Chapter One The Central Idea. Economics Economics is the study of how people deal with scarcity –Scarcity: Situation in which the quantity of resources.

Chapter OneChapter One

The Central IdeaThe Central Idea

EconomicsEconomicsEconomics is the study of how people deal with Economics is the study of how people deal with scarcityscarcity– Scarcity: Situation in which the quantity of resources Scarcity: Situation in which the quantity of resources

is insufficient to meet all wants (not enough stuff for is insufficient to meet all wants (not enough stuff for our wants)our wants)

– Leads to CHOICES: Must give up one thing in favor Leads to CHOICES: Must give up one thing in favor for anotherfor another

Economic interaction is the exchanges of goods Economic interaction is the exchanges of goods and services between peopleand services between people

These interactions can occur in a MARKET – an These interactions can occur in a MARKET – an arrangement where economic exchanges arrangement where economic exchanges between people take place between people take place

Consumer DecisionsConsumer DecisionsOpportunity Cost: Value of the next-best Opportunity Cost: Value of the next-best alternative that was not chosenalternative that was not chosen

Gains from Trade: Improvements in Gains from Trade: Improvements in income, production, or satisfaction owing income, production, or satisfaction owing to the exchange of goods or servicesto the exchange of goods or services– Important: Voluntary trade only happens if Important: Voluntary trade only happens if

BOTH parties gain.BOTH parties gain.– Does not change total amount of goods, just Does not change total amount of goods, just

redistributes or reallocatesredistributes or reallocates

Figure 1.1: Gains from Trade Through a Better Allocation of Figure 1.1: Gains from Trade Through a Better Allocation of GoodsGoods

Consumer DecisionsConsumer Decisions

When acting alone, When acting alone, Emily and Johann can Emily and Johann can only produce 1 card only produce 1 card each (2 total)each (2 total)

If they sell their If they sell their services to each services to each other, they can other, they can produce 10 total produce 10 total cardscards

They BOTH gain from They BOTH gain from tradetrade

EmilyEmily

PoetPoet

JohannJohann

PrinterPrinter

Write Write Full Full

TimeTime

Write Write and and PrintPrint

Print Print Full Full

TimeTime

Write Write and and PrintPrint

CardsCards 00 11 1010 11

PoemsPoems 1010 11 00 11

Consumer DecisionsConsumer DecisionsSpecialization: People concentrating on what Specialization: People concentrating on what they are good atthey are good atCreates a DIVISION OF LABOR: workers Creates a DIVISION OF LABOR: workers concentrate on different tasksconcentrate on different tasksComparative Advantage: A situation where a Comparative Advantage: A situation where a person can produce a good for a lower person can produce a good for a lower opportunity cost than another person.opportunity cost than another person.

– When people specialize where they have a When people specialize where they have a comparative advantage, overall production is comparative advantage, overall production is increasedincreased

International Trade: Exchange of goods or International Trade: Exchange of goods or services between people in different countriesservices between people in different countries

Scarcity and Choice for the Economy as a WholeScarcity and Choice for the Economy as a WholeConsumption vs. Consumption vs. InvestmentInvestmentOpportunity cost of Opportunity cost of producing 200 movies producing 200 movies instead of 100 movies is instead of 100 movies is 2,000 computers2,000 computersOC of making 300 movies OC of making 300 movies instead of 200 movies is instead of 200 movies is 4,000 computers4,000 computersOC of making 400 movies OC of making 400 movies instead of 300 is 5,000 instead of 300 is 5,000 computerscomputersOC of making 500 movies OC of making 500 movies instead of 400 is 13,000 instead of 400 is 13,000 computerscomputers

MoviesMovies ComputersComputers

00 25,00025,000

100100 24,00024,000

200200 22,00022,000

300300 18,00018,000

400400 13,00013,000

500500 00

Production PossibilitiesProduction PossibilitiesBecause OC Because OC continues to go up as continues to go up as we make more we make more movies, it is called movies, it is called INCREASING INCREASING opportunity costopportunity cost

MoviesMovies ComputersComputers

00 25,00025,000

100100 24,00024,000

200200 22,00022,000

300300 18,00018,000

400400 13,00013,000

500500 00

Figure 1.2: The Production Possibilities CurveFigure 1.2: The Production Possibilities Curve

Production Possibilities CurveProduction Possibilities CurveBows out because of Bows out because of increasing opportunity increasing opportunity cost of producing movies cost of producing movies – each move causes a – each move causes a more dramatic fall in more dramatic fall in graphgraphPoints of line: Points of line: EFFICIENTEFFICIENTPoints under or to the Points under or to the left of line: INEFFICIENTleft of line: INEFFICIENTPoints over or to the Points over or to the right of line: right of line: IMPOSSIBLEIMPOSSIBLE

Figure 1.3: Shifts in the Production Possibilities CurveFigure 1.3: Shifts in the Production Possibilities Curve

Shifts in the PP CurveShifts in the PP CurveShift out, up, right Shift out, up, right means increase in means increase in production, due to production, due to things like more things like more workers or developing workers or developing technologytechnology

Doesn’t need to be a Doesn’t need to be a uniform shiftuniform shift

Impossible points are Impossible points are not “forever” not “forever” impossibleimpossible

Figure 1.4: Shifts in the Production Possibilities Figure 1.4: Shifts in the Production Possibilities Curve Depend on ChoicesCurve Depend on Choices

Market Economies and Price SystemsMarket Economies and Price Systems

Market Economy: An economy where Market Economy: An economy where prices are freely determined and goods and prices are freely determined and goods and services can be traded freely in marketsservices can be traded freely in markets– Examples: United States, Mexico, AustraliaExamples: United States, Mexico, Australia

Command Economy (Centrally Planned Command Economy (Centrally Planned Economy): An economy where the Economy): An economy where the government determines prices and government determines prices and productionproduction– Examples: Soviet Union, ChinaExamples: Soviet Union, China

Market Economies are more productive, so Market Economies are more productive, so most of the world is trying to convertmost of the world is trying to convert

Key Elements of a Market EconomyKey Elements of a Market EconomyFreely Determined PricesFreely Determined Prices– Leads to inefficiencies. Example – feeding Leads to inefficiencies. Example – feeding

bread to cows in the Soviet Unionbread to cows in the Soviet Union

Property Rights and IncentivesProperty Rights and Incentives– Property rights give people control over their Property rights give people control over their

assetsassets– Incentives are devices used to motivate Incentives are devices used to motivate

people to take action, usually increasing people to take action, usually increasing productivityproductivity

Freedom to Trade both home and abroadFreedom to Trade both home and abroad

Key Elements of a Market Economy, continuedKey Elements of a Market Economy, continued

A Role For GovernmentA Role For Government– How much involvement should government How much involvement should government

have? Police? Education? Welfare?have? Police? Education? Welfare?– Market Failure: Market is inefficient, potential Market Failure: Market is inefficient, potential

for government involvementfor government involvement– Government Failure: Government made Government Failure: Government made

things worse things worse

Role of Private OrganizationsRole of Private Organizations– Organizations exist to reduce transaction Organizations exist to reduce transaction

costs (costs of buying and selling)costs (costs of buying and selling)

The Price SystemThe Price System

SignalsSignals– As demand increases, prices increase therefore As demand increases, prices increase therefore

“signaling” that there needs to be more workers, more “signaling” that there needs to be more workers, more production, etc.production, etc.

IncentivesIncentives– If more money is entering an industry, more firms will If more money is entering an industry, more firms will

enter. In contrast, it will hurt competing industries.enter. In contrast, it will hurt competing industries.

DistributionDistribution– Workers in “hot” industries earn more, while Workers in “hot” industries earn more, while

competing industries’ employees will earn less.competing industries’ employees will earn less.

