Group Assignment

COURSE NAME
Managerial Economics (BUS- 525)
SEC-05
INSTRUCTOR
Dr. Md.Main Uddin
MBA Program, summer 2016
School of Business & Economics
SUBMITTED BY

Name

ID

Md.Rakibul Islam Rakib

1521418660

Rabeya Akter

1521656060

Imtiaz Faisal

1530314060

DATE OF SUBMISSION
25/07/2016

DECLARATION STATEMENT

We hereby declare that the Group Assignment for Managerial Economics (BUS-525) is submitted in the
partial fulfillment of the requirement for the Masters of Business Administration. This report is a bona
fide team work carried out by us. No part of this report has been submitted for the award or any other
diploma/degree/fellowship or any other similar title or prize. Hence, it cannot be referred to for official or
legal purposes.

Regards By,
Name

Id

Md.Rakibul Islam Rakib

1521418660

Rabeya Akter

1521656060

Imtiaz Faisal

1530314060

Signature

ACKNOWLEDGEMENT
Completion of any project report is the milestone in the life of every management student and the success
of live project then enhances the self-confidence of the student. A successful and satisfactorily completion
of any task is the outcome of the invaluable aggregate contribution of the different personal effort in all
the direction, explicitly or implicitly.
The key to the acknowledgement of such a different task lies in the hands of the professor. Words are
poor gratitude bearer but I give him this opportunity to offer my sincere thanks to my professors Dr.
Md.Main Uddin, PHD for his benevolent and expertise guidance without which this research would not
have seen the life of today.
We also wish to thank everyone who helped us directly or indirectly in the preparation of this Case Study

Date: 25th July, 2016

Contents
How is economics a science? ...................................................................................................................... 4
Why do economists make assumptions? ................................................................................................... 4
Should an economic model describe the reality exactly? ........................................................................ 5
Name a way that your family interacts in the factor market and a way that it interacts in the
product market............................................................................................................................................ 5
Name one economic interaction that isnt covered by the simplified circular-flow diagram. ............. 6
Draw and explain a production possibilities frontier for an economy that produces milk and
cookies. What happens to this frontier if disease kills half of the economy's cows? ............................. 6
Use a production possibilities frontier to describe the idea of "efficiency." .......................................... 7
What are some topics that are addressed in macroeconomics? .............................................................. 7
What is the difference between a positive and a normative statement? Give an example of each. ..... 8
Why do economists sometimes offer conflicting advice to policymakers? ............................................. 8
Differences in Scientific Judgment: ....................................................................................................... 8
Differences in Values: ......................................................................................................................... 8
Perception versus Reality: .................................................................................................................. 8

How is economics a science?

To know the answer of this question at first we have to understand the fact about science. The
scientists collect data about a particular matter and draw hypothesis for a particular matter. After
testing the hypothesis they prove their theories. Similarly, economists also try to observe much
socio economic behavior and based on those behaviors they try to develop theories and verify the
theories. Moreover, scientists study different subject matters through observation and theory.
They try to prove their ideas in a systematic manner. Like the scientists the economists also try to
find out the relationship between many social factors and test viability of those relationships.
Scientists often try to prove their ideas though experiments. But in this case the economists face
difficulty because in some cases running experiments is difficult and sometime impossible.
Scientists can run several experiments several times but economists cannot. They only can
observe various occurrences into the society and define the situation accordingly. Finally,
scientists develop a particular theory which may be true for every similar situation and
economists also try to develop theory that is true for others. For example, if an economists
develop a theory for a particular country to show the reason behind the inflation than it may be
true for other countries.
From the above description we can understand that economics is like science because it use the
scientific method. But it also concerns about the society so we can also say that it is a part of
social science.

Why do economists make assumptions?

The world is a complex place. Many things occur into the society that may be difficult to
understand. There are many economic problem in a country that may be difficult to understand if
the problems thoughts as a whole. For this reason economists make assumption to simplify
problems without substantially affecting the answers. This may make the problem easier to
understand. For example, there are many countries in the world that do international trade and
produce numerous products. If we consider every country to develop a solution to a problem, it
may be difficult to understand the situation. If we assume that there are only two countries and
only produce two goods, it will be easier for us to understand the problem. If we understand this
simplified assumption than it will be easy for us to understand problem in the real world.

Should an economic model describe the reality exactly?

Economists use many different models to understand the world. These models do not describe all
the features and the factors that may exist in the economy. Moreover, different countries have
different features that may be difficult to include in a common model. So the economic models
actually simplify the situation and help to develop a basic understanding. It actually describes
some important common aspects within the society by excluding some other features. So, we
must say that economic model cannot describe reality exactly because it would be complicated to
understand. A model is simplification that allows the economist to see what is truly important.

