BAHRIA UNIVERSITY

Management Sciences Department

Assignment No-2

Subject: Microeconomics Teacher: M. Kashif

Instruction: Draw the graph where necessary ENROLLMENT: 02-111241-229
STUDENT NAME: MAHAM SHAHZAD SECTION: BBA 1-C

1. Give as many reasons as you can why we believe that economists assume that the
more-is-better property holds and describe how these explanations relate to the results
in the Application “You Can’t Have Too Much Money.”
2. Define cardinal and ordinal utility.
3. Define public goods, private goods, externalities with types and pareto optimality
conditions.
4. Define Production Possibilities Curve (PPC) and how it changes (discuss the factors).
5. Describe the trade specialization. Differentiate between absolute and comparative
advantages.
Answers:

1. This assumption is made for the following reasons:

 The word economic is closely associated with scare which means that
resources in the world are limited. May it be food, clothing, products etc; all
resources are finite. Utility is the total satisfaction received by a person after
consuming a good. As humans, it is in our nature that our desires and wants are
unlimited and cannot ever be satisfied. They keep growing and modifying with
us. Therefore, it is self-explanatory that our nature makes us prefer to have
more goods rather than less.
 Whenever customers are given a choice, they pick more goods over less even if
they don’t necessarily need them. If the trade off and monetary investment is
the same, consumers prefer more quantity even if it’s not their initial need. This
makes economists believe that “more-is-better” approach is applied by people
in their daily lives.
 Economists are fond of models that are easy to work with and understand.
Assuming "more is better" let’s them focus on how much we consume, and
ignore the negative implications of over-consumerism.

This all relates with “You can’t have too much money” because it implicates that our
desires are never ending and unappeasable, we always want more options. In this
consumerist competitive world, everyone wants what others have and comparing
yourself leads to wanting more goods or services. These wants are met typically by
money which is why economists believe that a person cannot have too much money;
consumer utility is practically unreachable.

However, there are exceptions to this. Some people’s wants really do get satisfied with
enough amount of goods and their satisfaction is reached, or it is impossible to acquire
more goods due to over satisfaction being reached. For example, one extra slice of
pizza may not be ideal even if you were hungry for the entire day. There is a limiting
point to our wants, depending on the situation.
2.

 Cardinal Utility: In this scenario, economists assume that our satisfaction and
happiness can be measured in units. One thing may give more utility units
(utils) than the other. This makes our trade off decisions easier based on what
amount of utility we receive from a product in return of money or time.
However, it’s difficult to quantify our “happiness” associated with a certain
thing.
 Ordinal Utility: This states that we cannot measure utility or give specific
figures to measure happiness, but we can identify our preferences over the
others. Our likings can be ranked from most wanted to least wanted. This
method is more realistic but harder to apply due to no fixed values.

3.

 Public goods: They are goods that you cannot be excluded from even if you
didn’t pay for it and your consumption of these goods does not affect the
availability of these goods for other people. For example, you cannot be
excluded from a public park, nor will your presence there affect anyone else’s
experience.
 Private goods: You can be denied of these goods if you didn’t pay for them
and your consumption of these goods reduces their availability for other
people. For example, movie tickets are private goods. If you don’t purchase the
ticket, you can be excluded and if you do buy it, there is one less seat for
anyone else in the theatre.
 Externalities: This means that the consumption of a good affects a third party.
Basically the ripple effect of an action. There are two types of externalities:
a) Positive: These are positive effects of externalities for example someone
wearing a mask protects others from contracting diseases. So it means that
positive externalities have good impact on others.
b) Negative: These are negative effects of externalities for example if a factory is
dumping toxic waste in rivers, it will have adverse effects on people living
nearby. So, actions of one party affects a third party.
c) Pareto optimality: It is a theoretical sense of efficiency in which ideally
everyone gets to have what they want without making anyone better off or
worse off. There are a many ways to express Pareto optimality conditions, but a
common one involves comparing the marginal rate of substitution (MRS) of
two goods between two consumers and the marginal rate of transformation
(MRT) between those goods. Essentially, it ensures everyone is getting the
most value out of the offers available, given their individual preferences.

4. The production possibility curve graphically determines how much quantity of a

good can be produced in relation to another good according to different factors that
have a consideration in their production. It shows the maximum quantity of good
that can be produced within the fixed boundaries of the input resources
(considering that all resources are being maximally utilized) and also movement
along the curve for different conditions of production. Some of these conditions
have changes in factors that include:

 Increase in resources: If new resources are acquired, it will definitely

increase the production of the good which is depending on those resources.
The curve would shift outwards.
 Instability and threats: Unexpected situations like natural disasters or
country’s political instability or change in rules and regulations affect the
production of the good. The curve shifts inwards because of difficulty in
production amidst these conditions.
 Technology advancements: Developments in technology cause increased
efficiency and speed in processes. If a human can complete a task in 30
minutes and the same task can be recreated by a machine in 5 minutes, it
will decrease the time needed to produce the good and therefore more
production will happen, causing the curve to shift outwards.
 The PPC is a powerful tool for understanding economic concepts like scarcity,
opportunity cost (the sacrifice of one good to produce more of another), and
economic growth.

5. Trade specialization is the concept where countries or individuals concentrate on

producing goods and services they're fairly better at and also trade them for goods that
they are less effective at producing. This allows for a more effective allocation of
funds and eventually leads to an advanced overall product and consumption for
everyone involved. For example, Pakistan produces textile goods and exports them in
order to earn resources to support imports of electronic items that are less effectively
produced in their own country.

These terms distinguish why a country or individual might specialize in a particular

good:

Absolute Advantage: A country has an absolute advantage in producing a good if it

can produce it with fewer resources (labor, land, capital) than any other country.

Comparative Advantage: A country has a comparative advantage in producing a

good if the opportunity cost of producing that good is lower than the opportunity cost
of producing another good, compared to another country.