Answers to Text ProblemsAnswers to Text Problems

1. The limited budget for guest speakers means that you 1. The limited budget for guest speakers means that you can either bring in Spike Lee for one lecture or have ten can either bring in Spike Lee for one lecture or have ten lectures by former economic advisers. As a resource, lectures by former economic advisers. As a resource, Spike Lee is scarcer than former economic advisers are, Spike Lee is scarcer than former economic advisers are, and therefore his price for a lecture is much higher. The and therefore his price for a lecture is much higher. The scarcity represented by the limited budget means that scarcity represented by the limited budget means that either Spike Lee or former economic advisers can be either Spike Lee or former economic advisers can be invited to speak, and therefore a choice must be made. It invited to speak, and therefore a choice must be made. It is necessary to consider how many people will attend the is necessary to consider how many people will attend the lecture and what those people will prefer. To determine lecture and what those people will prefer. To determine whether the money is better spent on Spike Lee or whether the money is better spent on Spike Lee or former economic advisers, you have to compare the former economic advisers, you have to compare the additional satisfaction per dollar spent on Spike Lee additional satisfaction per dollar spent on Spike Lee versus the former economic advisers.versus the former economic advisers.


2. The opportunity cost of attending one more year of 2. The opportunity cost of attending one more year of school is the income given up by not working over that school is the income given up by not working over that year. So, in a sense, the cost of any additional year of year. So, in a sense, the cost of any additional year of school for each graduate is the same: lost income. school for each graduate is the same: lost income. However, the income one can earn increases with the However, the income one can earn increases with the attainment of higher levels of education. Therefore, the attainment of higher levels of education. Therefore, the opportunity cost (income given up) of one year of school opportunity cost (income given up) of one year of school for the medical school graduate will be larger than the for the medical school graduate will be larger than the opportunity cost of the college graduate. Of the three opportunity cost of the college graduate. Of the three graduates, the high school graduate has the smallest graduates, the high school graduate has the smallest opportunity cost of an additional year of education.opportunity cost of an additional year of education.


3. The opportunity cost of any choice is the 3. The opportunity cost of any choice is the next-best or second-best alternative given next-best or second-best alternative given up. Allison's opportunity cost of ranking up. Allison's opportunity cost of ranking the consulting job first is not being able to the consulting job first is not being able to attend a local community college. The attend a local community college. The third alternative involving world travel has third alternative involving world travel has nothing to do with the opportunity cost of nothing to do with the opportunity cost of consulting. An opportunity cost is the consulting. An opportunity cost is the next-next-best alternative given up.best alternative given up.


4. Assuming that people like salt 4. Assuming that people like salt and and pepper pepper to season food, both of us are better off if to season food, both of us are better off if we trade one salt shaker for one pepper we trade one salt shaker for one pepper shaker. We both gain from a better shaker. We both gain from a better allocation. There is no production going on allocation. There is no production going on in the question. We both lose if trade is in the question. We both lose if trade is prevented, not just the one person in the prevented, not just the one person in the country that does not allow trade.country that does not allow trade.


5. A. Tina is producing 30 units of salsa and Julia is 5. A. Tina is producing 30 units of salsa and Julia is producing 15 units of salsa. Total production is 45 units producing 15 units of salsa. Total production is 45 units of salsa and 4 advertisements. of salsa and 4 advertisements.

B. Gains from trade are possible because they have B. Gains from trade are possible because they have different comparative advantages. This is to say, they different comparative advantages. This is to say, they have different relative efficiencies in the production of have different relative efficiencies in the production of salsa and advertisements.salsa and advertisements.

C. Total production will be 5 ads and 50 units of salsa per C. Total production will be 5 ads and 50 units of salsa per week.week.

Answers to Text ProblemsAnswers to Text Problems6.6. A.A.

B. The opportunity cost of increasing the time spent on math from 80 to 100 percent is B. The opportunity cost of increasing the time spent on math from 80 to 100 percent is 50 points on the English paper, a decrease in the English grade from 50 points to 50 points on the English paper, a decrease in the English grade from 50 points to 0 points. The opportunity cost of increasing the time spent on math from 60 to 80 0 points. The opportunity cost of increasing the time spent on math from 60 to 80 percent is 20 points on the English paper, a decrease in the paper's grade from percent is 20 points on the English paper, a decrease in the paper's grade from 70 points to 50 points.70 points to 50 points.

C. There are increasing opportunity costs from spending more time studying math. This C. There are increasing opportunity costs from spending more time studying math. This is because additional time spent on one subject takes away from the time is because additional time spent on one subject takes away from the time available for the other subject, and time taken away from that subject becomes available for the other subject, and time taken away from that subject becomes increasingly valuable when less time is available for that subject.increasingly valuable when less time is available for that subject.

D. Given the figures in the chart, there is no distribution of time between English and D. Given the figures in the chart, there is no distribution of time between English and math that will create a grade of 92 on both. Therefore, the tradeoff curve needs math that will create a grade of 92 on both. Therefore, the tradeoff curve needs to shift to the right. This might occur due to learning new study techniques.to shift to the right. This might occur due to learning new study techniques.


7.7. A.A.

B. PPF shifts out mainly in the production of cars. This is seen in the dashed B. PPF shifts out mainly in the production of cars. This is seen in the dashed line in the figure.line in the figure.


8. Japan had a high rate of saving relative to the 8. Japan had a high rate of saving relative to the United States, emphasizing investment more United States, emphasizing investment more than Americans. As you can see in Figure 1.3 in than Americans. As you can see in Figure 1.3 in Chapter 1, higher investment results in a more Chapter 1, higher investment results in a more rapid growth of the country's production rapid growth of the country's production possibilities curve. The consumption and possibilities curve. The consumption and investment decisions of past Japanese investment decisions of past Japanese generations allow the current generation to enjoy generations allow the current generation to enjoy a higher quantity and diversity of goods.a higher quantity and diversity of goods.

Answers to Text ProblemsAnswers to Text Problems99. . First, if Huey is not very efficient (inside his PPF) at either studying or having First, if Huey is not very efficient (inside his PPF) at either studying or having

fun, Tracy may help with both by helping Huey be more efficient at having fun, Tracy may help with both by helping Huey be more efficient at having fun and studying. Huey would move toward his PPF. Second, if Huey is fun and studying. Huey would move toward his PPF. Second, if Huey is efficient (on his PPF), Tracy may know something new about how to study efficient (on his PPF), Tracy may know something new about how to study and how to have fun. Here, Huey's PPF shifts outward. In either case, Huey and how to have fun. Here, Huey's PPF shifts outward. In either case, Huey is not being efficient.is not being efficient.Figure 1-3 shows how Huey's economics grade could be increased without Figure 1-3 shows how Huey's economics grade could be increased without affecting his grade in mathematics starting from an inefficient situation.affecting his grade in mathematics starting from an inefficient situation.


10. Neither the country that sets prices nor 10. Neither the country that sets prices nor the country that tries to adjust prices daily the country that tries to adjust prices daily is a market economy. A market economy is a market economy. A market economy has prices determined in a free market has prices determined in a free market through the interaction of self-interested through the interaction of self-interested buyers and sellers.buyers and sellers.


11. Oil is bought and sold on a world market. 11. Oil is bought and sold on a world market. A higher price tells U.S. producers that A higher price tells U.S. producers that their oil is more valuable and encourages their oil is more valuable and encourages them to increase production. The higher them to increase production. The higher price redistributes income away from price redistributes income away from consumers of oil toward producers of oil.consumers of oil toward producers of oil.


12. Nearly any good and service can be put into 12. Nearly any good and service can be put into the sentence to produce a true statement. The the sentence to produce a true statement. The statement will not work, however, in the case statement will not work, however, in the case of some public goods (for example, national of some public goods (for example, national defense); goods that involve externalities (such defense); goods that involve externalities (such as clean air); services in which the transport as clean air); services in which the transport costs are prohibitive (haircuts); goods and costs are prohibitive (haircuts); goods and services that are explicitly illegal (illicit drugs); services that are explicitly illegal (illicit drugs); or human beings themselves (that is, slavery is or human beings themselves (that is, slavery is illegal).illegal).

Chapter ReviewChapter Review

1.1. The _____________ of a choice is the The _____________ of a choice is the value of the foregone alternative that was value of the foregone alternative that was not chosen. not chosen.

