Download Running Header: ECONOMICS PAPER 1 Ngai Lam Oscar Wong

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Ngai Lam Oscar Wong
Eco 102
Professor William Albanos
2/14/2013
Question 1)
A) Positive Vs Normative Economic Analysis Statements
Economics as an academic discipline quite commonly uses idea from media analysts, business
consultants as well as advisers on government policy. It is therefore very imperative for an
individual to understand instances when economists make objective, evidence-based statements
concerning the world works as well as when they are making value judgments on policies issues
(Beggs). In this case, economist usually uses positive and normative economic in analysis
statements. Positive economic statement can be defined as objective, descriptive and factual
statement that can be tested amended or rejected by referring to the available evidence and that
deal with objective explanation and the testing and rejection of theories. On the other hand,
negative economic statement can be referred to as statements that are subjective, prescriptive and
value-based statements rather than objective statements. Positive economic statement is therefore
objective and fact based, while normative economic statement is subjective and value based.
Positive economic statements do not have to be correct, but they must be able to be tested and
proved or disproved. Normative economic statements are opinion based, so they cannot be
proved or disproved.
In summaries, a positive statement is a statement about what is and that contains no
indication of approval or disapproval. It is the study of the causal relationships that exist in the
economy. Positive economics deals with objective explanation and the testing and rejection of
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theories. It just states what the relationship is. There are no value judgments involved. The
statement “if taxes on tobacco is doubled, there will be substantial reduction in tobacco
consumption” is a positive economic statement. It just states what the situation is. “If
government subsidy to basic education is reduced, there will be higher drop-outs among children
of poor families”, is another positive economic statement.
On the other hand, a normative statement expresses a judgment about whether a situation is
desirable or undesirable. Value judgments play an integral part in the ranking of possible
objectives and the choices to be made among them. "The world would be a better place if the
moon were made of green cheese" is a normative statement because it expresses a judgment
about what ought to be ,buy most statements are not easily categorized as purely positive or
purely normative. For example: Unemployment is more harmful than inflation. Notice that there
is no way of disproving this statement. If you disagree with it, you have no sure way of
convincing someone who believes the statement that he is wrong. Normative statements are
subjective statements rather than objective statements – i.e. they carry value judgments. For
example, price of second hand cars are falling. However, on this case, it should show the
statement like “a car scrap page scheme will lead to fall in the price of second hand cars”. It is
about to correct.
B) Other things equal
This is a common assumption that is used in economics which is used in identifying the
relationship between two different variable; for instance, quantity and price in the law of
demand. While doing this, the assumption is used to see how the relationship of the two different
variables can be affected by other things. The down-sloping demand curve shows us indirect
relationship between quantity of demanded goods and price, other things equal. The up-sloping
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curve of quantity supplied versus price graph shows us positive relationship between them, other
things equal.
Sometimes we can find some situations that are in conflict with these economics principles.There
are some examples from Dunkley, G. writer books. We analyses the theory below.
Here is the Example: Producers of red wine sell one billion of bottles at price of 20$ in one
year, the following year they sell 3 billion of bottles of wine at price of 25$, in the third year they
sell 10 billion of bottles of white wine. In this case price and demand vary directly, so these data
may seem to be a little bit odd, but if we examine it carefully we may see that they don’t refute
law of demand. We only got that low of demand’s other-things-equal assumption has been
violated over three year. We can explain this rise in demand by getting higher income and
changing tastes of buyers.
C) GNP VS GDP
GDP refers to Gross Domestic Product and the total output measured by money of all final
goods and services produced by an economy in a country in a given time period (usually one
year) (Lidderdale, 2003). On the other hand, GNP refers to Gross National Product which
measures the total market value of goods and services produced in a given period of time. GNP
also encompasses the value of net income made abroad. Moreover, when calculating GNP, the
value of what foreign countries earn in the given country is subtracted from the value.
The model used in calculating GNP is
Gross national income (GNI) = GDP + (income receipts from the rest of the world) – (income
payments to the rest of the world)
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D)The four economic resources (explain in detail) and give terms used for the payment of
each?
The four economic sources include; Land, Labor, Capital, and entrepreneurship. Land is
the natural resources such as iron ore, gold, diamonds, oil, etc. while labor is human resources
such as wage-earning workers. Labor is the effort that people contribute to the production of
goods and services while 'Land' includes not only the site of production but natural resources
above or below the soil (Federal Reserve Bank of St Louis). The income earned by labor
resources is called wages which is the payment for labour. The payment/ income that resource
owners earn in return for land resources is called rent. Capital on the other hand man made
resources such as machines, plants and equipment used in the production of final goods, such as
assembly lines, trucks, heavy duty machinery, factories, etc. Capital has interest as payment or
reward. Entrepreneurship is the person or individual who wants to supply the product to the
market to make profit. Entrepreneurs usually invest their own capital in their business in which
its payment or reward is profit.
