Introduction to Economics Exercise 1

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INTRODUCTION TO ECONOMICS
Exercise 1

1. What determines that a resource be scarce? Why is scarcity important in defining Economics as a science Resources are seen as being scarce, when the wants exceed the resources. The fundamental problem of economics relates to the choices made in the face of limited resources and unlimited wants.

2. Read your local newspaper 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. price 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 Opportunity Cost, comment how your opportunity cost of going to the movies may be affected when: a. You have a final exam the following day
b. The University will be shut down for a month starting today c. The same movie will be shown on TV tomorrow
a) increase
b) decrease
c) increase

4. Explain if the following statements are true or false, Explain your reply d. The opportunity cost of choosing a certain activity is equal 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. b) True – opportunity cost relates to the individual, in that they must choose 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 Possibility Frontier (If it is not possible, explain your reply) The PPF can expand during periods of technological innovation or the discovery of new resources. Or through the process of trade.

6. a) England 2/6 = 1/3, USA 1/5
b) Wheat = England, Clothes = England
c) England = Wheat, USA = Clothes
d) England should produce wheat and USA clothes.

Using 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 advantage 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. GRAPH

b. GRAPH

c. GRAPH
The Price is above market equilibrium: If the price exceeds the equilibrium price, a surplus occurs and there 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 there 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.

e. The inferior good demand will decrease when consumer income rises. These goods are affordable and adequately fulfill their purpose, but as more costly substitutes that offer more pleasure become available, the use of the inferior goods diminishes.

f. A complementary good is a good with a negative cross 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,...
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