A.A. Comparative advantageComparative advantage

B.B. Production possibilityProduction possibility

C.C. Opportunity costOpportunity cost

D.D. Gain from tradeGain from trade


2. Specialization in production results in 2. Specialization in production results in ______________. ______________.

A.A. gains from tradegains from tradeB.B. division of labordivision of laborC.C. increasing opportunity costsincreasing opportunity costsD.D. comparative advantagecomparative advantage


3. The ________________ is the price of 3. The ________________ is the price of money in terms of another. money in terms of another.

A.A. trade ratetrade rate

B.B. exchange rateexchange rate

C.C. medium of exchangemedium of exchange

D.D. comparative rate comparative rate


4. The two major types of economies are 4. The two major types of economies are _____________ and ____________ _____________ and ____________ economies. economies.

A. multilateral, commandA. multilateral, commandB. central, plannedB. central, plannedC. market, governmentC. market, governmentD. market, commandD. market, command


5. In a market economy, prices serve as 5. In a market economy, prices serve as _______________, provide _______________, provide _____________, and affect the _____________, and affect the _______________. _______________.

A.A. signals, incentive, distribution of incomesignals, incentive, distribution of incomeB.B. distribution of income, signals, incentivedistribution of income, signals, incentiveC.C. signals, distribution of income, incentivesignals, distribution of income, incentiveD.D. incentive, signals, distribution of income incentive, signals, distribution of income


6. Scarcity is a characteristic of a 6. Scarcity is a characteristic of a command economy, but not of a command economy, but not of a market economy. market economy.

A. TrueA. True

B. FalseB. False


7. If Canada produces two goods with less 7. If Canada produces two goods with less resources than the United States, there resources than the United States, there can be no comparative advantage in can be no comparative advantage in those two goods. those two goods.

A.A. TrueTrue

B.B. FalseFalse


8. The production possibilities curve slopes 8. The production possibilities curve slopes downward. downward.

A.A. TrueTrue

B.B. FalseFalse


9. A market economy is also called a 9. A market economy is also called a centrally planned economy.centrally planned economy.

A.A. TrueTrue

B.B. FalseFalse


10. Freely determined prices and property 10. Freely determined prices and property rights are characteristics of centrally rights are characteristics of centrally planned economies. planned economies.

A.A. TrueTrue

B.B. FalseFalse


11. When one person or group of people can 11. When one person or group of people can produce one good relative to another good with produce one good relative to another good with comparatively less time, effort, or resources comparatively less time, effort, or resources than another person can produce that good, than another person can produce that good, this is called this is called

A.A. comparative advantage.comparative advantage.B.B. specialization.specialization.C.C. opportunity cost.opportunity cost.D.D. division of labor.division of labor.


12. When more than two people engage in 12. When more than two people engage in trade, it is called trade, it is called

A.A. international trade.international trade.

B.B. multilateral trade.multilateral trade.

C.C. gains from trade.gains from trade.

D.D. comparative advantage.comparative advantage.


13. The production possibilities curve 13. The production possibilities curve

A.A. slopes downward and is bowed out from the slopes downward and is bowed out from the origin.origin.

B.B. slopes upward and is bowed out from the slopes upward and is bowed out from the origin.origin.

C.C. slopes downward and is bowed in toward the slopes downward and is bowed in toward the origin.origin.

D.D. slopes upward and is bowed in toward the slopes upward and is bowed in toward the origin origin


14. Points outside the production 14. Points outside the production possibilities curve are possibilities curve are

A.A. efficient.efficient.

B.B. inefficient.inefficient.

C.C. impossible.impossible.

D.D. possible.possible.


15. Economic growth causes 15. Economic growth causes

A.A. an inward shift in the production possibilities an inward shift in the production possibilities curve.curve.

B.B. an outward shift in the production possibilities an outward shift in the production possibilities curve.curve.

C.C. an upward movement on the production an upward movement on the production possibilities curve.possibilities curve.

D.D. a downward movement on the production a downward movement on the production possibilities curve.possibilities curve.


16. The price that one department of an 16. The price that one department of an organization must pay to receive goods and organization must pay to receive goods and services from another department in the same services from another department in the same organization is called a(n) organization is called a(n)

A.A. transfer price.transfer price.B.B. transaction cost.transaction cost.C.C. opportunity cost.opportunity cost.D.D. transaction price.transaction price.


17. Which of the following is NOT one of the 17. Which of the following is NOT one of the important roles of prices in a market important roles of prices in a market economy? economy?

A.A. They serve as signals.They serve as signals.B.B. They provide incentives.They provide incentives.C.C. They form preferences.They form preferences.D.D. They affect the distribution of income.They affect the distribution of income.


18. 18. If the economy devotes all of its resources If the economy devotes all of its resources to steel production, it will be producing at to steel production, it will be producing at pointpoint

a.a. AA

b.b. BB

c.c. HH

d.d. GG


19. Point F in the diagram represents 19. Point F in the diagram represents

a.a. an efficient production level.an efficient production level.b.b. an inefficient production level.an inefficient production level.c.c. an impossible production level.an impossible production level.d.d. a possible production level.a possible production level.


20. If the economy is currently producing at 20. If the economy is currently producing at point E, then point E, then

A.A. it is utilizing its resources efficiently.it is utilizing its resources efficiently.

B.B. it is utilizing its resources inefficiently.it is utilizing its resources inefficiently.

C.C. it is on its production possibilities curve.it is on its production possibilities curve.

D.D. it is beyond its production possibilities curve.it is beyond its production possibilities curve.

ProblemsProblems

1. Sharon has only thirty dollars to spend for 1. Sharon has only thirty dollars to spend for her weekend entertainment. She can go to her weekend entertainment. She can go to a college football game for thirty dollars, or a college football game for thirty dollars, or she can go to the movies for ten dollars. she can go to the movies for ten dollars. Explain the problem of scarcity and choice Explain the problem of scarcity and choice in this context. What will Sharon consider in this context. What will Sharon consider as she decides whether to go to the as she decides whether to go to the football game or the movie? football game or the movie?

AnswerAnswer

The scarcity represented by the limited budget The scarcity represented by the limited budget means that Sharon can either go to the football means that Sharon can either go to the football game, or the movies three times, and therefore a game, or the movies three times, and therefore a choice between them must be made. Sharon will choice between them must be made. Sharon will consider how intense her preferences are to see consider how intense her preferences are to see the football game and compare this to the ticket the football game and compare this to the ticket price. She will compare the additional price. She will compare the additional satisfaction per dollar spent on the football game satisfaction per dollar spent on the football game versus going to the movies.versus going to the movies.

ProblemsProblems

2. 2. Compare the opportunity cost of one Compare the opportunity cost of one more year of college versus for one more year of college versus for one year for (1) a factory worker earning year for (1) a factory worker earning $15,000 a year, (2) an engineer $15,000 a year, (2) an engineer earning $60,000 a year, and (3) a earning $60,000 a year, and (3) a computer programmer earning computer programmer earning $100,000 a year. $100,000 a year.

AnswerAnswer

One of the opportunity costs of one more One of the opportunity costs of one more year of college is the yearly earning one year of college is the yearly earning one has to give up in order to attend college. has to give up in order to attend college. Therefore, the opportunity cost is higher Therefore, the opportunity cost is higher for the computer programmer than that for for the computer programmer than that for the engineer, which in turn is higher than the engineer, which in turn is higher than that for the factory worker.that for the factory worker.

ProblemsProblems

3. John is a high school student. He has ranked 3. John is a high school student. He has ranked his 3 options of what he can do during the his 3 options of what he can do during the Christmas school break in the following order: Christmas school break in the following order: (1) work in a fast-food restaurant full time and (1) work in a fast-food restaurant full time and earn $2,000, (2) work in a department store for earn $2,000, (2) work in a department store for the first two weeks of the break and earn $1,000 the first two weeks of the break and earn $1,000 and spend the rest of the break traveling, (3) and spend the rest of the break traveling, (3) work in his father’s shoe factory full time and work in his father’s shoe factory full time and earn $1,500. What is the opportunity cost of his earn $1,500. What is the opportunity cost of his choice? choice?

