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ECS1601 ASSIGNMENT 3 OF 2024 SEMESTER 2 EXPECTED QUESTIONS AND ANSWERS
ECS1601 ASSIGNMENT 3 OF 2024 SEMESTER 2 EXPECTED QUESTIONS AND ANSWERS
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ECS1601 ASSIGNMENT 3OF 2024 SEMESTER 2
EXPECTED QUESTIONS
AND ANSWERS
Question 1: Explain the law of supply and demand. How do shifts in supply
and demand affect equilibrium price and quantity?
Answer: The law of supply states that, all else being equal, as the price of a good or service
increases, the quantity supplied will increase. Conversely, the law of demand states that as the
price of a good or service increases, the quantity demanded will decrease.
Shifts in Supply and Demand:
● Demand Shift: If demand increases (shifts to the right), the equilibrium price and
quantity both rise. If demand decreases (shifts to the left), both equilibrium price and
quantity decrease.
● Supply Shift: If supply increases (shifts to the right), the equilibrium price falls, and the
quantity rises. If supply decreases (shifts to the left), the equilibrium price rises, and the
quantity decreases.
Question 2: Discuss the concept of price elasticity of demand. How is it
calculated, and what does it indicate about consumer behavior?
Answer: Price elasticity of demand (PED) measures the responsiveness of quantity demanded
to a change in price. It is calculated as:
PED=%change in quantity demanded%change in price\text{PED} = \frac{\%\text{change in
quantity demanded}}{\%\text{change in price}}PED=%change in price%change in quantity
demanded
If PED > 1, demand is elastic (consumers are sensitive to price changes). If PED < 1, demand
is inelastic (consumers are less sensitive to price changes). If PED = 1, demand is unitary
elastic.
, Question 3: What are the key differences between perfect competition and
monopoly?
Answer:
● Perfect Competition:
○ Many buyers and sellers.
○ Homogeneous products.
○ No barriers to entry or exit.
○ Price takers (firms accept the market price).
● Monopoly:
○ Single seller.
○ Unique product with no close substitutes.
○ High barriers to entry.
○ Price makers (the monopolist can set the price).
Question 4: Define Gross Domestic Product (GDP). What are its
components?
Answer: Gross Domestic Product (GDP) is the total market value of all final goods and services
produced within a country in a given period. The components of GDP are:
GDP=C+I+G+(X−M)\text{GDP} = C + I + G + (X - M)GDP=C+I+G+(X−M)
Where:
● C = Consumption
● I = Investment
● G = Government Spending
● X = Exports
● M = Imports
Question 5: How does inflation impact an economy? What are some
methods used by governments to control inflation?
Answer: Inflation reduces the purchasing power of money, leading to higher prices for goods
and services. It can erode consumer savings and distort economic decision-making.
Methods to control inflation include:
● Monetary policy: Central banks can increase interest rates to reduce money supply.
● Fiscal policy: Governments can reduce spending or increase taxes to reduce demand.
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