E) Describe with diagrams free trade concept. Use immigration an outsourcing basis for
discussion
Free trade is a trade policy that aims at allowing and encouraging more two or more
nations to carry on trade and business transactions with no or minimal government interference,
tariffs or restrictions. According to Bhagwati (2002), free trade can in a nutshell be defined as a
system of trade policy that permits people who are involved in trade (i.e. traders) to carry out
their activities of buying and selling goods and services without any external hindrances or
restrictions especially from the government. It is normally a common practice by most
governments in many countries to get involved in the day to day activities (or operations) of
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most of the businessmen in that particular country. With free trade, immigration is made possible
where citizens of any state could buy and sell goods and services with the citizens of any other
state, without tariffs or import restrictions. It also mean that citizens of one state could travel or
move to another state without permission, passport, or other restriction. Additionally when world
countries specialize in the production of the goods and services they are best suited in, then they
will be in a position to take, the advantages of economies of scale at offer such goods at cheaper
prices. This enhances countries outsourcing some of their services to countries where poods and
services as well as capital is cheap.
Question 2)
What are Laws of Demand/Supply? Show how equilibrium model-dynamics
cures surplus and shortage in a free economy. Describe difference between change in quantity
supplied and/or demanded and the notion of change in demand and/or supply.
In the Laws of Demand and Supply, the common sense principle that defines the generally
observed relationship between demand, supply, and prices: as demand increases the price goes
up, which attracts new suppliers who increase the supply bringing the price back to normal.
However, in the marketing of high price (prestige) goods, such as perfumes, jewelry, watches,
cars, liquor, a low price may be associated with low quality, and may reduce demand.
Quoted from (Boyes, W., & Melvin, M.)
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In Laws of Demand, Law of demand is the reason of the downward sloping of demand
curve.Law of demand states the inverse relationship of demand of a commodity and it's price,and
demand curve represents this inverse relationship of demand and price.So in this way they both
are related.
The quantity demanded for a consumer at different prices can be aggregated into a market
demand. Market demand then is simply, the sum of all individual demand relationships. In above
diagram, shows two individual demand relationships from different consumers, which has
quantities demanded combined (or sum up) to the market quantities in the far right graph. The
vertical axes always show price, which remains the same for individual and market demand
curves, while the horizontal axes shows quantity. Because price remains the same for all three
graphs, a single line (P) representing the same price can be drawn horizontally across all three
graphs. Quantity demand changes units from the individual to the market demand curve. Market
quantities may be in thousands or millions of units depending on the size of a market. The
demand curve shows an inverse relationship between price and quantity demanded. This
relationship is considered so pervasive, particularly for the market demand, that in economics it
has been termed the law of demand. The higher the price the lower the quantity demanded, and
the lower the price the higher the quantity demanded. Although the law of demand is not
logically absolutely necessary, given the case mentioned earlier of a Veblen luxury good, most
goods or services are believed to adhere to the law of demand.
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On the other hands, Sspply is the relationship showing the quantities of a goods or services, that
will be offered for sale at each price within a specific time period. The supply curve presupposes
competition among firms so that no one firm can set and influence price. Firms are small relative
to the market, and are price takers. Each small firm would provide a quantity of output for each
possible price. Combining each firm’s quantity of output at each price for all firms provides a
market supply relationship and thus a supply curve. Large firms (large relative to their market)
such as monopolies and oligopolies set and influence price, and are not included in the supply
curve, and in the analysis below. Because of their control of price, they can set their quantity of
output to their advantage.
In contrast, to demand, the supply relationship shows a direct relationship between price and the
quantity supplied. High prices encourage firms to produce more, while low prices discourage
production. At high prices more resources can be used in production, and more firms with higher
costs can find it profitable to produce. The reverse is true for low prices. This direct positive
relationship between price and quantity supplied is called the law of supply.
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The free market combines in exchange, both buyers and sellers. For fre economics it
combines the demand and the supply curve to determine price. This price is called an equilibrium
price, since it balances the two forces of supply and demand. An equilibrium price is the price at
which the quantity demanded is equal to the quantity supplied. The quantity supplied and
demanded is also referred to as the equilibrium quantity. In below diagram, shows both demand
and supply determining equilibrium price and quantity.
In figure 5, “E” is the equilibrium price and “Qe” is
the corresponding equilibrium quantity. At the price “Pe” the quantity supplied and a quantity
demanded are equal, and at the “Qe” quantity, demand and supply are equal.
If price were at “P2” the quantity that suppliers would like to supply would be larger than
consumers would demand at that price, creating a surplus quantity. A surplus would create forces
among the many competitive suppliers to cut prices (supplier are all relatively small). Those
forces would push the price down to the equilibrium level at “E”.