AnswerAnswer

John’s first choice is to work full time in a John’s first choice is to work full time in a fast-food restaurant. His next best fast-food restaurant. His next best opportunity is working for part of the opportunity is working for part of the Christmas break and traveling for the Christmas break and traveling for the remainder of the break. Therefore, the remainder of the break. Therefore, the opportunity cost of his first choice is the opportunity cost of his first choice is the $1,000 he would have received from $1,000 he would have received from working in a department store as well as working in a department store as well as the time he could have used for traveling.the time he could have used for traveling.

ProblemsProblems

4. Suppose you have two hotdog sausages 4. Suppose you have two hotdog sausages and a friend of yours has two hotdog buns. and a friend of yours has two hotdog buns. Explain how you can both gain from trade. Explain how you can both gain from trade. Is this gain from trade through better Is this gain from trade through better allocation or greater production? Suppose allocation or greater production? Suppose now that your friend lives in another now that your friend lives in another country, whose government does not allow country, whose government does not allow trade between countries. Who would lose trade between countries. Who would lose as a result of this trade barrier? as a result of this trade barrier?

AnswerAnswer

You can trade one of your hotdog sausages You can trade one of your hotdog sausages for one of your friend’s hotdog buns. As a for one of your friend’s hotdog buns. As a result, both you and your friend can gain result, both you and your friend can gain from the exchange. This gain is through from the exchange. This gain is through better allocation rather than greater better allocation rather than greater production. If trade between you and your production. If trade between you and your friends is prohibited, then both you and friends is prohibited, then both you and your friend would lose.your friend would lose.

ProblemsProblems5. Suppose Ashley and Allison can produce the following combinations of pizza 5. Suppose Ashley and Allison can produce the following combinations of pizza

and cakes in a day: and cakes in a day:

A. If Ashley and Allison are both currently producing 2 pizza pies per day, how A. If Ashley and Allison are both currently producing 2 pizza pies per day, how many cakes are they producing? What is the total production of pizza and many cakes are they producing? What is the total production of pizza and cakes between them?cakes between them?

B. Is there a possibility for increasing production? Why or why not? B. Is there a possibility for increasing production? Why or why not? C. Suppose that Ashley completely specializes in producing pizza and Allison C. Suppose that Ashley completely specializes in producing pizza and Allison

completely specializes in producing cakes. What will be the total completely specializes in producing cakes. What will be the total production of pizza and cakes? production of pizza and cakes?

AnswerAnswer

A. Ashley is producing 3 cakes and Allison is producing 6 A. Ashley is producing 3 cakes and Allison is producing 6 cakes. Total production—4 pizza pies and 9 cakes. cakes. Total production—4 pizza pies and 9 cakes.

B. Gains from trade are possible because they have B. Gains from trade are possible because they have different comparative advantage—different relative different comparative advantage—different relative efficiencies in the production of pizzas and cakes.efficiencies in the production of pizzas and cakes.

C. Total production will be 5 pizza pies and 10 cakes per C. Total production will be 5 pizza pies and 10 cakes per day.day.

ProblemsProblems

6. Suppose one country is relatively efficient 6. Suppose one country is relatively efficient at producing software and another country at producing software and another country is relatively efficient at producing TV sets. is relatively efficient at producing TV sets. Will specialization and trade between Will specialization and trade between these two countries increase the total these two countries increase the total production of the two countries? production of the two countries?

AnswersAnswers

Specialization and trade between two Specialization and trade between two countries will increase the total production countries will increase the total production of the two countries because shifting of the two countries because shifting production toward the good in which they production toward the good in which they are relatively efficient will increase the total are relatively efficient will increase the total world production of both goods.world production of both goods.

ProblemsProblems7. Suppose you must divide your time between studying for your biology final 7. Suppose you must divide your time between studying for your biology final

and writing a final paper for your economics class. The time and the and writing a final paper for your economics class. The time and the grades in the two classes are as follows: grades in the two classes are as follows:

A. Draw a tradeoff curve for the biology grade versus the economics grade. A. Draw a tradeoff curve for the biology grade versus the economics grade. B. What is the opportunity cost of increasing the time spent on biology from B. What is the opportunity cost of increasing the time spent on biology from

60 to 80 percent? What is the opportunity cost of increasing the time 60 to 80 percent? What is the opportunity cost of increasing the time spent on economics from 80 to 100 percent? spent on economics from 80 to 100 percent?

C. Are there increasing opportunity costs from spending more time on C. Are there increasing opportunity costs from spending more time on biology? Explain. biology? Explain.

AnswerAnswerA.A. A tradeoff curve for the biology grade versus the economic A tradeoff curve for the biology grade versus the economic

grade is as follows:grade is as follows:

B.B. 20 points on the biology grade; 45 points on the economics 20 points on the biology grade; 45 points on the economics grade. grade.

C.C. There are increasing opportunity costs from spending more There are increasing opportunity costs from spending more time on biology because as more time is spent on biology, an time on biology because as more time is spent on biology, an increasing number of economics points must be given up.increasing number of economics points must be given up.

ProblemsProblems8.8. A small country produces only two goods, CDs and T-shirts. A small country produces only two goods, CDs and T-shirts.

Given its limited resources, this country has the following Given its limited resources, this country has the following production possibilities: production possibilities:

A. Draw the production possibilities curve. A. Draw the production possibilities curve. B. Suppose this country improves its technology for producing B. Suppose this country improves its technology for producing

CDs, but technology remains the same for the production of CDs, but technology remains the same for the production of T-shirts. What happens to the production possibility curve? T-shirts. What happens to the production possibility curve? How does this change affect the opportunity cost of How does this change affect the opportunity cost of increasing T-short production? increasing T-short production?

AnswerAnswer

A.A.

B.B. The production possibilities curve shifts out in the direction of CDs, The production possibilities curve shifts out in the direction of CDs, but the total quantity of T-shirts that can be produced remains the but the total quantity of T-shirts that can be produced remains the same. This change causes the production possibilities curve to be same. This change causes the production possibilities curve to be flatter when CD production is on the horizontal axis, and therefore flatter when CD production is on the horizontal axis, and therefore

decreases the opportunity cost of increasing CD production.decreases the opportunity cost of increasing CD production.

ProblemsProblems9. Look at the diagram below. What is the opportunity cost of moving from 9. Look at the diagram below. What is the opportunity cost of moving from

point B to point A? What are some ways in which the economy can move point B to point A? What are some ways in which the economy can move out of the inefficient area inside the production possibilities curve? out of the inefficient area inside the production possibilities curve?

AnswerAnswer

There is no opportunity cost of moving from There is no opportunity cost of moving from B to A because it is a move from inside the B to A because it is a move from inside the production possibility curve to a point on production possibility curve to a point on the production possibility curve. The the production possibility curve. The economy can do this by increasing its use economy can do this by increasing its use of resources and employing more of its of resources and employing more of its capital and labor.capital and labor.

ProblemsProblems

10. Suppose two countries initially have the 10. Suppose two countries initially have the same endowment of resources and are same endowment of resources and are both able to produce computers and both able to produce computers and clothing. Computers represent investment clothing. Computers represent investment and clothing represent consumption. and clothing represent consumption. Suppose one country chooses a Suppose one country chooses a combination that has more computers than combination that has more computers than the other. How do you think the production the other. How do you think the production possibilities curves will differ in the future? possibilities curves will differ in the future?

AnswerAnswer

The country that chooses more of The country that chooses more of the investment good will have its the investment good will have its production possibilities curve shift production possibilities curve shift out further than the other out further than the other country’s production possibilities country’s production possibilities curve.curve.

