Supply and Demand and Marginal Cost

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IA 710 CLASS 1
Scarcity, shortage and substitutability

1.

Answer all parts:
a) What do you think is meant by the concept of constrained choice? Why is economics often described as the science of constrained choice?

b) Explain how scarcity, choice and opportunity cost are relevant when choosing amongst alternatives?

2.

Define the concept of “opportunity cost” and discuss various examples.

3.

Explain how the concept of opportunity cost may be used to explain the following: a) Why very few petrol stations are found in the centre of large cities.

b) Why it might be worthwhile for a company to contract out work even though contracting out may involve a higher monetary cost.

c) Why tourists pay higher prices for goods and services in a foreign city than local residents of that country.

4.

A company invests £10,000 in new machinery in the hope of boosting future profits. What is the opportunity cost of the investment?

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5.

A university wishes to build a new sports centre and has to decide whether to build the centre on land it already owns, or whether to buy land next to the university at a cost of £1 million. It decides to use the land it already owns as this will lower costs. Critically analyse this reasoning.

6.

List some ways in which consumers and firms might respond to a large increase in the price of oil. What effect would this have on the longer-term price of oil?

7.

Answer all parts.
a) Why do economists theorise rather than attempt to describe reality?

b) Do assumptions have to be realistic in order for a theory to work?

c) Suppose you wanted to construct a model to explain the number of cars consumers would purchase during a given year. List twenty factors which you feel might affect the demand for cars. Then reduce your list to just four. Why might a consideration of only four factors be an improvement on a consideration of twenty factors?

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8.

Classify each of the following statements as either ‘positive’ or ‘normative’. Positive

Normative

People on higher incomes should pay a
higher proportion of their income in tax than
people on low incomes.
A rise in interest rates will discourage
business investment expenditure.
A cut in wage levels for young people will
reduce youth unemployment.
Unemployment benefits should be dependent
on recipients undertaking some form of
community service.
A universal government health insurance
scheme denies consumers any choice and is
therefore undesirable.

The Market in Operation – example
1973 – Organization of
Petroleum Exporting
Countries (OPEC) cuts
supply of oil.
Price of oil triples and then
doubles again in 1979-80
How does this affect the
behaviour of:
• consumers?
• firms?
• workers?
What happens to the price
of oil in the long term?
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3

CLASS 2
Production possibilities, trade-offs and comparative advantage .

1.

Refer to the diagram below and indicate which statements are correct. Explain your answers

Production Possibility Frontier
BIKES

Y

.B

.E

.A
.D
0

.C

X

CARS

a) A movement from C to E is possible only if we are prepared to have fewer cars.

b) A movement from C to B means that the price of cars has risen.

c) A is an infeasible position.

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2.

Suppose an economy produces only two goods – hats and buckets. The economy has 10 workers, and each worker can produce either 8 hats in a day or 16 buckets, regardless of how many other workers are employed in the same industry.

a) What is the opportunity cost of a hat in terms of buckets?

b) How many workers are there in each industry when the economy is producing 48 hats? How many buckets are being produced?

c) Draw the PPF for hats and buckets. Why is the shape of the PPF different to the one shown in question 1 above?

d) Identify whether the following combinations of goods are efficient, inefficient, or unattainable: i. 32 hats, 32 buckets
ii. 40 hats, 80...
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