If prices were at “P1” the quantity that suppliers would like to supply, would be less than
consumers would demand at that price, creating a shortage. Because of the shortage and a
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competition among consumers, prices would tend to rise. Only at “E” would there be no
tendency for the price to change, and “E” is the equilibrium price.
Question 4. Outline in detail: The notion of free exchange. Discuss the types of protectionism
used around the world to reinforce restriction of free-trade and what they denote. Name and
describe at least 5 organizations that promote these concepts.
The Notion of Free Exchange
Free exchange refers to the rights allowed to an investor to transfer assets to another party
without paying for any transaction fees during the exchange (Boyes, 2010). There are different
types of protectionism employed around the world as a way of reinforcing free-trade for instance
through tariffs. This is whereby governments raise the price of imports to make them less
attractive to foreign customers (Langholtz, 2003). Subsidies as well as import quotas are also
used. Such protectionism is put in place in order to protect local industries from foreign
competition (Dunkley, 2004). A number of organizations promote these concepts for instance the
World Trade Organization (Boyes, 2010).
Question 5 Explain the notion of (PPC) production possibilities curve. Include shapes shifts and
operational points
Production Possibilities Curve (PPC)
Production Possibilities Curve or the PPC is a graphical representation of the various
possibilities in alternative production facing a given economy (Dunkley, 2004). This analysis is
often represented by a convex curve.It is also a curve representing all possible combinations of
maximum outputs that could be produced assuming a fixed amount of productive resources of a
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given quantity.In other words, it is a graphical illustration of the total goods and services that can
be made available in an economy at any given time, depending on the availability of resources
(Boyes, 2010). If available resources are present and are fully employed, operational points of
PPC can lie anywhere on the illustration other than inside or outside of it (Langholtz, 2003).
Whenever the resources increase, the PPC shifts outward to the right indicating that more goods
can be made available as compared to before (Dunkley, 2004).
Above the diagram, we could increase total output by moving towards the production possibility
curve and reaching any of points C, A or B. Point D is unattainable at the moment because it lies
beyond the PPC. This particular production possibilities curve illustrates the alternative
combinations of two goods—output X and output Y--that can be produced by the economy. This
curve presents the alternative combinations of crab puffs and storage sheds that the economy can
produce. Production is technically efficient, using all existing resources, given existing
technology. The vertical axis measures the production of output X and the horizontal axis
measures the production of output Y.
The production possibilities curve should be co A schedule presents a limited, discrete
number of production alternatives in the form of a table. The production possibilities curve, in
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contrast, presents an infinite number of production alternatives that reside on the boundary of the
frontier. The production possibilities schedule is commonly used as a starting point in the
derivation of the production possibilities curve .Compared with the production possibilities
schedule. In real market, the PPC does not always have to be drawn as a curve. If the opportunity
cost for producing two products is constant, then we draw the PPC as a straight line.
As an introductory model of the economy, the production possibilities curve is commonly
used to illustrate basic economic concepts, including full employment, unemployment,
opportunity cost, economic growth, and investment.
Question 6. Describe in some detail. The difference in allocation of resource (4 hints questions)
between capitalism; socialism and communism? Use any model to explain, Centralized vs
decentralized allocations.
There exists a difference in allocation of resources between capitalism, communism and
socialism. While Capitalism does not require government control in allocation of resources,
Socialism relies on a public worker or owner for allocation of resources (Dunkley, 2004). This
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means that the worker owns the rights to resources (Langholtz, 2003). Communism is more
political and allocation of resources is through people of power within the society (Boyes, 2010).
Centralized vs. Decentralized allocations
First, in detail, Capitalism is a system based on money and on individual. USA is the
greatest example of capitalism in the world. Socialism is sharing wealth with everyone, the
greatest example are the old URSS and now China. Capitalism is a system based on capital, each
person or society has the right to have wealth, stack wealth buy or sell anything. When you work
you get paid for it. All the market should be free and uncontrolled. Anyone can work for
someone or start it's own business. You can invest your money in someone else business. It's
freedom and individual right, it's a anarchy-like system where everyone do what they want.
Secondly, Communism is a system in which the government owns and operates all
factors of production. Under such a system, the government would assign people to jobs, own all
business, and control all business decisions to allocate the resource they decided. In communism,
there are certain laws, rules and goals in allocating resources and responsibilities. If the citizens
abide by these laws, this leads to a harmonious spirit of sharing with one goal. This consequently
builds stronger social communities, and an even stronger economy. But nowadays, There seems
to be no room for this political ideology in this age of consumerism and private entrepreneurship,
but communism still has its practical aspects, especially in controlling natural resources.
Thirdly, ocialism represents the theoretical transition from capitalism to communism, the
primary goals of modern real world socialism are: (1) to correct the inefficiencies of market
failures, (2) to obtain more equal wealth and income distributions, and (3) to equalize economic
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opportunities. To accomplish these goals, government exerts a significant amount of government
control, while less than communism, more than capitalism.