ProblemsProblems

11. Susan the professor can spend her 11. Susan the professor can spend her time doing research or preparing time doing research or preparing lectures. What is the opportunity cost lectures. What is the opportunity cost of her spending time doing research? of her spending time doing research? As Susan spends more and more As Susan spends more and more time doing research, there are time doing research, there are increasing opportunity costs. Why?increasing opportunity costs. Why?

AnswerAnswer

11. The opportunity cost is the value of the next 11. The opportunity cost is the value of the next best forgone alternative that was not chosen best forgone alternative that was not chosen because Susan decided to do research. If this because Susan decided to do research. If this next best alternative is preparing lectures, the next best alternative is preparing lectures, the opportunity cost of research is the amount of opportunity cost of research is the amount of lecture preparation she could have done with lecture preparation she could have done with time allocated to research. The more time time allocated to research. The more time devoted to research, the less time that is devoted to research, the less time that is allocated to teaching, the higher the value of the allocated to teaching, the higher the value of the time allocated to teaching.time allocated to teaching.

ProblemsProblems

12. Suppose the government in a 12. Suppose the government in a hypothetical economy is responsible hypothetical economy is responsible for setting prices. Explain why, for setting prices. Explain why, regardless of how the government regardless of how the government sets prices, this cannot be a market sets prices, this cannot be a market economy. economy.

AnswerAnswer

In a market economy prices are In a market economy prices are freely determined by many buyers freely determined by many buyers and sellers. For this to work, and sellers. For this to work, prices cannot be set by a single prices cannot be set by a single entity such as the government.entity such as the government.

ProblemsProblems

13. Suppose increased production of 13. Suppose increased production of VCRs in Asia causes the price of VCRs in Asia causes the price of VCRs to decline all over the world. VCRs to decline all over the world. Explain how this change in the price Explain how this change in the price signals information to U.S. producers, signals information to U.S. producers, provides incentives to U.S. producers, provides incentives to U.S. producers, and affects the distribution of income. and affects the distribution of income.

AnswerAnswer

A decrease in the price of VCRs signals A decrease in the price of VCRs signals U.S. producers that VCRs are now less U.S. producers that VCRs are now less scarce. A lower price decreases profits, scarce. A lower price decreases profits, thereby providing incentives for U.S. thereby providing incentives for U.S. producers to produce fewer VCRs. It also producers to produce fewer VCRs. It also redistributes income away from U.S. redistributes income away from U.S. producers and toward consumers.producers and toward consumers.

ProblemsProblems

14. Explain how a market 14. Explain how a market economy works to enable the economy works to enable the production and allocation of production and allocation of surfboards. surfboards.

AnswerAnswer

Prices in the surfboard market are free to vary; Prices in the surfboard market are free to vary; people have property rights to the surfboards people have property rights to the surfboards they buy; many people sell surfboards; the they buy; many people sell surfboards; the government does not regulate the use of government does not regulate the use of surfboards; and surfboard production takes surfboards; and surfboard production takes place within firms with many workers. A higher place within firms with many workers. A higher price, for instance, will allocate surfboards to the price, for instance, will allocate surfboards to the serious surfers and away from the casual serious surfers and away from the casual surfers.surfers.

ActivitiesActivities

1122334455667788Multiple Choice Questions, Short Free-Multiple Choice Questions, Short Free-Response Questions, Long Free-Response Response Questions, Long Free-Response QuestionsQuestions

Activity 1Activity 11.1. False – Sunshine isn’t scarce because it isn’t limited; False – Sunshine isn’t scarce because it isn’t limited;

it is a free good.it is a free good.2.2. False – Polio isn’t scarce because it is desirable.False – Polio isn’t scarce because it is desirable.3.3. False – Scarcity is a relative, not an absolute, False – Scarcity is a relative, not an absolute,

concept. Because resources are scarce and wants concept. Because resources are scarce and wants are unlimited, almost everything is scarce. If you are unlimited, almost everything is scarce. If you pay an opportunity cost to use a good or service, it is pay an opportunity cost to use a good or service, it is scarce. If you pay a positive price for a good or scarce. If you pay a positive price for a good or service, it is scarce. Water may cover three-fourths service, it is scarce. Water may cover three-fourths of the earth, but we pay an opportunity cost and a of the earth, but we pay an opportunity cost and a positive price for clean water everywhere. Of positive price for clean water everywhere. Of course, water may be scarcer in the deserts than in course, water may be scarcer in the deserts than in the wetlands. Only a government can actually make the wetlands. Only a government can actually make water cheaper in a desert.water cheaper in a desert.

Activity 1Activity 1

4.4. False – An important opportunity cost of going False – An important opportunity cost of going to college is lost earning. If you could earn to college is lost earning. If you could earn $20,000 a year by working, you will sacrifice $20,000 a year by working, you will sacrifice $80,000 during four years of college.$80,000 during four years of college.

5.5. False – If all other things are equal, less mass False – If all other things are equal, less mass transportation will be purchased if the price is transportation will be purchased if the price is higher. The price could be increased in terms higher. The price could be increased in terms of dollars, inconvenient schedules, crime and of dollars, inconvenient schedules, crime and filthy cars. The demand curve for filthy cars. The demand curve for transportation would have to be perfectly transportation would have to be perfectly inelastic, or vertical, for the answer to this inelastic, or vertical, for the answer to this question to be True.question to be True.


6. False – The price of something depends 6. False – The price of something depends on supply and demand, not on on supply and demand, not on usefulness or on some criterion of usefulness or on some criterion of quality. Water is more useful than quality. Water is more useful than diamonds, but it has a lower price. What diamonds, but it has a lower price. What you pay for a good or service depends you pay for a good or service depends on the market price determined by on the market price determined by supply and demand.supply and demand.

Activity 1Activity 17 & 8: False – When people trade voluntarily, both 7 & 8: False – When people trade voluntarily, both

parties expect to gain, or they wouldn’t trade. One parties expect to gain, or they wouldn’t trade. One reason for this gain is the law of comparative reason for this gain is the law of comparative advantage. If one person does legal work better than advantage. If one person does legal work better than another and if a second person word-processes another and if a second person word-processes documents better than the first, they would gain by documents better than the first, they would gain by trade. But would a lawyer who is the fastest word trade. But would a lawyer who is the fastest word processor in town hire a secretary? Yes, because of processor in town hire a secretary? Yes, because of comparative advantage: Each person would specialize comparative advantage: Each person would specialize in what he or she does comparatively better. An hour in what he or she does comparatively better. An hour spent word processing is an hour not spent in legal spent word processing is an hour not spent in legal work, and the opportunity cost for the lawyer would be work, and the opportunity cost for the lawyer would be very high. The lawyer will specialize in legal work and very high. The lawyer will specialize in legal work and the secretary in word processing. The total output of the secretary in word processing. The total output of goods and services will increase. This concept can goods and services will increase. This concept can also be applied to countries.also be applied to countries.


9. False – A monopoly charges a higher 9. False – A monopoly charges a higher price than a competitive market price, but price than a competitive market price, but the monopolist cannot repeal the law of the monopolist cannot repeal the law of demand. If the price is too high, the demand. If the price is too high, the monopolist might sell nothing. A monopolist might sell nothing. A monopolist will try to establish a price at a monopolist will try to establish a price at a point that will make the greatest profit. point that will make the greatest profit. This price is higher than a competitive This price is higher than a competitive price and will result in less production.price and will result in less production.


10. False – Profits are an incentive for business to 10. False – Profits are an incentive for business to succeed. A business that doesn’t care about its succeed. A business that doesn’t care about its customers will not make high profits. As Adam customers will not make high profits. As Adam Smith said, “It is not from the benevolence of the Smith said, “It is not from the benevolence of the butcher, the brewer or the baker that we expect butcher, the brewer or the baker that we expect our dinner, but from their regard for their own our dinner, but from their regard for their own interest. We address ourselves not to their interest. We address ourselves not to their humanity but to their self-love, and never talk to humanity but to their self-love, and never talk to them of our own necessities but of their them of our own necessities but of their advantages.”advantages.”


