ECS2601 ASSIGNMENT 1 2026
DUE 11 AUGUST 2026
Question 1
1.1 In your own words, explain the idea of trade-offs in microeconomics. (2)
In microeconomics, trade-offs refer to the choices that consumers, workers, and firms
must make because resources are limited or scarce. Consumers have limited incomes
and must decide how to allocate their money across different goods and services -
buying more of one good means buying less of another. Workers face trade-offs
between working now (earning income) versus pursuing further education (hoping for
higher future income), and between labour and leisure time. Firms face trade-offs in
deciding what products to produce, how much to produce, and which combination of
inputs (labour, capital, raw materials) to use. These trade-offs require decision-makers
to weigh costs and benefits to make optimal choices given their constraints.
(Pindyck & Rubinfeld, Chapter 1, p. 26-27)
,1.2 Differentiate between any two of the following concepts: (4)
I choose (c) Positive versus normative analysis and (d) Real versus nominal
prices.
(c) Positive versus Normative Analysis
Positive Analysis Normative Analysis
Deals with what is - explanation and Deals with what ought to be -
prediction of economic phenomena involves value judgments
Describes relationships of cause and effect Evaluates policies and outcomes
based on what is desirable
Can be tested against facts and data Cannot be empirically tested -
depends on opinions and values
Example: "If the government increases the Example: "The government should
gasoline tax, consumption will decrease by increase the gasoline tax to reduce
10%" pollution"
Positive analysis is central to microeconomics as it helps explain and predict behaviour,
while normative analysis is important for policy decisions but involves subjective value
judgments about equity and fairness.
(Pindyck & Rubinfeld, Chapter 1, p. 28-29; Study Unit 1)
, (d) Real versus Nominal Prices
Nominal Price Real Price
The absolute price of a good in The price of a good adjusted for inflation -
current dollars (unadjusted for relative to an aggregate measure of prices
inflation)
Also called "current-dollar" price Also called "constant-dollar" price
Example: The price of a textbook was Example: The 2020 price in 2000 dollars
$50 in 2000 and $100 in 2020 might be $60 (after adjusting for inflation)
Can be misleading when comparing Allows meaningful comparisons over time
prices across different time periods by removing the effect of inflation
To calculate real prices, we use a price index such as the Consumer Price Index
(CPI). The real price is calculated as: Real Price = (CPI_base / CPI_current) ×
Nominal Price. For example, if the CPI was 100 in 2000 and 200 in 2020, a $100
nominal price in 2020 would be $50 in 2000 dollars.
(Pindyck & Rubinfeld, Chapter 1, p. 34-35; Study Unit 1)
DUE 11 AUGUST 2026
Question 1
1.1 In your own words, explain the idea of trade-offs in microeconomics. (2)
In microeconomics, trade-offs refer to the choices that consumers, workers, and firms
must make because resources are limited or scarce. Consumers have limited incomes
and must decide how to allocate their money across different goods and services -
buying more of one good means buying less of another. Workers face trade-offs
between working now (earning income) versus pursuing further education (hoping for
higher future income), and between labour and leisure time. Firms face trade-offs in
deciding what products to produce, how much to produce, and which combination of
inputs (labour, capital, raw materials) to use. These trade-offs require decision-makers
to weigh costs and benefits to make optimal choices given their constraints.
(Pindyck & Rubinfeld, Chapter 1, p. 26-27)
,1.2 Differentiate between any two of the following concepts: (4)
I choose (c) Positive versus normative analysis and (d) Real versus nominal
prices.
(c) Positive versus Normative Analysis
Positive Analysis Normative Analysis
Deals with what is - explanation and Deals with what ought to be -
prediction of economic phenomena involves value judgments
Describes relationships of cause and effect Evaluates policies and outcomes
based on what is desirable
Can be tested against facts and data Cannot be empirically tested -
depends on opinions and values
Example: "If the government increases the Example: "The government should
gasoline tax, consumption will decrease by increase the gasoline tax to reduce
10%" pollution"
Positive analysis is central to microeconomics as it helps explain and predict behaviour,
while normative analysis is important for policy decisions but involves subjective value
judgments about equity and fairness.
(Pindyck & Rubinfeld, Chapter 1, p. 28-29; Study Unit 1)
, (d) Real versus Nominal Prices
Nominal Price Real Price
The absolute price of a good in The price of a good adjusted for inflation -
current dollars (unadjusted for relative to an aggregate measure of prices
inflation)
Also called "current-dollar" price Also called "constant-dollar" price
Example: The price of a textbook was Example: The 2020 price in 2000 dollars
$50 in 2000 and $100 in 2020 might be $60 (after adjusting for inflation)
Can be misleading when comparing Allows meaningful comparisons over time
prices across different time periods by removing the effect of inflation
To calculate real prices, we use a price index such as the Consumer Price Index
(CPI). The real price is calculated as: Real Price = (CPI_base / CPI_current) ×
Nominal Price. For example, if the CPI was 100 in 2000 and 200 in 2020, a $100
nominal price in 2020 would be $50 in 2000 dollars.
(Pindyck & Rubinfeld, Chapter 1, p. 34-35; Study Unit 1)