Name a way that your family interacts in the factor market and a way
that it interacts in the product market.
We can show the interaction through the circular flow diagram that is given below:
Revenue

Goods and
Services Sold

Markets for
Goods and
Services

Firms sell

Households
buy

Spending

Goods and
Services
Bought

Firms
Produce and
sales goods and
services
Hire and use
factors of
production

Factors of
Production

Households
Buy and
consume goods
and services
Own and sell
factors of
production

Land, Labor
and Capital

Markets for
Factors of
Production

Households
sell

Firms buy

Wages Rent and profit

Income

Figure 1

In the circular flow model, we see how business and households are connected to one another. In
this model we can see that households buy goods and services from the firms in exchange of
money. In the factor market the firms buy labor from the households in exchange of money. This
flow continues perpetually.
Our families interact with the product market through every time anyone buys anything from a
firm. When we go to a store and buy products for our family, we are participating in the product
market. If we pay money and the firm allows us to have the products that we want.
Our families interact with firms in the market for factors of production every time a person from
the family does paid work for a firm. When the person goes to the workplace, he or, she is
providing the firms with his or, her labor, which is a factor of production. In returns the company
pays money. Now our family members may use the money to buy things and the circle will
continue.

Name one economic interaction that isnt covered by the simplified

circular-flow diagram.
Circular flow diagram that discussed earlier is a simplified form. A more complex and realistic
model would include government and international trade.

Quality of Milk Produced

Draw and explain a production possibilities frontier for an economy that

produces milk and cookies. What happens to this frontier if disease kills
half of the economy's cows?
PPF1

Figure 2
PPF2

Quality of Cookies Produced

In figure 2 the production possibilities frontier for milk and cookies (PPF1). If disease kills half
of an economies cow population, less milk will be produced, so the PPF will shifts inward
(PPF2). If the economy produces all cookies, it does not need any cows and production is
unaffected. But if the economy produces milk, then there will be less production of milk after the
disease hits.

Use a production possibilities frontier to describe the idea of

"efficiency."

Quality of Good Y Produced

A diagram is given below to explain the word efficiency in terms of production possibility
frontier.

A
B

Production Possibility Frontier

Quality of Good X Produced

Figure 3

The meaning of efficiency is that the economy is getting all it can produce from the scarce
resources available. In terms of production possibility frontier, an efficient point is a point on the
frontier, such as point A in figure 3. When the economy is using its resources efficiently, it
cannot increase the production of one good without the reduction of the production of the other.
A point inside the frontier, such as B is inefficient since more of one good could be produced
without reducing the production of other good.

What are some topics that are addressed in macroeconomics?

Macroeconomics is a branch of economics that studies how the aggregate economy behaves.
Different topics that are addressed in macroeconomics is rent control, foreign competition,

borrowing by the government, inflation, price level, rate of growth, national income, gross
domestic product, changes in unemployment and so on.

What is the difference between a positive and a normative statement?

Give an example of each.
Positive statements are descriptive and make a claim about how the world is, while normative
statements are perspective and make a claim about how the world ought to be.
Example,
Positive Statement: A negative growth rate of money is the cause of inflation.
Normative Statement: The government should keep the growth rate of the money low.

Why do economists sometimes offer conflicting advice to policymakers?

Economists sometimes offer conflicting advice to policy makers for two reasons:
a. Economists may disagree about the validity of alternative positive theories about how the
world works; and
b. Economists may have different values and, therefore, different normative views about
what public policy should try to accomplish.
The description of each of these reasons is given below:

Differences in Scientific Judgment:

There are many different alternative theories exist in the economics. Different economists follow
different theories. For this reason they may have different opinion about an particular economic
outcome.
Differences in Values:

Different economists may give conflicting advice because their value may differ based onto their
background.
Perception versus Reality:

Sometime perceptions are way too different than the reality. If we talk about the rent control,
tariffs and import quotas of a country, we can see that there are many people who oppose to
8

these propositions. If a government decides to set price ceiling on the house rent, the landlord
will be demotivated to improve their housing quality. In the long run it will create an negative
impact on the society. So, the government may ignore take such policy.
If the government impose high tariff rate and trade quota it may restrict trade among nations. But
free trade also can be problematic. So, the government must set barrier to some particular
product that may causing problem for the local products. Again, here economists may provide
conflicting policy for this proposition.