1.a. Two 1.a. Two b. Twob. Twoc. Twoc. Twod. Constantd. Constant

2.a. Two2.a. Twob. Fourb. Fourc. Sixc. Sixd. Increasingd. Increasing


Figure 2.3: Bowed out Production Figure 2.3: Bowed out Production Possibilities CurvePossibilities Curve

Figure 2.4: Vertical Production Figure 2.4: Vertical Production Possibilities CurvePossibilities Curve

Figure 2.5: Downward sloping, Figure 2.5: Downward sloping, straight Production Possibilities Curvestraight Production Possibilities Curve


3.3. BD’BD’

4.4. AA’AA’

5.5. CC’CC’

6.6. It is impossible for a country by itself to attain It is impossible for a country by itself to attain with existing resources and technology.with existing resources and technology.

7.7. The economy is not fully using existing The economy is not fully using existing resources and technology. An example of resources and technology. An example of point Y is the Great Depression of the 1930s.point Y is the Great Depression of the 1930s.


8.8. New resources are discovered. New New resources are discovered. New technologies are developed.technologies are developed.

9.9. Resources are not being fully employed.Resources are not being fully employed.

10.10. The government might want to The government might want to emphasize the production of capital emphasize the production of capital goods so the economy would grow more goods so the economy would grow more in the future. This would shift the PPC in the future. This would shift the PPC outward in the future. outward in the future.


A.A. You decide to go to collegeYou decide to go to collegeExplicit Costs: Tuition, Books, TravelExplicit Costs: Tuition, Books, Travel

Implicit Costs: Income not earned, Less job Implicit Costs: Income not earned, Less job experienceexperience

B.B. You take a job after schoolYou take a job after school– Explicit Costs: Work clothes, Meals, Explicit Costs: Work clothes, Meals,

TransportationTransportation– Implicit Costs: Less Studying, Less Social Implicit Costs: Less Studying, Less Social

TimeTime


C.C. You study for and take an AP Economics You study for and take an AP Economics ExaminationExamination

– Explicit Costs: Cost of AP Economics Explicit Costs: Cost of AP Economics Books, Cost of AP Economics ExamBooks, Cost of AP Economics Exam

– Implicit Costs: Money earned from part-time Implicit Costs: Money earned from part-time job, Less social time, Less study time for job, Less social time, Less study time for other coursesother courses


D.D. A stay-at-home dad returns to A stay-at-home dad returns to workwork

Explicit Costs: Work clothes, Explicit Costs: Work clothes, Taxes, Child-Care ExpensesTaxes, Child-Care Expenses

Implicit Costs: Less time with Implicit Costs: Less time with family, Less time for recreationfamily, Less time for recreation


E.E. Family members work in their parents’ Family members work in their parents’ restaurantrestaurant

A.A. Child’s (employee) viewpoint:Child’s (employee) viewpoint:Explicit Costs: Taxes, Work ClothesExplicit Costs: Taxes, Work ClothesImplicit Costs: Lower pay than elsewhere, Less Implicit Costs: Lower pay than elsewhere, Less time for study, Less time for recreationtime for study, Less time for recreation

B.B. Parents’ (employer) viewpoint:Parents’ (employer) viewpoint:Explicit Costs: Payroll Taxes, Wages for ChildExplicit Costs: Payroll Taxes, Wages for ChildImplicit Costs: Less flexibility in hiring and firing, Implicit Costs: Less flexibility in hiring and firing, More complex relationship with childMore complex relationship with child

Activity 3Activity 3A. You decide to go to college: Consider the benefits of A. You decide to go to college: Consider the benefits of

a college education to be your expected extra future a college education to be your expected extra future income, growth in knowledge and social development. income, growth in knowledge and social development. A decision to attend college occurs when the A decision to attend college occurs when the expected explicit and implicit costs are less than expected explicit and implicit costs are less than expected benefits. If income were the only criterion, expected benefits. If income were the only criterion, individuals who drop out of college to become star individuals who drop out of college to become star professional athletes may have concluded that the professional athletes may have concluded that the costs of missing a professional sports career costs of missing a professional sports career exceeded the anticipated future income from exceeded the anticipated future income from becoming a better educated, but nonstarring, becoming a better educated, but nonstarring, individual in a career outside of sports.individual in a career outside of sports.

Activity 3Activity 3B. You take a job after school: Working after school B. You take a job after school: Working after school

may supplement family income, but it normally may supplement family income, but it normally increases the disposable income of the high school increases the disposable income of the high school student. More disposable income benefits the income student. More disposable income benefits the income earner. Choice of hours, however, can make the earner. Choice of hours, however, can make the benefits exceed the costs. Total benefits may exceed benefits exceed the costs. Total benefits may exceed total costs, even when the cost of an additional hour of total costs, even when the cost of an additional hour of work per week exceeds the benefit of the additional work per week exceeds the benefit of the additional hour of work. But the economic way of thinking hour of work. But the economic way of thinking causes the person to adjust work so the extra benefit causes the person to adjust work so the extra benefit from the extra hour just matches the extra cost. If this from the extra hour just matches the extra cost. If this extra hour of work causes the worker to earn a lower extra hour of work causes the worker to earn a lower grade in a class, total benefits of work may exceed grade in a class, total benefits of work may exceed total costs of work; but the marginal costs of that extra total costs of work; but the marginal costs of that extra hour of work greatly exceed the marginal benefits of hour of work greatly exceed the marginal benefits of the extra income.the extra income.

Activity 3Activity 3C. You study for an take an AP Economics C. You study for an take an AP Economics

Examination: While the benefits of studying for an AP Examination: While the benefits of studying for an AP Economics exam are self-evident, there are costs that Economics exam are self-evident, there are costs that most students can list in a minute. AP Economics most students can list in a minute. AP Economics students may take other AP tests, so the management students may take other AP tests, so the management of study time becomes a crucial factor in mastery of all of study time becomes a crucial factor in mastery of all the tests. Marginal decisions determine time the tests. Marginal decisions determine time allocation among the subject areas: When an extra allocation among the subject areas: When an extra hour spent on economic adds more expected score hour spent on economic adds more expected score points than an hour spent on chemistry, the student points than an hour spent on chemistry, the student spends the hour studying economics.spends the hour studying economics.


D. A stay-at-home dad returns to work: Stay-at-D. A stay-at-home dad returns to work: Stay-at-home parents sacrifice money income. This home parents sacrifice money income. This stay-at-home dad concluded that the benefits of stay-at-home dad concluded that the benefits of working for a living exceeded the lost benefits of working for a living exceeded the lost benefits of staying at home. Lost benefits could be explicit staying at home. Lost benefits could be explicit in the form of lower or no public-assistance in the form of lower or no public-assistance payments. Implicit lost benefits involve control payments. Implicit lost benefits involve control over use of time, ability to bond with and teach over use of time, ability to bond with and teach children, and the ability to have household children, and the ability to have household chores done without paying someone else. chores done without paying someone else. Explicit new costs will include payroll taxes, Explicit new costs will include payroll taxes, possibly income taxes, commuting costs, child-possibly income taxes, commuting costs, child-care expenses and costs of work clothes.care expenses and costs of work clothes.

Activity 3Activity 3E. Family members work in their parents’ restaurant: This is the E. Family members work in their parents’ restaurant: This is the

toughest scenario of all. Family decision making frequently toughest scenario of all. Family decision making frequently follows tradition rather than market criteria. A student may work follows tradition rather than market criteria. A student may work in a family business that is not the best fit for either the family or in a family business that is not the best fit for either the family or the student “just because” other generations worked there. At the student “just because” other generations worked there. At the other extreme, knowing the business and feeling a sense of the other extreme, knowing the business and feeling a sense of ownership in it may bring out the finest service possible from a ownership in it may bring out the finest service possible from a young worker. Either scenario carries costs and benefits. The young worker. Either scenario carries costs and benefits. The student works to earn family approval, and this approval is student works to earn family approval, and this approval is worth more than the perceived costs. Adult members of the worth more than the perceived costs. Adult members of the family business may want their high school children to sharpen family business may want their high school children to sharpen their work ethic. The business may absolutely need the family their work ethic. The business may absolutely need the family members to assist as part of family tradition or because a family members to assist as part of family tradition or because a family member has higher productivity than a stranger. Some family member has higher productivity than a stranger. Some family restaurants hold secret recipes that are not entrusted to anyone restaurants hold secret recipes that are not entrusted to anyone beyond the family. Both parties – the employee and the beyond the family. Both parties – the employee and the employer – must conclude that the benefits of working exceed employer – must conclude that the benefits of working exceed the costs, or family labor services will not be purchased.the costs, or family labor services will not be purchased.


