Foundations of Economic Thinking - Essay Example

? Micro and Macro-economics Micro and Macro-economics questions and answers Lesson Foundations of economicthinking 1. A small county produces two goods: automobiles (consumer goods) and forklifts (capital goods). Points on a production possibilities curve can be shown in a table: A B C D E Automobiles 0 10 20 30 40 Forklifts 70 60 45 25 0 a).Show these data graphically. Does this production possibilities curve exhibit the law of increasing opportunity cost? Briefly explain. (10 points) GRAPH OF PRODUCTION POSSIBILTY BETWEEN AUTOMOBILES AND FORKLIFTS Fork Lifts 80 70 A 60 B 50 C 40 30 D 20 0 E Automobile 0 10 20 30 40 50 60 70 80 Source: Author The production possibility curve above represents two types of goods namely; fork lifts and automobile. The horizontal movement represents all the resources that were used to come up with automobile while vertical movement represent all resources that were used to come with the forklifts. Additionally, the graph represents a trade off that may exist when resources are shifted to either automobile or fork lifts. This is usually done when resources are fully employed given the fact that technology and institutions remain constant (Tucker, 2011). Given all the above conditions, out potential for the two products may be able to be achieved at any point on the curve (Tucker, 2011). The law of increasing opportunity coast states that, when technology and resources are held constant, opportunity cost increases as the production of one out increases (Tucker, 2011). In this case, the production possibility curve above exhibit the law of increasing opportunity cost because production possibility curve above displays a convex shape (Tucker, 2011). Whereby, movement along the horizontal axis causes a hypothetical economy to sacrifice production of fork lifts to produce additional unit’s automobile (Tucker, 2011).For example; when there is a shift from point A to B to C to D up to E, production of automobile continue to increase as more and units of forklifts are being sacrificed. On the other hand, when there is an upward movement along the vertical axis, hypothetical economy must sacrifice production of additional units of automobile in order to produce additional units of fork lifts. Therefore, based on the above assessment it can be scrutinized that the production possibility curve above exhibit the law of increasing opportunity cost (Tucker, 2011). b) If the economy is at point C, what is the opportunity cost of 10 more automobiles? (5 points) If the hypothetical economy is at point C, the economy must sacrifice 20 units of automobile in order to produce 45 additional units of forklifts this is because movement along the vertical axis led to an increase in number of automobile units being sacrificed in order to produce additional units of fork lifts. On the other hand, a downward movement below point C along the vertical axis leads to an increase in number of additional units of automobile being produced as more and more units of forklifts are being sacrificed(Tucker, 2011). C) If the economy is characterized by this production possibilities curve and is producing 10 automobiles and 40 forklifts, what can you conclude about its use of its available resources? (5 points) When this economy produces 10 automobiles and 40 forklifts, it is an indication that, the hypothetical economy must sacrifice 10 units of automobile in order to produce 10 units of folk lifts. On the other hand, the economy must sacrifice 40 units of forklifts to produce 10 units of automobile. At this point of production we can say that economy is it’s attainable and efficient because the resources are fully employed while technology is held constant (Tucker, 2011). d) Is production at a point outside of the production possibilities curve currently possible? Could a future advance in technology allow production beyond the current production possibilities curve? Could international trade allow a country to consume beyond its current production possibilities curve? Briefly explain. (5 points) Production at any point outside the possibility curve is not possible because the level of output would exceed what economy can afford to produce since the available economic resources are limited (Lipsey and Harbury, 1994). On the other hand, future advance in technology beyond the current possibility curve may make production attainable at a point outside production possibility curve (Lipsey and Harbury, 1994). This is because technology enhances efficiency and increases the level of production and therefore, future advances in technology will may production at a point outside the production possibility curve attainable (Musgrave and Kacapyr, 2006).In above connection, international can allow a country consume beyond its current possibility curve because as countries find it easier to import rather than to produce (Musgrave and Kacapyr, 2006).This make countries to consume beyond their current production possibility curve(Musgrave and Kacapyr, 2006). 