Chapter 1: Page 20; Questions – 4, 7, 9, 10, 11 4) What are the key elements of the scientific method and how does this method relate to economic principles and laws? The key elements of the scientific method are the observation of real world behavior and outcomes. Based on those observations, formulating a possible explanation of cause and effect which is a hypothesis. Next, testing this explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis. Then, accepting, rejecting, and modifying the hypothesis, based on these comparisons.
Finally, continuing to test the hypothesis against the facts. If favorable results accumulate, the hypothesis evolves into a theory. A very will tested and widely accepted theory is referred to as an economic law or an economic principle. An economic principle is a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions. 7) What are economic resources? What categories of economists use to classify them? Why are resources also called factors of production? Why are they called inputs?
Economic resources are natural, human, and manufactured resources that go into production of goods and services. Economists classify economic resources into four general categories land, labor, capital, and entrepreneurial ability. Resources are called factors of production because land, labor, capital, and entrepreneurial ability are combined to produce goods and services. Another name for factors of production is inputs 9) Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are these curves used to determine the optimal allocation of resources to a particular product?
If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product? Explain. Any economic activity should be expanded as long as marginal benefit exceeds marginal cost and should be reduced if marginal cost exceeds marginal benefit. The optimal amount of the activity occurs when marginal benefit is equal to marginal cost. Achieving the optimal output requires the expansion of a goods output until its marginal benefit and marginal cost are equal. No resources beyond that point should be allocated to the product. 0) Explain how (if at all) each of the following events affects the location of a country`s production possibilities curve: a. The quality of education increases This event affects the location of a country’s production possibilities curve because this is a good for the future. This good allows the economy to flow toward a greater cause. This will improve the quality of human resources. b. The number of unemployed workers increases. This affects the location of a country’s production possibilities curve on a macro level. The total number of workers unemployed will bankrupt the economy unless they are able to find other jobs. . A new technique improves the efficiency of extracting copper from ore. This and new and improved technologies contributes to economic growth. d. A devastating earthquake destroys numerous production facilities. This will strain the economy because every resource is exhausted and production possibilities curve will decrease. 11) Suppose that, on the basis of a nation`s production possibilities curve, an economy must sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the robot from another country in exchange for 9000 pizzas.
Relate this information to the following statement: “Through international specialization and trade, a nation can reduce its opportunity cost of obtaining goods and thus ‘move outside its production possibilities curve. ” This information and the statement are related because they are both related to opportunity cost and are no longer to production possibilities curve. Chapter 2: Page 44; Questions – 1, 4, 7, 11, 12 1) Contrast how a market system and a command economy try to cope with economic scarcity. In a command economy, government owns most property resources and economic decision making occurs through a central economic plan.
In a market systems participants act in there own self interest. 4) What are the advantages of using capital in the production process? What is meant by the term “division of labor”? What are the advantages specialization in the use of human resources and material expenses? Explain why exchange is the necessary consequence of specialization. The monetary rewards for new production techniques accrue directly to the innovator. The market system therefore encourages extensive use and rapid development of complex capital goods. Human specialization is called the division of labor hich contributes to a society’s output in several ways. Specialization makes use of differences in ability. Specialization enables individuals to take advantage of existing differences in their abilities and skills. Specialization fosters learning by doing. Even if the abilities of two people are identical, specialization may still be advantageous. Specialization saves time. By devoting time to a single task, a person avoids the loss of time incurred in shifting from one job to another. 7)Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. uppose also that each of the three techniques shown in the table to the right will produce the desired output. a. With the resources prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end? Technique 2, because they would come out cheaper. In combinations and ways that minimize the cost per unit of output, otherwise inefficiency drives up costs and lowers profit. The lowest possible cost is the most efficient.
It will entail profit. The profit will be $1. 00 by using the one that cost $34 instead of the two that cost $35. The industry will expand; it will stop if there is a change in technology or resource prices. b. Assume now that a new technique, technique 4, is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer. Yes, the firm will adopt the new technique because it is cheaper. c. Suppose that an increase in the labor supply causes the price of labor to fall to $1. 0 per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain. Technique 1 will now be the one the producer will choose because it is now the cheapest. d. “The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible. ” Evaluate this statement. Does your answer to part c, above, bear out this contention? Explain.
Yes, because economic efficiency requires obtaining a particular output of product with the least input of scarce resources. 11) In market economies, firms rarely worry about the availability of inputs to produce their products, whereas in command economies input availability is a constant concern. Why the difference? In market economies there concern is a solely on the individual or business as opposed to command economics are owned by the government and this is on a macro level. 12) Distinguish between the resource market and the product market and households both sellers and buyers in this model?
What are the flows in the circular flow model? A product market is the place where goods and services produced by businesses are bought and sold. The resource market is where households buy resources and businesses sell in a produce market. In a produce market Businesses buy and households sell. The market economy creates continues, repetitive flows of goods and services, resources, and money. Chapter 3: Page 66; Questions – 2, 5, 7, 9, 12 2) What are the determinants of demand? What happens to the demand curve when any of these determinants change?
Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each. The basic determinants of demand are 1) consumers preferences, 2) the number of buyers in the market, 3) consumers incomes, 4) the prices of related goods, and 5) consumer expectations. Changes in one or more of the determinants of demand will change the demand data. A change in the demand schedule or, graphically, a shift in the demand curve is called a change in demand. A change in demand is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand).
It occurs because the consumer’s state of mind about purchasing the product has been altered in response to a change in one or more of the determinants of demand. A change in quantity demanded is a movement from one point to another point (from one price- quantity combination to another) on a fixed demand curve. The cause of such a change is an increase or decrease in the price of the product under consideration. 5) What are the determinants of supply? What happens to the supply curve when any of these determinants changes? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each.
The determinants of supply are 1) resource prices, 2) technology, 3) taxes and subsidies, 4) prices of other goods, 5) producer expectations, and 6) the number of sellers in the market. A change in any one or more of these determinants of supply, or supply shifters, will move the supply curve for a product either right or left. A change in supply means a change in the schedule and a shift of the curve. An increase in supply shifts the curve to the right means a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.
A change in quantity supplied is a movement from one point to another or a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered. 7) “In the corn market, demand often exceeds supply and supply sometimes exceeds demand. ” “The price of corn rises and falls in response to changes in supply and demand. ” In which of these two statements are the terms “supply” and “demand” used correctly? Explain. “The price of corn rises and falls in response to changes in supply and demand. This statement is true because the price of corn does in fact rise and fall in response to changes in supply and demand. 9) Critically evaluate: “In comparing the two equilibrium positions in figure 3. 7b, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand. This does not refute the law of demand. 12) What do economists mean when they say “price floors and ceilings stifle the rationing function of prices and distort resource allocation”? A price ceiling sets the maximum legal price a seller may charge for a product or service.
A price at or below the ceiling is legal. A price above it is not. The rationale for establishing price ceilings on specific products is that they purportedly enable consumers to obtain some good or service that they could not afford at the equilibrium price. A price floor is a minimum price fixed by the government. A price at or above the price floor is legal a price below it is not. Price floors above equilibrium pric3es are usually invoked when society feels that the free functioning of the market system has not provided a sufficient income for certain groups of resource suppliers or producers.