1.1. Because the supply of parking Because the supply of parking spaces is limited, the scare goods spaces is limited, the scare goods must be allocated among people must be allocated among people who want parking spaces.who want parking spaces.

2.2. Tradition, Command, and the Tradition, Command, and the MarketMarket


Leave things as they have been: TraditionLeave things as they have been: Tradition

First-come, first-served: Tradition and First-come, first-served: Tradition and CommandCommand

Markets and a Price System: The MarketMarkets and a Price System: The Market

Democracy: A political solution, which is Democracy: A political solution, which is CommandCommand

Random Choice: Command with some Random Choice: Command with some market because of resellingmarket because of reselling

Activity 4Activity 4Leave things as they have been: Faculty are Leave things as they have been: Faculty are rewarded; Student parking is discouragedrewarded; Student parking is discouragedFirst-come, First-served: People with low opportunity First-come, First-served: People with low opportunity costs for time are rewarded; Those who have high costs for time are rewarded; Those who have high opportunity costs for time and many productive opportunity costs for time and many productive activities are penalized. activities are penalized. Markets and a price system: People with higher Markets and a price system: People with higher incomes and more important time alternatives are incomes and more important time alternatives are rewarded; those with low opportunity costs for time or rewarded; those with low opportunity costs for time or with lower incomes are penalized.with lower incomes are penalized.Democracy: People with political clout are rewardedDemocracy: People with political clout are rewardedRandom Choice: People with luck, regardless of cost, Random Choice: People with luck, regardless of cost, are rewarded; The unlucky are penalized.are rewarded; The unlucky are penalized.


5.5. It is impossible to say because equality or It is impossible to say because equality or fairness depends on each individual’s fairness depends on each individual’s perspective. Many students will choose first-perspective. Many students will choose first-come, first-served or random choice because come, first-served or random choice because everyone has an “equal chance”. everyone has an “equal chance”.

6.6. The market system leads to the greatest The market system leads to the greatest efficiency because every choice has an efficiency because every choice has an opportunity cost. There is an incentive to opportunity cost. There is an incentive to make choices that minimize opportunity cost. make choices that minimize opportunity cost. Each person makes choices based on his or Each person makes choices based on his or her costs and benefits.her costs and benefits.

7.7. Must base answers on equity or efficiency.Must base answers on equity or efficiency.


1.1. Resource owners are anyone who has Resource owners are anyone who has land, labor, capital or entrepreneurship to land, labor, capital or entrepreneurship to sell in the factor market.sell in the factor market.

2.2. A business firm buys resources and in A business firm buys resources and in turn, sells goods and service to resource turn, sells goods and service to resource owners.owners.

3.3. A market where finished goods and A market where finished goods and services are bought and sold.services are bought and sold.

4.4. Answers varyAnswers vary


5.5. A market where the factors of production A market where the factors of production (land, labor, capital, entrepreneurship) (land, labor, capital, entrepreneurship) are bought and soldare bought and sold

6.6. Wages for labor, for exampleWages for labor, for example7.7. They buy in the factor markets and sell in They buy in the factor markets and sell in

the product markets.the product markets.8.8. Supply and demandSupply and demand9.9. From selling their resources in the factor From selling their resources in the factor

markets.markets.


10.10. From selling the goods and services they From selling the goods and services they produce with the factors of productionproduce with the factors of production

11.11. Interdependence is important because Interdependence is important because people specialize and trade their people specialize and trade their production in markets for other products production in markets for other products they need. The circular flow of income they need. The circular flow of income shows the interdependence of the shows the interdependence of the economy.economy.


1. Absolute advantage states that a particular 1. Absolute advantage states that a particular individual or country can produce more of a individual or country can produce more of a specific commodity than another individual or specific commodity than another individual or country using the same amount of resources. country using the same amount of resources. Comparative advantage states that a particular Comparative advantage states that a particular country or individual can produce a specific country or individual can produce a specific commodity at a lower opportunity cost (in terms commodity at a lower opportunity cost (in terms of forgone production in an alternative of forgone production in an alternative commodity) than another country or individual.commodity) than another country or individual.

Activity 6Activity 6A.A. Washing two loads of dishesWashing two loads of dishesB.B. Vacuuming ½ of a roomVacuuming ½ of a roomC.C. Washing one load of dishesWashing one load of dishesD.D. Vacuuming one roomVacuuming one roomE.E. DebbieDebbieF.F. MikeMikeG.G. DebbieDebbieH.H. MikeMikeI.I. Mike should wash dishes and Debbie should Mike should wash dishes and Debbie should

vacuum. They will finish their chores sooner by vacuum. They will finish their chores sooner by specializing according to their comparative specializing according to their comparative advantage. The person with the lower opportunity advantage. The person with the lower opportunity cost should perform the chore.cost should perform the chore.

Activity 6Activity 6A.A. Cleaning two jail cellsCleaning two jail cellsB.B. Cleaning 4/3 of a jail cellCleaning 4/3 of a jail cellC.C. Cleaning ½ of an officeCleaning ½ of an officeD.D. Cleaning ¾ of an officeCleaning ¾ of an officeE.E. HannahHannahF.F. HannahHannahG.G. HannahHannahH.H. AndyAndyI.I. Hannah should clean offices and Andy should Hannah should clean offices and Andy should

clean jail cells, and they will finish sooner. The clean jail cells, and they will finish sooner. The person with the lower opportunity cost should person with the lower opportunity cost should perform the chore.perform the chore.

Activity 6Activity 6A.A. For every car, it must give up 1/3 of a computerFor every car, it must give up 1/3 of a computerB.B. For every car, it must give up 3/5 of a computerFor every car, it must give up 3/5 of a computerC.C. For every computer, it must give up three carsFor every computer, it must give up three carsD.D. For every computer it must give up 5/3 of a carFor every computer it must give up 5/3 of a carE.E. United StatesUnited StatesF.F. JapanJapanG.G. United StatesUnited StatesH.H. JapanJapanI.I. The U.S. should produce cars, and Japan should produce The U.S. should produce cars, and Japan should produce

computers because cars and computers would then be computers because cars and computers would then be produced by the lower-cost country. The total output of cars produced by the lower-cost country. The total output of cars and computers will be higher.and computers will be higher.

J.J. If people and national do not trade on the basis of If people and national do not trade on the basis of comparative advantage, there will be fewer goods and comparative advantage, there will be fewer goods and services for people to enjoy. People will be poorer. Less services for people to enjoy. People will be poorer. Less trade or self-sufficiency means a lower standard of living.trade or self-sufficiency means a lower standard of living.


A.A. Yes, YesYes, YesB.B. Master’s DegreeMaster’s DegreeC.C. Marginal Benefits = $100,000Marginal Benefits = $100,000

Marginal Costs = $100,000Marginal Costs = $100,000D. The person’s earning power is greater as he or D. The person’s earning power is greater as he or

she gets older. The higher degree also she gets older. The higher degree also increases earning power. Going to school increases earning power. Going to school longer means these potential earnings are longer means these potential earnings are sacrificed, which increases the opportunity sacrificed, which increases the opportunity cost. cost.


A.A. Answers vary – Ironing blue jeans and Answers vary – Ironing blue jeans and cleaning up every speck of dust are examples.cleaning up every speck of dust are examples.

B.B. Depends on the exampleDepends on the example3.3. People frequently don’t purchase the highest-People frequently don’t purchase the highest-

priced goods because the marginal benefit of priced goods because the marginal benefit of the highest quality is not worth the additional the highest quality is not worth the additional cost.cost.

