a discount because they are buying in bulk
• marketing economies - from spreading the fixed cost of promotion over a larger level of output
• administrative economies - from spreading the fixed cost of management staff and IT systems over a larger level of output
• research and development economies - from spreading the fixed costs of developing new or improved products over a larger level of output

(5). Scarcity :

Scarcity is the fundamental economic dilemma. Scarcity is the condition that exists in society where there are not enough resources to satisfy people's wants/needs.

There is a greater want than resources can provide which leads resources to become scarce.

needs: water, food, shelter, clothing, medical modern additions- transportation, education

Unlimited wants : Buying a house leads to new wants (paint, rugs etc.) and needs like repairs (broken toilet) and maintenance (cutting grass, cleaning etc.)

Answer 3 :-

Externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service (a side-effect).

Negative externality:

Negative externalities might result from consumption. Pollution is an example of a negative externality in production (Example: cigarette smoke).

The social cost > the private cost

When there is a negative externality in producing or consuming a good/service, too much of the good or service will be produced at market equilibrium.

Positive externality:

The private benefit < the social benefit (Example: college education).

When there is a positive externality in producing or consuming a good/service, too little of the good or service will be produced at market equilibrium.

If there are negative or positive externalities then the market equilibrium will not result in the efficient quantity being produced. Overproduction with negative externalities/ underproduction with positive externalities, There will be deadweight loss