Main Concepts : Economic of Poverty | Economic of Scarcity | Economic of Opportunity Cost | Economic Production Possibility Frontier | Economic Marginal Analysis | Economic Marginal Analysis | Economic Marginal Cost | Economic Division of Labor | Economic Efficiency | Economic of Growth | Economic of Investment | Economic Net Benefit | Economic of Specialization | Economic of Trade off.
How do scarcity and poverty differ?
- Poverty is having few goods. Scarcity is having more wants than goods with which to satisfy them, even if one has many goods.
Why can’t Opportunity Costs exist without Scarcity?
- Without Scarcity, there are no alternatives that have to be given up, and thus there are no Opportunity Costs.
Does an economy that is inside its Production Possibilities Curve face any trade-offs?
- No. It can have more of all goods.
How can a good be costly yet not scarce?
- If a costly good is not desirable, it will not be scarce.
What factors cause the Production Possibilities Curve to be bowed out?
- Diminishing returns and the fact that some inputs are more suitable than others for producing certain goods cause the bowing out of the Production Possibilities Curve. When the curve is bowed out, as more of any good is produced its Opportunity Cost goes up.
What will cause an economy Production Possibility Curve to shift out and to the right?
- More investments. Innovation. Increased division of labor. Additional inputs.
How are trade and the division of labor related?
- The division of labor means that workers specialize. They must then trade what they produce to get the goods they want to consume.
If the marginal cost of an action exceeds its marginal benefit, why will net benefits fall?
- When marginal costs exceeds its marginal benefits, more is being added to total costs than total benefits, so net benefits must fall.
Why do people value each unit of a good by its marginal value?
- People value a unit of a good by what would be lost if they didn’t have the unit. By interchanging units of the good, a person would have to lose only the least-valued use a unit of the good is being put to, i.e., its marginal value.
Why is the Opportunity Cost of an option equal to the value of the best of all the alternatives that had to be forgone?
- The Opportunity Cost of a decision is the value of what the person would have done otherwise. If the person is rational, they would otherwise have chosen the most valuable of the alternative options.
Studies have shown that females put a lot of time into raising children. How would increase in female wages that has occurred over the last three decades affect the cost of raising children?
- One of the main costs of raising children is the opportunity cost of female time. Because female wages have been rising, the effect has been to significantly increase the cost of raising children. Many economists believe that this may partly explain the drop in the number of children per household that has occurred in recent times.
You have ten workers who are equally skilled and who can do each other worker’s job with the same efficiency. The first workers does a task worth $100, the second, $90, the third, $80, and so on until the last, whose task is worth $10. Worker number one comes to you, demands a raise, and threatens to quit if the raise is not forthcoming. How much at most should you be willing to pay worker number one?
- If worker number one quit, the other workers could be reassigned tasks and you would be worse off by only $10. So worker one should be paid no more than $10.
Use the principle of opportunity cost to explain why firms might spend more time training workers when there is a recession in their industries (assuming the firms expect to retain the workers and the recession to eventually end).
- The opportunity cost of training a worker is the value of what the worker would have been doing otherwise. Most likely, this would be producing goods for the firm to sell. But during a recession, this forgone cost is likely to be lower (since the firm has to sell its output at a lower cost or perhaps can’t sell it at all0. So this is the cheapest time to train workers.
What is wrong (from an economic point of few) with the following argument? “Marketing is vitally important. After all, without marketing, we wouldn’t sell anything and our firm would be bankrupt. Therefore, our firm should spend more on marketing.”
- This argument tries to measure the value of an additional expenditure on marketing not by its marginal contribution, but rather by the total value of all marketing. The correct way to evaluate the issue is to ask if the additional money spent on marketing is matched or exceeded by its additional or marginal benefit.
- The cost of maintaining our military forces is the opportunity cost of what the people in the military would have been doing otherwise. With a pay system, only those people whose opportunity cost falls below what the armed forces pay will join. But with a draft, persons with higher opportunity costs will likely be forced into service. Thus, the total opportunity cost of a draft will be higher.
An economy is producing two goods, A and B. Then there is technological progress, but in Good A only. Can the economy then consume more of both goods?
- Yes. To produce the “old” amounts of Goods A and B takes less inputs; the leftover inputs can then be used to produce more A and B.
Afdol Manufacturing has spent $100,000 on safety equipment. If it spends an additional $20,000, its losses from accidents will fall from $160,000 to $130,000. Should it spend the additional $20,000?
- The control variable is safety. More safety has a marginal costs of $20,000. Its marginal benefit is the reduction in accident losses: $30,000 ($160,000 - $130,000). So the firm should spend the additional $20,000.
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