4.4. You could make college acceptance You could make college acceptance conditional on work during the entire senior conditional on work during the entire senior year. This would raise the cost of senioritis year. This would raise the cost of senioritis and provide an incentive for seniors to study and provide an incentive for seniors to study harder.harder.

Activity 8Activity 81.1. False. The best things in life are not free. Even False. The best things in life are not free. Even

things such as love and friendship (not economic things such as love and friendship (not economic goods though) have opportunity costs.goods though) have opportunity costs.

2.2. No. If life were priceless, we would not use life as an No. If life were priceless, we would not use life as an opportunity cost for any other benefit. Yet we fight opportunity cost for any other benefit. Yet we fight wars. The “benefits” of smoking, drinking, hang wars. The “benefits” of smoking, drinking, hang gliding, using illegal drugs, driving without a seat belt gliding, using illegal drugs, driving without a seat belt and driving at excessive speeds confront people with and driving at excessive speeds confront people with the risk of an increased probability of death, yet the risk of an increased probability of death, yet people engage in these activities. If life were people engage in these activities. If life were priceless, we would use whatever resources were priceless, we would use whatever resources were necessary to cure cancer, heart disease and other necessary to cure cancer, heart disease and other terminal illnesses.terminal illnesses.


3. Only C involves opportunity costs for the 3. Only C involves opportunity costs for the student who is cheating. For some student who is cheating. For some people, the opportunity cost of cheating is people, the opportunity cost of cheating is their conscience. Students compare their conscience. Students compare benefits and costs when contemplating benefits and costs when contemplating cheating. For those with weak cheating. For those with weak consciences, other costs must be consciences, other costs must be substituted to discourage them. If the substituted to discourage them. If the costs of cheating are greater than the costs of cheating are greater than the benefits, cheating will not occur.benefits, cheating will not occur.


4.4. False. Scarcity is a relative concept, not an False. Scarcity is a relative concept, not an absolute one. Resources are scarce absolute one. Resources are scarce compared with wants. Unsold stocks of goods compared with wants. Unsold stocks of goods do not proved that scarcity does not exist do not proved that scarcity does not exist because these goods still have a price. If because these goods still have a price. If there were no scarcity, we could produce there were no scarcity, we could produce everything we wanted at a price of zero.everything we wanted at a price of zero.

5.5. False. Money is not a resource. If the False. Money is not a resource. If the government prints more money, it does not government prints more money, it does not affect the number of goods and services used affect the number of goods and services used to satisfy our wants.to satisfy our wants.


6. Her behavior does make sense 6. Her behavior does make sense economically. The benefits of finding a economically. The benefits of finding a cheaper gas station were not as high as cheaper gas station were not as high as the opportunity cost. It was not until the the opportunity cost. It was not until the tenth apartment that the additional benefits tenth apartment that the additional benefits and additional opportunity costs of and additional opportunity costs of searching for apartments were equal. This searching for apartments were equal. This makes sense. After all, a good place to makes sense. After all, a good place to live at a reasonable cost is more important live at a reasonable cost is more important than saving a few cents on a gallon of gas.than saving a few cents on a gallon of gas.


7. Tina should hire Tom. The key is the law 7. Tina should hire Tom. The key is the law of comparative advantage. Tina sacrifices of comparative advantage. Tina sacrifices an hour of legal fees if she does her own an hour of legal fees if she does her own word processing. She can probably pay word processing. She can probably pay several Toms to word process for less several Toms to word process for less than she can earn in an hour as a lawyer. than she can earn in an hour as a lawyer. Therefore, she specializes in law, and Therefore, she specializes in law, and Tom specializes in word processing.Tom specializes in word processing.

Multiple Choice QuestionsMultiple Choice Questions1.1. DD2.2. BB3.3. EE4.4. BB5.5. DD6.6. CC7.7. EE8.8. BB9.9. BB10.10. BB11.11. AA12.12. CC13.13. CC14.14. CC15.15. DD

16.16.CC17.17.BB18.18.CC19.19.DD20.20.EE21.21.CC22.22.CC23.23.AA24.24.CC25.25.CC26.26.BB27.27.BB28.28.CC29.29.CC30.30.EE

Short Free-Response QuestionsShort Free-Response Questions

1.1. Graph I assumes increasing opportunity cost. Graph I assumes increasing opportunity cost. The shape of the curve is concave to the origin The shape of the curve is concave to the origin or bowed out. If you move from Point A to or bowed out. If you move from Point A to Point E, you must give up increasing amounts Point E, you must give up increasing amounts of planes to get more butter. This is what a of planes to get more butter. This is what a production possibilities curve should look like. production possibilities curve should look like. Graph II assumes constant opportunity cost. Graph II assumes constant opportunity cost. As you go from Point A to Point E, the trade-As you go from Point A to Point E, the trade-offs do not change.offs do not change.Graph III, a curve convex to the origin, Graph III, a curve convex to the origin, assumes decreasing opportunity cost.assumes decreasing opportunity cost.

Short Free-Response QuestionsShort Free-Response Questions

2. 2. False. People with $1 million False. People with $1 million cannot spend more than $1 cannot spend more than $1 million. Even if people had all million. Even if people had all the money they could use, the money they could use, time to use it would be scarce.time to use it would be scarce.

Long Free-Response QuestionsLong Free-Response Questions

A.A. Scarcity exists because there are limited Scarcity exists because there are limited resources to fulfill unlimited wants. resources to fulfill unlimited wants.

B.B. What to produce and how much of each What to produce and how much of each good or service to produce, how to good or service to produce, how to produce, and for whom to produce.produce, and for whom to produce.

C.C. Tradition, Command, and MarketTradition, Command, and Market

D.D. Varying AnswersVarying Answers

Long Free-Response QuestionsLong Free-Response Questions

A.A. Movie production indicates increasing Movie production indicates increasing per-unit opportunity costs. As more per-unit opportunity costs. As more movies are produced, increasingly more movies are produced, increasingly more computers must be sacrificed.computers must be sacrificed.

B.B. GraphGraph

C.C. With a move from Point C to Point D, the With a move from Point C to Point D, the per-unit opportunity cost of producing per-unit opportunity cost of producing one additional computer is 5/3 movies.one additional computer is 5/3 movies.

Long Free-Response QuestionsLong Free-Response QuestionsD.D. The per-unit opportunity cost of producing The per-unit opportunity cost of producing

one more movie as we alter the production one more movie as we alter the production from Point C to Point B is one computer.from Point C to Point B is one computer.

E.E. The point on the axis will shift inward for the The point on the axis will shift inward for the movie production, but the point on the axis movie production, but the point on the axis corresponding to computer production will corresponding to computer production will not change.not change.

F.F. Shift the PPF inward.Shift the PPF inward.

G.G. Shift the PPF outward.Shift the PPF outward.

Long Free-Response QuestionsLong Free-Response QuestionsA.A. More education increases human capital, a More education increases human capital, a

resource, and moves the curve outwardresource, and moves the curve outwardB.B. Better medicine improves human capital, a resource, Better medicine improves human capital, a resource,

and moves the curve outwardand moves the curve outwardC.C. International trade increases output because of the International trade increases output because of the

law of comparative advantage and moves the curve law of comparative advantage and moves the curve outward.outward.

D.D. The increase in the unemployment rate results in The increase in the unemployment rate results in underemployed resources, which is illustrated by a underemployed resources, which is illustrated by a point inside the curve. The resources (workers) are point inside the curve. The resources (workers) are still available but are not being employed.still available but are not being employed.

E.E. The computer viruses take computers out of The computer viruses take computers out of commission, which shifts the curve inward.commission, which shifts the curve inward.

Chapter One The Central Idea. Economics Economics is the study of how people deal with scarcity –Scarcity: Situation in which the quantity of resources.

Documents

impossible slide

place slide

central idea slide

overall production

exchanges of goods

exchange of goods

computers oc

investment opportunity