Download Assigment 1 Microeconomics

Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
PRINICPLES OF MICROECONOMICS
ECN 202
Unit 1 Assignments
Respond to the following items. Provide as much thought process as
possible to give complete responses. All responses should be in complete
sentences!
Note: Please answer every question to complete the full assignment. There
are no optional questions. Each question has a 10-point value. Total point
value of the exam is 100.
1. What is the definition of economics?
Economics attempts to explain why
the world is the way that it is. Economics seeks to understand the
choices people make when given different options. Of all of the
factors concerning economics, the only one that is unlimited is “Want.”
Time and money, no matter how wealthy or how poor a person is, is
limited, but wants, is unlimited. Economics is the study of how people
choose to meet their unlimited want with their limited resources.
2. How does the PPC illustrate the concepts of opportunity cost, scarcity,
tradeoffs, and the necessity for allocating scarce goods and resources? In
your answer describe each of the economic terms. This may be more easily
explained by first defining each term. Opportunity cost is the
opportunity with the highest value that is not chosen when a choice is
made. For example, if I really want a pair of rollerblades and a
bicycle, but I only have enough money for one of the items, and I
choose the bicycle, then the roller blades are the opportunity cost
because they were not chosen. Scarcity is the concept that there is
more of a demand for an item than there is a supply of that item at
zero price. A tradeoff is the giving up of one good or activity in
order to obtain some other good or activity. The Production
Possibilities Curve demonstrates that as the amount of one good is
increased the amount of the other good must be decreased given the
resources available. Points that are ON the curve are said to represent
the maximum amount of any two types of good that can be produced. The
two goods are inversely related to one another, when you produce more
of product A, then Product B goes down, if you increase the production
of Product B, Product A goes down. Points inside the curve are said to
be inefficient. Meaning that either more off one good could be
produced or more of both goods could be produced. Points outside the
PPC are considered an impossible combination given the systems
resources. One thing to remember about the Production Possibilities
Curve, is that it is a snap shot in time; because what may be
considered an impossible combination today, could actually be possible
in the near future, and in the distant future could actual be
considered inefficient as point inside the curve. When you produce more
of Product A, the opportunity cost and the tradeoff is that you produce
less of Product B, and vice versa the more you produce of Product B,
the opportunity cost and trade off is that you produce less of Product
Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
A. This happens because the resources of every person, every
government, every country are scarce and are limited, be it the poorest
or the richest on earth.
3. The PPC suggests that a nation cannot live beyond its means or
production potential. Explain two reasons why international trade would
cause this statement to be modified. The PPC is measuring two variables,
and the variables are inversely related, any positive change in the
number of one good produced causes negative change in the number of the
other good produced. The Production Possibility Curve is based on the
ceteris paribus meaning all other things held constant or equal. When
trade is introduced, the ceteris paribus is being maintained, because
that means extra workers outside of what is normal are increasing
production capacity this SHIFTS the production possibility curve to the
right. Another reason why trade affects the production possibility
curve is it increases comparative advantage. The whole reason for
trading is to increase comparative advantage; it is based on
specialization. Some countries because of their physical location,
natural resources, or technological advances introduce some sort of
specialization and comparative advantage. All one need to do is look
towards the Middle East to see that they have a comparative advantage
when it comes oil, one reason; they have so much of it. Comparative
advantage makes production more efficient, and with better efficiency
comes an increase in production possibility and thus a shift of the
production possibilities curve to the right.
4. Describe the adjustments in the production possibilities curves in each of
the following situations:
(a) The economy moves from full employment into a serious depression.
This would case the Production Possibilities Curve to shift to
the left, due to a decrease in the amount of workers, which in
turn would cause production of all goods and services to be
reduced.
(b) A serious plague reduces the economy’s labor force by one-third
This would cause the Production Possibilities Curve to shift to
the left, due to a decrease in the amount of workers, which in
turn would cause production of all goods and services to be
reduced
(c) The cold war ends.
This can be thought of in terms of GUNS vs
Butter. Holding all other things equal, there would be a
MOVEMENT along the PPC in which there would be rise in the
production of non-defense goods, and decrease in defense goods.
(d) Congress significantly increases government spending for health care
and education. At first glance this would appear that you could
increase both Health Care Spending and Education, to a certain
extent that is true, but what would happen, is that you would
first have a shift of the curve to the right, then you would have
a movement long the curve to settle things out. To explain, say
congress raises spending on health care from $500 billion to $750
billion, and raises the spending on education from $100 billion
to $400 billion. In the first PPC the government can spend $600
Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
billion dollars on healthcare and education, in the second PPC
the government can spend $1150 billion on education and
healthcare together. Theoretically speaking the government has a
limited amount that it can spend ($1150 billion) in reality
congress knows no boundary on spending, they can only do so much
with that $1150 billion dollars, they could change the ratio of
how much goes to health care and how much goes to education, but
if they do that then, that is simply a movement along the PPC.
Now if they raise taxes and decide to spend more than the $1150
billion, then the PPC would shift again, and then the process
would start all over again.
5. Explain the terms specialization and comparative advantage as they
pertain to you. The way that I interpret the question is “how does
specialization and comparative advantage apply to my job.” In that
aspect, I work as a computer systems engineer therefore I specialize in
resolving business critical information systems issues. Therefore when
given a limited amount of time in the day, I can solve problems
relating to business information systems faster than the average UAW
production worker. Therefore I can perform that job with a lower
opportunity cost than the UAW worker, and that gives me a comparative
advantage. Likewise a UAW production worker, who inspects precision
metals, would have a lower opportunity cost in finding tiny defects in
the metal that would ruin the product than I would, and therefore the
UAW production worker would have a comparative advantage over me. No
one person can perform every task with the lowest opportunity cost, nor
can any one country. Because the world and the USA in particular
participate in a global economy, everyone person is effected by
comparative advantage and specialization. All one need to do is look
at issues such as trade deficit, companies sending factory jobs to
other countries, imported bananas from Columbia, or exported
technologies to other countries.