2. What are the advantages and disadvantages associated with the corporate form of business enterprise? Explain. (25 points) The following are advantages of corporate form of business; first advantage is that, corporate form of business is independent entities which mean that the interest of shareholders are being protected such that shareholders are not personally liable for the liabilities of the business enterprise (Adamson, 2012). Secondly corporate forms of business enterprise separate tax liabilities between the business and the company. This means that owners are only liable to pay taxes on their own salaries while corporate pays corporate tax which is based on profits earned by the company. Third advantage is that it has perpetual life existence (Adamson, 2012). This means that the company is anticipated to operate forever because it does not die like human beings unless when mismanaged (GItman and Mcdaniel, 2009).Corporate forms of business have a lot of credibility. This means that they are more appealing and tend to have professional appearance as compared to other forms of business enterprise. Corporate forms of business can be able to raise more capital by issuing additional shares unlike other forms of business (GItman and Mcdaniel, 2009). On the other hand, corporate forms of business have some disadvantages which include; corporate enterprises may experience the problem of double taxation whereby, the company tends to pay taxes based on profits made as well as on dividend making the tax benefits to be so high. Another disadvantage is that in corporate forms of business there a lot of record keeping and documentations (GItman and Mcdaniel, 2009). This is because corporate must prepare annual reports which are used by the management in making corporate decisions as well as other stakeholders who may want to know about the performance of the company (GItman and Mcdaniel, 2009). Additionally, the cost of starting and running corporate forms of business is very high as compared to that of running sole proprietorships (GItman and Mcdaniel, 2009). In corporate forms of business decision making is time consuming because there is a lot of consultation until an agreement is made Adamson, 2012). Lesson 2: The Operation of Market Economies 1. The following table summarizes information about the market for principles of economics textbooks: Price Quantity Demanded per Year Quantity Supplied per Year $45 4,300 300 55 2,300 700 65 1,300 1,300 75 800 2,100 85 650 3,100 a). What is the market equilibrium price and quantity of textbooks? (5 points) PRICES Quantity Supplied A Equilibrium Price ($65) Quantity Demanded Quantity Equilibrium Qty (1300) Source: Author The equilibrium price of text books is $65 while equilibrium quantity is 1,300.The equilibrium point is at point A as indicated in the figure above which a point of intersection between the quantities demanded is and quantity supplied. b).To quell outrage over tuition increases, the college places a $55 limit on the price of textbooks. How many textbooks will be sold now? Is there a shortage or surplus of text books in this market? If so, calculate the value of the surplus or shortage. (10 points) At a price of $55, the quantity supplied is 700 text books while the quantity demanded will be 2,300 books. This means that the 700 text books supplied at this price will be sold. Therefore, there will be a deficit of (2300-700=1600books) 1600books text because the quantity demanded is higher than the quantity supplied. Hence there is a deficit of 1600 text books computed as shown below; Shortage= quantity supplied –quantity demanded Shortage ,=700 text books-2,300text books = -1,600 Shortage = 1,600text books. c). suppose that the price of printing paper (the major input into textbook production) increases. What happens to the equilibrium price and quantity of textbooks? Use supply and demand diagram to graphically illustrate your answer. (10 points) When the cost of inputs increases, production become very expensive forcing the suppliers to factor in this cost in the units of outputs sold to buyers. Therefore, the equilibrium price will escalate and the quantity of text books demanded will decline. This can be illustrated with an aid of a diagram as shown below. Quantity Supplied P1 E Equilibrium Price (EP) Quantity Demanded Quantity Equilibrium Q1 Qty (EQ) Source: Author Explanation of the figure above Based on the above diagram, it can be scrutinized that an increase in equilibrium price from point EP to point P1 causes a decline in quantity of text books demanded from point EQ to point QI as shown herein. Lesson 3: Economics in America 1. Answer the following questions: a).Suppose the consumption of a good entails rather sizable spill over benefits. How might the resulting misallocation of resources be corrected? (8 points) Spill over benefits refers to advantages or gains that people or a group of individuals obtain by consuming goods and services that they did not take party in their production process (Carbaugh, 2011). For example of those goods include; Radios, Television newspapers to name just but a few (Carbaugh, 2011). The cost and benefits that may occur either during production or consumption of those goods and services may lead to over or under consumption or over and under production of goods and services (Carbaugh, 2011). When this happens, resources miss allocation might occur and therefore creating the need to correct this situation (Carbaugh, 2011). The following are ways in which such miss allocation of resources may corrected; first step should involve identification of sources of miss allocation to know whether miss allocations are a rising from over or under production (Carbaugh, 2011). If there is underproduction, measures to boast production should be adopted. Such measures include; government may subsidies the cost of production by removing taxation on some inputs such reduction may help to motivate firms to increase their outputs (Carbaugh, 2011). On the contrary, if there is over production, firms may be taxed in order to discourage over production (Carbaugh, 2011). b) Name a good which is accompanied by spill over benefits. (7 points) Example a goad accompanied by spill over benefits is public DSTV, whereby every member of the public may access the DSTV and derive its benefits despite the fact that they have not been involved in its production. Additionally, if the premise where the DSTV is located requires repair and some maintenance the