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Introduction to Economics Tutorial 1 1. What is scarcity? Can you think of two causes of scarcity? Scarcity means human wants for goods and services exceed available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more. 2. Residents of a town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month? 100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10. 3. What is the difference between microeconomics and macroeconomics? Microeconomics - The branch of economics that studies the behavior of an individual consumer, firm, and industries. Macroeconomics - The branch of economics that studies the behavior of the whole economy, (both national and international) such as the national income, unemployment rate, inflation etc. 4. Can you think of any example of free goods, that is, goods or services that are not scarce? Air? Sand? Water? Basically free goods are goods that have no opportunity cost. Economic goods Demand is higher than supply and availability Requires human efforts for production Has a money value or price Can be regarded as wealth in economics They are not gifts of nature e.g. table,chair, stationery Free goods Are available and abundant in nature Does not require human efforts to produce Has no money value or price Cannot be regarded as wealth in economics They are gifts of nature e.g sunlight,air ,water 5. Raising (i.e. increasing) public transportation fares ________. a) reduces the opportunity cost of driving one’s car. b) increases the opportunity cost of taking public transportation. c) increases the opportunity cost of driving one’s car. 6. Explain the basic economic concepts using production possibilities curve (PPC). Scarcity – any point outside the PPC – unattainable Choice – any point along the PPC Opportunity cost – moving from one point to another 7. Explain why individuals make choices that are directly on the budget constraint (PPC), rather than inside the budget constraint (PPC) or outside it? Because that’s the maximum amount that the individual can get. If it’s choice inside the budget constraint area, that mean, this individual can get more without having to forgo anything. 8. During the Second World War, Germany’s factory were decimated (destroyed). It also suffered many human casualties, both soldiers and civilians. How did the war affect Germany’s production possibilities curve (PPC)? Move the PPC inward. Due to reduction in population. Many resources got destructed – including land and capital. Use this information to answer the following 4 questions: Marie has a weekly budget of $24, which she likes to spend on magazines or pies. 9. If the price of a magazine is $4 each, what is the maximum number of magazines she could buy in a week? 6 magazines 10. If the price of a pie is $12, what is the maximum number of pies she could buy in a week? 2 pies 11. Draw Marie’s budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of the budget constraint? See pdf annotator 12. What is Marie’s opportunity cost of purchasing a pie? 3 magazines Additional questions What is the opportunity cost associated with increased airport security measures as a result of the 9/11 incident? Group work Economic decisions in capitalism, socialism and mixed-econoy Capitalism Production depends on the demand of the consumers Socialism Planning authority decide what to produce Mixed economy Decided by both public and private sectors – based on consideration for social welfare and economic growth How to produce Depends on the relative prices of the resources involved. Only the cheapest and most efficient technique will be adopted Choice between traditional and modern techniques of production Decided by the public and private sectors. For whom to produce Based on pricemechanism – based on affordability Distribution is decided by Central Planning Authority. Distribution done through a set of administered fixed process. Necessity goods fixed at lower price and luxury goods at higher price. Distribution decided by public and private sectors. Price mechanism doesn’t fully function in mixed economies. In many mixed economies, the government imposes price controls and intervene indirectly through the imposition of indirect taxes and subsidies. 1 What to produce 2 3