Some Important and Logical Questions of Economics

1. Why does the market demand curve slope downward?

The market demand curve slopes downward because of the inverse or negative relationship between the demand curve and the price of the commodity. When the price increases then the quantity demanded decreases and when the price falls then the quantity demanded increases and vice versa.

In the above figure, the demand of the commodity is measured along the x-axis and the price of that commodity along the y-axis respectively. Initially, OQ quantity is demanded at the OP price level. When the price rises from OP to OP1 then the quantity demanded increases from OQ to OQ1. Likewise, when the price falls from OP to Op1 then the quantity demanded increases from OQ to OQ2 respectively. Here, DD is the downward sloping demand curve because of the inverse relationship between demand and price.

 

 

2. Why do products with close substitutes have relatively price elastic demand?

Products with close substitutes have relatively price elastic demand because consumers can switch to another relative product when the price rises too much. For example, Goldstar has a relatively high elasticity of demand because there are plenty of alternatives like Adidas, Nike, etc. for consumers to choose from.

In the above figure, the demand for coke is measured along the x-axis, and the price of the y-axis is measured along the y-axis respectively. DD¹ is the upward sloping demand curve. When the price increases from OP to OP₁ then the quantity demanded of coke decreases from OQ to OQ₁. Likewise, when the price increases from OP to OP₂ then the quantity demanded of coke increases from OQ to OQ₂ and vice-versa.

 

 

3. Why does a Market Supply Curve slope upward?

Supply is the quantities of the commodity supplied by the suppliers at the time period at the given price. The market supply curve slopes upward because of the positive relationship between market supply and price. When the price increases then the quantity demanded also increases and when the price decreases then the quantity supplied also decreases and vice-versa.

In the above table, quantity supplied is measured along the x-axis, and the price is measured along the y-axis respectively. Initially, OQ₁ quantity is supplied at the OP₁ price level. When the price falls from OP₁ to OP₂ then the quantity demanded also decreases from OQ₁ TO OQ₂. Similarly, when the price increases from OP₁ to OP₂ then the quantity supplied also increases from OQ₁ to OQ₃.

 

 

4. Differentiate between positive economic and normative economic.

The differences between positive economics and normative economics are below:

S.N.	Positive Economics	Normative Economics
1	It expresses what it is?	It expresses what ought to be?
2	It is based on facts and objectives	It is based on values and subjective.
3	It can be verified by evidence.	It is backed up by values, feelings and opinions.
4	It can be approved or disapproved.	Most of the time, it can be disapproved.
5	For example; Reducing the price of cigarettes has increased smoking among consumers of all age groups.	For example; the Prices of cigarettes should be increased to reduce smoking among all age groups.

 

 

5. In what ways does GDP reflect the state of the country? Explain?

Gross Domestic Product (GDP) is the monetary value of all final goods and services produced during a year in a country. It includes only the monetary value of all final goods and services produced in a domestic territory of a country.

It is calculated as;

GDP= C+I+G+X-M

Here, GDP= Gross Domestic Product

C= Consumption Expenditure

I= investment Expenditure

G= Government Expenditure

X= Exports

M= Imports

Some of the features of this market are given below;

• It is calculated in monetary terms.
• It includes only final goods and services.
• The intermediate goods are excluded to avoid double counting.
• It does not include capital gains and transfer payments.
• It includes only those goods which have market value and brought to the market for sale.

GDP is one of the important indicators that reflects the health of a nation. It provides information about economic performance to the policymakers and central banks in order to make economic policies like fiscal policy, monetary policy, interest rate, inflation, deflation, tax and spending plans, etc. It provides the necessary information to the investors about the state of the economy to increase their portfolios. A bad economy means lower earnings and lower stock prices which demotivates the investigators to invest because of the lower portfolios. Economists use GDP to find whether an economy is in peak or in recession.

GDP provides the necessary information on whether the economy is expanding by producing large quantities of goods and services or contracting by producing fewer quantities of output. A healthy economy reflects low unemployment, a balanced and stable price level, balanced Balance of payments. The overall performance of the economy is calculated by using GDP so it is essential for the nation.

 

 

6. Explain the relation between production, consumption, scarcity, and choice?

Production is the process of transferring factor inputs into outputs in order to make consumption. Consumption is the buying of goods and services. Consumption is related to what the consumers consume whereas production is what producers produce to earn profit. Production and consumption are interrelated to each other. Let’s take an example; If the consumer consumes good X, then the producer can increase the production of such goods for their higher earnings. Production of those goods which high consumption is smart action by the producers.

Scarcity is the excess of human wants due to limited resources. Human wants are unlimited but the resources to meet are limited, and this situation creates scarcity. Due to scarcity of resources, choice arises. The choice is the selection of the best alternative from the bunch of alternatives. Scarcity and choice are interrelated. For example; Kedar has $5000. He can do three things with that money. First, he can save his money in the bank and earn interest. Second, he can give this money to his friend and his friend will return after some years with no interest. Lastly, he can organize parties in his home. Here, the rational choice will be depositing money in the bank and earn interest because of his scarce resources.

 

 

7. Explain the cost of BOP and the exchange rate.

Balance of Payments:

Balance of payment is the measurement of all the economic transactions between native countries and the rest of the world in a particular time period. It is one of the indicators that shows the financial health of a country with international trade. Balance of payment includes the following two accounts;

Current Account:

The current account includes the monetary value of goods, services, and labor with the rest of the world. It tracks the difference between a country’s total export and import. The current account is balanced when export-import=0.

Export-Import<0, current account deficit

Export-import>0, current account surplus

Capital Account:

The capital account includes the monetary value of financial assets or investments.

Inflow>Outflow, capital account surplus

Inflow<Outflow, capital account deficit

The macroeconomic goal of an economy is to improve its international trade that is a balance of payment as close to 0.

 

Exchange Rate:

The prices at which two currencies are traded are called the exchange rates. The exchange rate between the currencies is determined by the interaction between the buyers and sellers of foreign currencies. When the domestic currency becomes less valuable than it depreciates and vice versa. The exchange rate fluctuates due to change in demand and supply of foreign currencies. For example; when Nepal imports noodles from India they need to pay an Indian rupee. To buy the Indian rupee, they must sell Nepalese currency in the foreign exchange market.