Economics: Fundamental Concepts and Principles
Chapter 1
What do economists mean when they say that “there is no free lunch”?
It means there are scarce inputs so to obtain something you must sacrifice other things. This is called the opportunity cost. To obtain more of one thing, society sacrifices the opportunity of getting the next best thing that could have been created with these resources.
Explain the individual’s economizing problem.
The economizing problem is the need to make choices because economic wants exceed economic means. Individuals face an economizing problem. Because their wants exceed their incomes, they must decide what to purchase and what to forgo.
Chapter 2
What are the Five Fundamental Questions that every economy must answer?
What goods and services will be produced?
How will the goods and services be produced?
Who will get the goods and services?
How will the system accommodate change?
How will the system promote progress?
What is the relationship between businesses and households in the circular flow diagram?
The circular flow diagram shows how money circulates the economy. Resources flow from households to businesses through the resource market, and products flow from businesses to households through the product market. Households receive income from businesses through the resource market, and businesses receive revenue from households through the product market.
Chapter 3
List five determinants of market demand that could cause demand to increase.
- A favorable change in consumer tastes.
- Increase in number of buyers in a market.
- Rise in income.
- Increase in the price of a substitute good or decrease in the price of a complementary good.
- Expectation of higher future prices.
What is the difference between a change in demand and a change in quantity demanded?
A change in demand occurs when a consumer’s state of mind about purchasing a product has changed in response to a change in one or more determinants of demand. In contrast, a change in quantity demanded is a movement from one point to another point along a fixed demand curve or schedule. The cause of such change is an increase or decrease in the price of the product under consideration.
Use supply and demand analysis to explain what is most likely to happen to price and quantity in a market for a crop such as lettuce, tomatoes, or oranges, when extreme weather destroys a large portion of the crop.
The extreme weather destroys a large portion of the crop so it will cause a decrease in supply. If the supply curve shifts to the left it means there’s a new
The equilibrium point where the new supply curve intersects the original demand curve at a lower quantity and higher price. Thus, in this scenario, an increase in the price and a decrease in the quantity of the crop is most likely to happen.
Use supply and demand analysis to explain what is most likely to happen to the price and quantity of pink salmon when there is a large increase in the supply of pink salmon due to technological improvements in fishing boats that make them larger and more efficient and at the same time there is a small decrease in demand for pink salmon as consumers’ tastes change to preferring other kinds of fish.
The decrease in demand and the increase in supply will make the price of pink salmon most likely to go down because at any given price there’s a higher quantity of pink salmon supplied but there’s a lower quantity of pink salmon demanded. It will also result in an increase in the quantity of salmon available in the market although the effects in demand and supply are opposite because the increase in supply is larger than the decrease in the demand.
Chapter 26
What is the principle of comparative advantage? Why are there gains to specialization?
The principle of comparative advantage says that total world output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for producing that good. Gains to specialization arise because individuals or firms can be focusing goods or services where they have comparative advantage so they can produce at a lower opportunity cost. This leads to increased efficiency, higher output, more innovation, and trade benefits.
State how the world economy can benefit from free trade.
The world economy can achieve a more efficient allocation of resources and a higher level of material well-being thanks to free trade. It also promotes competition and deters monopoly. Overall, it contributes to economic growth.
How can the United States compete successfully with a relatively low-wage nations such as Mexico?
The marginal cost is lower in the United States than the marginal cost in Mexico. If the US productivity is greater than Mexico, then they can relatively produce more than Mexico. Wages often reflect productivity.