.
6. Explain the difference between positive and normative economics. As a
conscientious voter, which is more important to consider? Why? Be
specific! Positive Analysis is, what IS, they way things actually are.
For example, if you state that when the equilibrium price of coffee
beans falls below $.32 a pound, then American growers of coffee can no
longer make a profit at the price, then you are using positive
analysis. Normative economics or analysis, is an analysis of what
ought to be or what should be. For example, if you say that there
should be law restricting the amount of foreign coffee beans allowed
into the coffee bean market, then you are applying normative economics.
As a conscientious voter, normative economics is more important,
because, positive economics states the way things are now, meaning the
actions that brought the current state of economics have already taken
place. In other words what is done is done, however normative
economics deals with what should be done or what will be done. It is
the normative economics that play a major role in U.S. politics. Do we
raise the price of imported steel, do we open borders to trucks from
Mexico, do we grant HB1 Visas to foreigners for information technology
positions.
Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
7. Indicate which of the following statements is true or false. If the statement
is false, change it to make it true.
a. Positive analysis imposes the value judgments of one individual on
the decisions of others ------FALSE ------ Normative Analysis
imposes the judgment of one individual on the decisions of
others, more simply, when there is a judgment or
interpretation, then it is normative analysis.
b. Ceteris paribus is Latin for "let the buyer beware ---FALSE—
Ceteris paribus is Latin for “all else held constant”
c. Rational self-interest is the same thing as selfishness. ---FALSE--Rational self interest means that people when given a choice weigh the
alternatives and make the best decision they can with the information
that they have at the given time. Rational self interest means they do
what they consider more important. For example, if you are full time
student studying to be a doctor, do would probably devote more time to
studying terms like zygotes, PVC, AV NODE or TMJ than you would to your
physical education class. That example is in of itself, not selfish,
but it is thinking in a rational self interest way.
d. An economic good is scarce if it has a positive price. ---False—An
economic good is any good that is scare if it has a price of zero.
e. A resource is the ingredient used to make factors of production . –
False—A resource is the an ingredient used to make a good, a resource
is a factor of production.
For example, labor is a resource and like
wise it is a factor of production.
8. Answer true or false and if the statement is false, change it to make it
true.
a. A movement along the supply curve represents an increase in
supply. –FALSE—A movement along the curve means that two variables
change one another, that can be either positively related or negative
related, but the change must be occur in both variables. If one of the
variables moves but the other does not, then there is shift in the
curve, because something other than the two variables being compared
caused one of the variables change.
a. An increase in supply without any changes in demand will cause
the equilibrium price to rise
--False—it would cause the
supply curve to shift to the right and equilibrium price to fall.
c. An increase in demand without any changes in supply will cause
the equilibrium price to fall
---FALSE—an increase in demand
without and increase in supply would cause the demand curve to
shift to the right and cause the equilibrium price to rise.
d. An increase in supply and an increase demand will cause the
equilibrium price and the equilibrium quantity to rise. It depends on
which one has the greater weight, meaning which one rises more.
For
example if the increase in supply is 10,000 units and in increase in
demand is 25,000 units, then the equilibrium price will rise. If the
increase in supply is 18,00 units and the increase in demand is 12,000
units, then the equilibrium price will fall.
Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
9. In December 1992, the federal government began requiring that all
foods display information about fat content and other
ingredients on food packages. The displays had to be verified by
independent laboratories. The price of an evaluation of a food
product could run as much as $20,000. What impact do you think this law
had on the market for meat? Explain your responses. The $20,000 price of
the evaluation would have very little impact on the production cost of
meat and therefore cost itself for the verification would not affect it
much at all. In business there is a term called the materiality
concept, for most large companies that produce meat, $20,000 would be
treated as in the most efficient manner possible. On the other the cost
of repackaging the meat to reflect nutritional content, could be
expensive. This would in turn cause the production cost of meat to
increase, this would cause a shift of the production possibilities
curve to the left, and then there would be new market price for meat
that was higher than before the law had was implemented. It does not
matter if there is a drought and half of the cattle were to die, or
that the US imported 10,000,000 lbs of beef from Argentina, or the
government lowered the FDA restrictions regarding meat, the market
would determine the price, even if all three events happened at the
same time.
10. Assuming no government intervention, describe the market behavior
that should result if the price of a product is below its equilibrium price; then
describe the behavior that should occur if the price is above its equilibrium
price. Be specific. In essence describe the process by which the market will
self correct the situation. The law of supply and demand will cause the
price will cause to reach market or equilibrium price. If the price of
a good is below the equilibrium price, the demand will exceed supply,
and this will cause a shortage and the price rise. As the price rises,
the supply will rise because firms will have more incentive to produce
more of that product and if the firms produce more than is needed the
run the chance of Supply being greater than demand, in this case price
for a short while may be above the equilibrium price. When this
happens there is a surplus, and the price will begin to fall until it
reaches the equilibrium price.
Basically the situation acts in this
manner, something shifts either the supply or the demand curve, then
for a short period of time the price may be higher or lower than the
equilibrium price, but eventually there will be a movement along the
curve to which there will be an equilibrium price and an equilibrium
quantity in which the quantity demanded will be equal to the quantity
supplied. .