However, now socialism comes in many different varieties. Some nations practice a form
of socialism that comes very close to communism, with extensive government control. Socialism
found in other nations has a distinctive capitalistic flavor, with a great deal of market activity.
In centralized allocations, decisions regarding distribution of resources are made by
people of a higher management (Dunkley, 2004). On the other hand decentralized allocations
delegate decisions regarding allocation of resources to all levels of management (Langholtz,
2003).
In detail, the difference between a centralized and a decentralized system of organization
is that in a centralized structure all the decision making and authority are focused on the top tier
of management. These few people are the ones that dictate company policy and make all the
crucial decisions. A decentralized system, on the other hand, delegates authority throughout the
organization and to all levels of management.
Very often the methods used will depend on a variety of influences such as the size of the
company and if it is scattered in a variety of places rather than all under one roof. In a huge
organization with many diversifications, like General Motors, for example, there is more likely
to be evidence of a decentralized system because it would be impossible and impractical for only
a handful of people to ensure that every aspect of the operation was covered.
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Question 7. Describe the notions inverse vs positive relationship; scarcity; association as
causation; fallacy of composition and Rational self-interest.
Inverse vs. Positive Relationship
Inverse relationships also referred to as negative relationships happen when increased
value of a variable leads to a decreased value of another variable (Boyes, 2010). The value of
these variables tends to move in opposite direction on number lines when this occurs (Langholtz,
2003). On the other hand, positive relationships or rather direct relationships take place when
both variables in a given equation lead to an increase or decrease in value (Dunkley, 2004). On a
number line, these variables tend to move in the same direction unlike those in inverse
relationships.
Scarcity
This can be defined as a situation whereby there are fewer products in the market than the
demand for them (Boyes, 2010). In other words, scarcity is when individuals want more than is
available in the market. This force, people to make certain choices as they cannot have the
products they want (Langholtz, 2003).
Association as causation
The term association can mean a number of things. It can be defined as a group of
individuals who come together for a common purpose or a relationship between two variables,
where one is dependent or leads to the other (Dunkley, 2004). Causation on the other hand refers
to changes in a variable that directly cause changes in another variable (Boyes, 2010).
Association and causation are intertwined in that by associating two variables, changes are
observed in either one of them.
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Fallacy of composition and rational self-interest
The fallacy of Composition is committed when a conclusion is drawn about a whole
based on the features of its constituents
Therefore man needs an objective standard, grounded in the facts of reality, to achieve
happiness. The human faculty of happiness is a biologically evolved measuring instrument that
measures how well one is doing in the pursuit of life. Therefore the standard by which one can
judge whether or not some action will lead to greater or lesser happiness is, whether or not it
promotes one's life.
Rational self-interest as pursuit of one's own life and happiness in reality, rational selfinterest depends on the information at hand and the individual’s perception of what is in his or
her best interest. People only focus on 1)Selfish or excessive regard for one's personal advantage
or interest and 2)Personal advantage or interest.
To summarize, this is the belief that what might apply to one individual will apply to
others in the same manner (Langholtz, 2003). In other words, it argues that what might be true
for a person is also true for a society in general. It means that people will make the choices that
give them the greatest amount of satisfaction. This is the assumption that people do not
intentionally make decisions that would leave them worse off. For example, if a person can save
more by spending less, then the society in general can also do the same. This is however not the
case.
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References
Boyes, W., & Melvin, M. (2010). Economics. 8th Edition. Eagan, MN: Cengage Learning.
Dunkley, G. (2004). Free Trade: Myths, Realities and Alternatives. New York: Zed Books.
Langholtz, H.J. (2003). Resource-Allocation Behavior. Boston: Springer.
Bhagwati, J. N. (2001). Fair Trade and Harmonization: Economic analysis. Cambridge, MA:
MIT Press
Beggs, J. (n.d). Positive Versus Normative Analysis in Economics. Retrieved from
http://economics.about.com/od/economics-basics/a/Positive-Versus-Normative-Analysis-InEconomics.htm
Federal Reserve Bank of St Louis. (n.d)Factors of Production – The Economic Lowdown
Podcast Series. Volume 1, Episode 2 (6:19).Retrieved from
http://www.stlouisfed.org/education_resources/economic-lowdown-podcast-series/factors-ofproduction/
Hornberger, J. G. (n.d) . The Case for Unilateral Free Trade and Open Immigration. Retrieved
from
http://www.amatecon.com/etext/cftoi/cftoi-ch01.html
Citied and diagram sources
PRODUCTION POSSIBILITIES CURVE, AmosWEB, AmosWEB LLC,
http://kr.mnsu.edu/~renner/supdem.htm
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