Economics Homework

Homework #1

Taylor McCarthy

September 28, 2015

1. “Scarcity is the goods available are too few to satisfy individual’s desires” (5). Scarcity is when resources are limited to make those goods and services desired. Everything has a cost. This is where opportunity cost comes in. Opportunity cost is what you can gain from choosing the next best alternative. It is what you are giving up not what you have. For example, if I only have enough money to pay for dinner or a subway ride home. I can eat, but then I will not have a way home. Or I could take the subway, but then not have anything to eat for dinner. Marginal cost is the cost to you by producing an extra item. The marginal benefit is the additional benefits you get from something you have already obtained. If the marginal benefit is greater than the marginal cost you will end up with happiness. For example, I pay tuition to Pace University. The marginal cost is attending class and does not include what I paid for in tuition. I attend class and the marginal benefit is to do the assigned readings and homework for class. The benefit is that I am prepared for class.

2.

a. A production possibilities curve is the maximum combination of outputs that can be obtained from a given number of inputs. There is a limited amount. It is the most output we can obtain from a certain number of inputs.          

b. A point inside the curve is inefficient, which means not achieving maximum productivity. If the curve is inefficient, you fail at making the best combination of outputs using the given number of inputs. A point outside the curve is unattainable, when you consider the resources and technology.

c. The curve illustrates the concept of opportunity cost by showing the ways society chooses more and more of an item, which in result increases opportunity cost. In order to get more butter, one must give up fewer guns. The more we focus on butter, the higher the opportunity cost is going to rise.

d. A production possibility curve that is showing increasing marginal cost is bowed outward. The reason it is bowed outward is to show that some outputs and inputs are better for the production of goods. Butter at 20 means 0 guns and guns at 15 means 0 butter.

e.

f. A point outside of the production possibility curve is not always unattainable. When technology and resources improve and the economy gets better, we can get more output with the same number of inputs.

3.

a. Households are the consumers and businesses are the producers in the circular flow model. Households supply labor time and are paid by businesses. That happens in a factor market. Businesses produce goods and services and households buy them. This happens in a goods market.

b. Consumers demand with their money what businesses are going to produce. Businesses have to make educated guesses on what products they produce will make them a profit. The demand from consumers is reconciled when supplies of the producers makes a profit.