Introduction to Economics Exercise 1

INTRODUCTION TO political economy Exercise 1 1. What determines that a resource be scarce? Why is scarcity important in defining Economics as a science Resources atomic number 18 seen as being scarce, when the wants exceed the resources. The key problem of economics relates to the choices made in the face of limited resources and unlimited wants. 2. Read your local composition and economic magazines. Explain the difference between Microeconomics and Macroeconomics. From your research, give three examples of microeconomic and macroeconomic issues.Microeconomics relates to the study of households and firms and the interaction between these different economic actors. Macroeconomics, however, relates to the study of the economy as a whole, and in particular problems pertaining to growth, unemployment and inflation. Examples of microeconomic issues 1. charge ceilings/floors 2. positive/negative externalities 3. elasticity Examples of macroeconomic issues 1. inflation 2. unemployment 3 . economic growth (GDP) 3. Regarding the concept of hazard Cost, comment how your opportunity impairment of going to the movies may be repaired when a.You have a final exam exam the spare-time activity day b. The University impart be shut down for a month first today c. The same movie will be shown on TV tomorrow a) increase b) settle c) increase 4. Explain if the following statements are true or false, Explain your reply d. The opportunity speak to of choosing a certain activity is sufficient to the sum of all the benefits of all the alternatives not chosen. e. Opportunity cost is a subjective measure a) False the opportunity cost of choosing a certain activity is equal to the cost of the next best alternative forgone. ) True opportunity cost relates to the individual, in that they must pick how to maximize their own utility/happiness, and opportunity cost can vary from individual to individual. 5. Under what conditions is it possible to expand the Production Possibil ity Frontier (If it is not possible, explain your reply) The PPF can expand during periods of technological creation or the discovery of new resources. Or through the process of trade. 6. a) England 2/6 = 1/3, regular army 1/5 b) Wheat = England, Clothes = England c) England = Wheat, regular army = Clothes ) England should produce wheat and USA clothes. utilise the following table Hours of work needed to produce one unit England USA Wheat 2 1 Clothes 6 5 a. What is the opportunity cost of producing wheat in England and in the USA b. Which country has an absolute reward in the production of wheat, and of clothes c. Which country has a comparative advantage in producing wheat and producing clothes d. Which country should specialize in the production of wheat? And of clothes? a. represent b. interpret c. GRAPHThe Price is to a higher place grocery store residue If the toll exceeds the equilibrium damage, a surplus occurs and on that point will be competition among the sellers and price will come down to the equilibrium point. This way the equilibrium is tried to maintain in each of the cases. d. GRAPH Price is below the market equilibrium If the price is below the equilibrium a shortage occurs and on that point will be a competition among the buyers and the price will rise to the equilibrium level. This is also another way to restore the equilibrium though there are changes that are occurring in the market in the prices. . The inferior levelheaded exact will slump when consumer income rises. These goods are affordable and adequately fulfill their purpose, but as much costly substitutes that offer more pleasure become available, the use of the inferior goods diminishes. f. Acomplementary goodis agoodwith a negativecross elasticity of demand. This means the demand for a good will decrease when the price of the complementary good is increased. g. If there is a rumor that price for this good will increase, demand will credibly increase too. Cons umers want to purchase the product before any increase.All the market will be affect we will see an increase of demand for main and complementary goods. Shortage will probably appear and price will increase to search equilibrium. Rumor will be reality. 7. Using the following demand and supply table Price Demand Supply 1. 25 8 28 1. 00 14 24 0. 75 20 20 0. 50 26 16 0. 25 32 12 a. Graph the demand curve and the supply curve b. Identify the equilibrium price and equilibrium measuring c. seize on a price of 1. 00, Identify if there is shortage or surplus in the market and how the market forces behave to reinstate the equilibrium d.Now assume the price is 0. 50 and repeat the question above e. Now assume this is the market behavior for an inferior good, what would happen if the consumers income would increase from $ 25 to $ 32 a week f. Assume this markets complementary good? s price increases, what would happen in this market g. Assume there is a rumor that the price for this good wil l increases in the following days. How do expectations affect this market? What will be the final outcome? For all the questions above you must support your dish with a graph. 8.Price elasticity of demand (0,1)/(-0,2) = -1,5 The demand is elastic and sensitive to price changes. 9. Price elasticity of demand ((0,38-0,5)/0,5) = -0,24 -24% ((26000-10000)/10000) = 1,6 160% (-0,24)/(1,6) = -0,15 The demand is elastic and sensitive to price changes. 10. a. Vodka extravagance good or superior good, make a vodka more expensive can increase its perceived value as a luxury good to such an extent that sales can go up, rather than down. b. Table Salt indispensableness good, necessity goods are usually produced by apublic utility.We cant live without and wont samely cut dressing on even when times are tough c. Furniture normal good, this does not necessarily match to the quality of the good, but an abnormal good would clearly not be in demand, except for perhaps lower socioeconomic gro ups. d. Perfume luxury good or superior good, making a sweetness more expensive can increase its perceived value as a luxury good to such an extent that sales can go up, rather than down. e. Beet inferior good, we can switch beet by others foodstuffs more expensive, better quality or that give more pleasure like a meat. f.Sugar necessity good, necessity goods are usually produced by apublic utility. We cant live without and wont apparent cut back on even when times are tough. 11. Decision making is based on costs and benefits. That means you make purchases if the borderline benefits are greater than the price. Thus, when you decide to make a purchase, you are likely receiving something worth more to you than what you had to spend to buy it, or else you wouldnt have bought it. That net benefit, deduction the equilibrium price, is consumer surplus. 12. GRAPH b. With a price of 4$, Bert buys 2 bottles.His CS for 2 bottles (7-4) + (5-4) = 3 + 1 = 4$ c. With a price of 2$, Bert buys 3 bottles. His CS for 3 bottles (7-2) + (5-2) + (3-2) = 9$ 13. GRAPH A price ceiling occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium. When a price ceiling is set, a shortage occurs. A price floor is the lowest legal price a commodity can be interchange at. Price floors are used by the government to prevent prices from being too low.For a price floor to be effective, it must be set above the equilibrium price. 14. a. 4P 80 = 100 2P 6P = one hundred eighty P = 30$ Q = 40 The equilibrium price is 30$ and the equilibrium quantity is 40 bushels b. GRAPH c. (0. 5) x (20) x (40) = four hundred $ Consumer surplus (0. 5) x (10) x (40) = 200 $ Producer surplus 400 + 200 = 600 $ Surplus Equilibrium 15. f. The difference between marginal utility and tally utility The marginal utility of a good or service is the gain or loss from an increase or decrease in the consumption of that good or service.All goods and services have their own marginal utility. The total utility is the sum of all marginal utilities for a good or service. Total utility is the heart and soul sum of satisfaction or benefit that an individual gains from consuming a given amount of goods or services. The more the person consumes, the larger his or her total utility will be. g. The principle of diminishing marginal utility Diminishing marginal utility is to use or consume a good or service with the most important or efficient utility for us.