Scarcity, Rivalrous, & Excludable Goods
What is scarcity, and how does it impact economic decision-making?
Scarcity: Humans have unlimited wants but limited resources to make those wants happen. Scarcity factors into decision making by forcing people to make trade offs
What is an opportunity cost?
The trade-off, potential loss or gain of alternatives when one alternative is chosen.
What is comparative advantage?
The ability of an individual or group to produce/carry out a particular activity more efficiently than another activity.
Name the four main types of economic systems.
Traditional, Command, Market, Mixed
What explicit costs? Provide an example. What are implicit costs? Provide an example.
Explicit Costs: Out of pocket expenses. Example: A bakery paying $2,000 per month in rent
Implicit Costs: The opportunity costs of using resources the firm already own. These don't show up in accounting records but represent forgone income or benefits. Example: A bakery owner could earn $50,000 a year working as a chef for another company but chooses to run their own bakery instead -- that lost salary is an implicit cost.
Define rivalrous goods. Provide an example.
A rivalrous good: one person's consumption of the good prevents or limits another person's ability to consume it. Ex: clothes, shoes, food
Describe a PPC and its purpose.
A PPC is a model used to illustrate trade-offs and choices that an economy faces when allocating its limited resources between the production of two goods or services.
Why is comparative advantage important to countries in international trade?
It enables individuals, businesses, and nations to specialize in what they do best, leading to increased overall productivity and wealth through trade.
Identify one unique aspect of the traditional economy that you would not see in command economies or market economies.
Economic functions are determined by custom, rituals, and cultural traditions
Explain the significance of MB = MC in decision-making
When MB (marginal benefit) = MC (marginal costs) the optimal level of an activity has been reached. The overall benefit has been maximized. Any further action would lead to a decrease in net benefit.
Define excludable goods. Provide an examples
An excludable good is a good that can be restricted from use by individuals who haven't paid for them. A movie ticket, a streaming service
Draw a PPC on the board. Explain what a point on the inside of the PPC means and what a point on the outside of the PPC means.
Inside, inefficient use of resources. Outside, unattainable or unsustainable level of production.
Identify the economic principle that explains why specialization leads to increased overall production.
The theory of comparative advantage combined with the concept of the division of labor.
What are the 3 basic economic questions?
"What to produce?" "How to produce it?" "For whom to produce?"
Calculate the economic profit in the following scenario: The total revenue of the company is $100,000 annually. The mortgage on the building they use is $35,000 annually. The company pays $25,000 for labor annually, and $30,000 for resources and supplies. The owner of the company could rent out the building for $40,000 annually. The owner also has invested $50,000 into the company that he otherwise could have kept in his brokerage account where it could have earned 10% interest.
Explicit Costs: $35,000 + 25,000 + $30,000 = $90,000
Implicit Costs: $40,000 + (($50,000 x 0.1) = $5,000) = $45,000
Total Costs = $135,000
Economic Profit = $100,000 - $135,000 = - $35,000
Explain the difference between rivalrous and non-rivalrous goods.
Rivalrous goods are those where one person's consumption of the good reduces the amount available to others. Non-rivalrous goods can be consumed by multiple people simultaneously without taking away the ability for others.
Explain how investment/increase in capital goods can lead to an overall rightward shift in the PPC.
Who has the absolute advantage in producing cars & who has comparative advantage in producing Cars?
Cars Tables
USA 10 30
Mexico 5 10
Absolute Advantage USA (10), Comparative Advantage Mexico (1C = 2T) vs. USA (1C = 3T)
Describe two ways a mixed economic system combines elements of the command economy and the market economy.
1. Gov't regulates private business alongside private businesses regulating themselves.
2. Public services with market-based good and services.
Marginal
Utility
Allocation
Marginal: Additional
Utility: Benefit/Satisfaction
Allocation: Distribute/Give Out
Which of the following goods is non-rivalrous but excludable?
A. A toll road with no traffic during off-peak hours
B. A crowded public park on a busy weekend
C. National defense provided by the government
D. Fish in the open ocean during peak fishing season
E. Street lighting in a residential neighborhood.
A. Non-rivalrous, one person's use doesn't keep others from using it. Excludable b/c you have to pay to use it.
An economy produces only drones and medical equipment. Its production possibilities curve (PPC) is concave from the origin (bowed out). A new breakthrough in drone manufacturing technology occurs at the same time that a severe shortage of skilled medical technicians hits the country. Which of the following best describes the likely change to the PPC?
(A) The PPC shifts outward for drones and inward for medical equipment, becoming more asymmetric.
(B) The PPC shifts outward for both goods, with a larger increase for drones.
(C) The PPC expands outward along the drones axis while pivoting inward along the medical equipment axis.
(D) The PPC experiences a parallel outward shift for drones and an inward shift for medical equipment.
(E) The PPC shifts inward overall because the labor shortage outweighs the technological gain.
C
What will the terms of trade be between the USA and Mexico in this example?
Cars Tables
USA 10 30
Mexico 5 10
2.5T = 1C
Give one advantage and disadvantage of the following economic systems: Traditional, Command, Market
Command Economy: Adv: In theory, equal access to G&S, Disadv: Corruption
Market Economy: Adv: Efficient, Disadv: income inequality
Maria has $25 to spend on two goods: Smoothies ($5 each) and sandwiches ($10 each). The table below shows the Marginal Utility she gets from each additional unit of each good
Quantity MU of smoothie MU of Sandwich
1 50 100
2 40 85
3 30 70
4 20 45
5 10 30
What is the optimal allocation of her budget based on the marginal utility of each item.
2 sandwiches and 1 smoothie