Why Should Policymakers Think about Incentives - Assignment Example

Give three examples of important trade-offs that you face in your life. As a young the most obvious trade offs that I face in my life are foregoing the opportunity to hang around with my friends to have fun and instead to go to school to study; I also have to forgo playing video games because I have to do my homework and has to refuse late hour parties so I can attend my classes early. 2. What is opportunity cost of seeing a movie? The opportunity cost of seeing a movie is the money and time spent on watching the movie which could have been spent somewhere else. 3. Water is necessary for life. Is the marginal benefit of a glass of water large or small? It is large because regardless of the quantity of water, we need it to sustain life, thus, the benefit of a glass of water in relation to life is large irrespective of quantity. 4. Why should policymakers think about incentives. Policy makers should think about incentives for them to encourage and promote certain behaviors that would produce favourable economic condition. Without an incentive, they cannot induce any behaviour in the market. For example, if policymakers want business to expand, they have to provide the incentive of lower cost of capital as an incentive to borrowing. This encouraged borrowings through lower incentive will then be used by business to expand their operations. When business expands, more workers are hired that will have money to spend, thus, making the economy more robust. 5. Why isn’t trade among countries like a game with some winners and some losers? Trade is not winning and losing because one country has to give up something inorder to acquire something, thus, it is became trade. Goods and payment and exchange where the two parties have the capacity to produce and pay. If one country is a loser, it will lose the capacity to give up something or to pay its purchases, thus, making trade lackluster. Also, when trade becomes lopsided, the other trading country will be discouraged to to trade. But if trading becomes amicable to both trading parties, trading will flourish, which will make the economies of the trading parties prosper. 6. What does the invisble hand of the market-place do? The invisible hand meant the market forces and was first coined by Adam Smith in his work The Wealth of Nations. It is the interplay of the law of supply and demand whereby the market naturally finds the point where the seller and buyer agrees at a certain price to buy and sell. It also serves as an invisible regulatory mechanism whereby the unfit will be driven out of the market leaving those who can satisfy the market to exist. The invisble hand also set the behaviour desired by the market. Thus, quality, better price and innovation is a byproduct of the invisible hand whereby the players are forced to produce goods more efficiently and differently to get ahead of the competition. In the end, the consumer benefits from it because the goods that he or she needed or wanted are produced in the most efficient way possible as dictated by the forces of the market. 7. Explain the two main causes of market failure and give an example of each. It is always expected that market should achieve efficiency but in reality, they do not always achieve the desired efficiency. When the market becomes inefficient and results in an equilibrium that characterizes such inefficiency, market failure occurs. There are several causes of market failure; two main causes of it are externalities and illiquidity. Externality is the influence or the impact of certain irrational behaviours to the market. The Dot.com burst in 2001 was an example of externality where the irrational behaviour of the market caused it to crash. During those times, dotcom companies were considered as good investments that people kept on buying dotcom stocks that drove its prices up. It came to a point where the values of their stocks were irrationally high than what they are really worth, thus, eventually crashing the market and the companies. Illiquidity can crash the market when there is no longer enough money to facilitate transaction. The most recent example for this is the explosion of the market bubbles in Asia. It was a time of housing boom and there was an excessive and irrational demands for housing that was financed by credit until it came to a point that the banks who guarantee those credits did not have enough reserves to finance the credit of both the consumers and the contractors, thus, eventually crashing the market. 8. Why is productivity important? A country’s economy is dependent to it. It is the total output that a given population in a country would produce given the condition and technology available. The degree of wealth of a certain economy is dependent on its productivity. Thus, every government and its instrumentalities always strive to have an enhanced productivity in their given economies. 9. What is inflation and what causes it? Inflation simply meant that there are too much money chasing for fewer goods. Inflation is the main reason why the things we buy are getting expensive because we use more money for the same goods that we are going to purchase. Printing excessive notes or money causes inflation. To illustrate, we can infer to the Disney character “Mickey Mouse”, which was used as a monicker of derision when the Philippine government printed excessive money during the Japanese occupation when people became “millionaires” being poor at the same time because the goods they purchased also shot up along with their excessive money. 10. How are inflation and unemployment related in the short run? The relationship between inflation and unemployment is best explained by Philips’ Curve. Philips’ Curve states that there is an inverse relationship between unemployment and growth in wages whereby inflation is a function of unemployment. As wages increase, it implies changes in inflation and unemployement rate. Thus, when there is a high inflation rate, unemployment will also tend to be lower in the short run. Review questions (page 38) 1. How is economics a science? Economics is a science because it is methodological in its attempt to allocate scarce resources to satisfy need and unlimited wants. 2. Why do economists make assumptions? Economists make assumption about the common beliefs in the market which is based on a sound economic theory. It helps economists to make decisions and/or recommend decisions that are based and relevant to economic reality. 3. Should an economic model describe reality exactly? Ideally, it should but it just cannot. The complicities of the real world cannot be reduced into economic models which explains why economist make assumptions. 4. Name that your family interacts in the factor market and a way that it interacts in the product market. Factors of production are inputs to make a product or service. They are land, labor, capital, technology and initiative of the entrepreneur. The product market are the distribution channels and/or the places where they sell their goods and service. The product market represents the demand and the competition and they exert pressure on the producers in the factor market to produce goods and services that meet their demands at the most efficient way possible. 5. Name one economic interaction that isn’t covered by the simplified circular-flow diagram. Government regulation and how they impact economic activity are not covered by the circular flow diagram. 6. Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens if disease kills of the economy’s cows? Graph source: tutor2u In the graph, it is shown that the production of several commodities which we can substitute, such as milk and cookies, used the same fixed total inputs. In our case, we can assume it is milk because it is the most common input of production of the two. This production possibility frontier graph shows that the production level of one commodity is also at its optimum relative to the other commodity that uses other input. It shows that the inputs were distributed to a point that enables the optimum allocation of inputs relative to produced goods. In the question, if half of the cow dies and along its byproduct which is milk is cut in halves, the optimum production of the two commodities will be distorted and becomes inefficient, thus, causing a decline in a given economy.   7. Use a production possibilities frontier to describe the idea of efficiency. Production possibilities frontier shows how to efficiently distribute the various inputs of production enabling an economy to allocate its resources to achieve efficiency. 8. What are the two subfields into which economics is divided? Explain what each subfield studies. The two subfields of economics are macroeconomics and microeconomics. Microeconomics is the “bigger picture” of economics because it studies and shows how the decision of consumer, government and business can affect the economy. The study of macroeconomics includes the supply and demand, fiscal and monetary policies of the government, fundamentals of an economyand inflaction. Microeconomics, on the other hand, studies the interaction of various componenents in a certain economy on they affect each other. The study includes how wages affect demands, how the decisions of firms affect the economic choices of households, etc. 9. What is the difference between a positive and a normative statement? Give an example of each. Normative economics is the economic objective of a certain country characterized by growth, prosperity and stability. The science of it deals with the recommendation on how to achieve such goals. Positive economics, on the other hand, is represented by rigid data, concrete facts such as statistics and formulas of how an ideal economy should be. 10. Why do economists sometimes offer conflicting advice to policymakers? It is because people are different and have different world views and have different economic priorities. They could also disagree on the validity of the theories and methods they used in interpreting the economic world around them. Read More