public do not have to pay for this cost (Carbaugh, 2011). Therefore, this is a good example of a good which is accompanied by a spill over benefits. c) What are the two characteristics of public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain. (10 points) The two distinct characteristics of public goods include; two or people may consume the same good without reducing or diminishing its value (Centre Cournot Pour LA Recherche EN Economies and Touffut, 2006). Another characteristic is that; once goods have been produced, individuals can not be prevented to consume these goods (Centre Cournot Pour LA Recherche EN Economies and Touffut, 2006). For example include; everyone enjoy the both internal and external security provided by police FBI and defense forces without excluding anybody. The US border patrol is a public good, because everyone enjoys the boarder patrol independently without interfering with other people enjoyment (Centre Cournot Pour LA Recherche EN Economies and Touffut, 2006). Additionally, T.V satellites are public goods because everyone enjoys it without interfering with each other and without being forced to pay for the benefits derived (Centre Cournot Pour LA Recherche EN Economies and Touffut, 2006). Lesson 4: Measuring Economic Performance 1. Defining GDP GDP refers to the Aggregate market value of every final good and services produced in a particular region at a given period (Boyes and Melvin, 2013). The GDP is expressed using the formula below. GDP= Consumption(c) + Government expenditure (G) +Investiments+Exports-Imports (NX) a). Which is more meaningful to economic policy makers, nominal or real GDP? Does your answer make any assumptions about what policy makers want to know? Justify your answer. (10 points) The most meaningful economic policy maker is real GDP because it takes into account the current changes in the economy when measuring the value of goods and services. On the other hand, is the nominal GDP which measure the face value of the aggregate goods and services produced in a particular economy at a given period (Coes, 1995).Therefore, nominal GDP is not a meaningful economic policy measure because it does reflect the actual living standards ( Coes, 1995). Nominal GDP tend to assumes important factors such as; literacy, crime, distribution of income, poverty level of poverty and quality of health to name just but a few (Coes, 1995). b). Why is GDP inadequate as a measure of social welfare? Can you think of any ways to make GDP a better measure of social welfare? (15 points) GDP is an inadequate measure of economic welfare because it does not take into consideration factors which have meaningful impact in the economy (Coes, 1995). The following are some of those factors that GDP tend to ignore; poverty levels, unemployment level, the levels of income, quality of health to name just but a few (Coes, 1995). Therefore, GDP may be made a better measure by making sure that all the factors that it assumes are factored in as well as ensuring factors like inflation and price changes are taken into account (Coes, 1995). 2).Bureau of Economic Analysis (BEA) reports the following data for the U.S. economy: Year Nominal GDP GDP Price Index 2007 14,029 2.9 2008 14,292 2.2 2009 13,939 1.1 2010 14,527 1.2 a). Compute real GDP for each year. (15 points) Based on the above data real GDB may be calculated as follows; Real GDP=Nominal GDP?GDP Price Index Real GDP for 2007=14,029?2.9= $4,837.6 Real GDP for 2008=14,292?2.2= $6,496.4 Real GDP for 2009=13,939?1.1= $12,671.8 Real GDP for 2010=14,527?1.2= $12,105.8 Aggregate Real GDP for 4 years= $36,111.6 b). In your own words, but accurately, characterize the performance of the U.S. economy over the period 2007–2010. (10 points) Based on the above computation of it can be scrutinized that real GDP has been increasing from 2007 to 2010. This indicates that the US economy has been going through a period of increased welfare (Boyes and Melvin, 2013). In above connection, an increase in the Unite states GDP indicates that inflation was higher and that demand for money continues to increase from 2007 to 2010. 3. Consumers in an economy buy only three general types of products, A, B, and C. Changes in the prices of these items over a period are shown below: Average Price Per Unit Product Quantity Year 1 Year 2 A 10 $10 $8 B 15 20 22 C 8 50 55 a). Using year 1 as the base year, calculate the country's price index (GDP deflator) in year 2. (25 points) GDP deflator= Nominal GDP ? 100 Real GDP Nominal GDP= (10-8) ? 10 = 2.5 8 = (20-22) ? 15 = -1.36 22 = (50-55) ? 8= -0.73 55 0.41 Real GDP =Quantity ? prices for the current year = (10?8) + (15?22) + (8?55) =80=330+440 =$850 GDP deflator= Nominal GDP ? 100 = 0.41 ? 100 =0.04823 Real GDP 850 Reference list Adamson, J. E. 2012; Law for business and personal use. Mason, OH, South-Western Cengage Learning. Boyes, W. J., and Melvin, M. 2013; Economics. Australia: Cengage Learning South-Western. Carbaugh, R. J. 2011; Contemporary economics: an applications approach. Armonk, N.Y., M.E. Sharpe. Centre Cournot Pour LA Recherche EN Economies and Touffut, J.-P. 2006; Advancing public goods. Northampton, MA, Edward Elgar Pub. Coes, D. V. (1995). Macroeconomic crises, policies, and growth in Brazil, 1964-90. Washington, DC: World bank. GItman, L. J., and Mcdaniel, C. D. 2009; The future of business: the essentials. Mason, OH, South-Western Cenage Learning. Lipsey, R. G., and Harbury, C. 1994; First principles of economics. Oxford, Oxford University Press. Musgrave, F., and Kacapyr, E. 2006; Barron's how to prepare for the AP microeconomics/macroeconomics advanced placement examinations. Hauppauge, N.Y., Barron's. Tucker, I. B. 2011; Macroeconomics for today. Mason, OH, South-Western Cengage Learning. Read More