Revision Economics

What is scarcity? Can you think of two causes of scarcity?

Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor,tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the day to try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.
A rapid increase in demand or a rapid decrease in supply can result in scarcity.

Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?
100 people would produce 10 hams per month

A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?
It would make more sense for her to spend her time at the consulting job because then, the consultant would have enough money to buy the vegetables that the consultant needs instead of growing them.

A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

If the computer systems engineer hired a painter to paint his house, the painter would do a more professional job rather than the computer systems engineer because if he painted his own house without hiring the painter, it wouldn’t look as professional.

The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be?
A public enterprise is a business organization wholly or partly owned by the state and controlled through a public authority.

Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?
Even though they are small countries, they export a higher ratio of goods and services rather than the U.S.

What are three reasons to study economics
1) Virtually every major problem facing the world today has an economic dimension.
2) It is hard to overstate the importance of economics to good citizenship.
3) A basic understanding of economics makes you a well-rounded thinker.

What is the difference between microeconomics and macroeconomics?
Macroeconomics looks at the economy as a whole, while microeconomics focuses on different agencies of the economy.

What are the three main goals of macroeconomics?
Growth in the standard of living, low unemployment, and low inflation.

What are examples of individual economic agents?
households, workers, businesses

How did John Maynard Keynes define economics?
“[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.”

Are households primarily buyers or sellers in the goods and services market? In the labor market?
Firms produce goods and services, which they sell to households in return for revenues.

Households sell their labor as workers to firms in return for wages, salaries and benefits.

What are the three ways that societies can organize themselves economically?
Traditional economy, command economy, and market economy.

What is globalization? How do you think it might have affected the economy over the past decade?
It is the expanding cultural, political, and economic connections between people around the world. The increased buying and selling of goods, services, and assets across national borders.

Residents of the town of Smitheld like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?

100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.

A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?

She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than what she could save growing her own vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best. In other words, she should specialize in consulting, and use the income she earns to buy the vegetables she needs.

A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!

Give the three reasons that explain why the division of labor increases an economy’s level of production.

1. Specialization allows people to do what they do best.
2. Workers who specialize are more likely to think of ways to improve the
   production process.
3. Specialization may allow for economies of scale that reduce production costs.

Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do better than if each worker tries to do everything from appetizer to dessert.

Suppose it takes the baker one hour to make an appetizer but ten minutes to
make dessert; the chef, on the other hand, takes ten minutes to make an
appetizer and an hour to make dessert. If each does both, it takes each an
hour and ten minutes per meal (just for appetizers and dessert). But if the chef
makes the appetizer and the baker makes the dessert, it only takes 20 minutes
per meal; that means they can make three meals per hour.

Can you think of any examples of free goods, that is, goods or services that are not scarce?

A good or service is scarce if we do not have the resources to give everyone all
they want of it. Air is not scarce in most circumstances (although clean air
might be). Sand in the desert is not scarce. Some would argue that existing
ideas are not scarce because in theory an idea can be endlessly shared.

What is the difference between microeconomics and macroeconomics?

Microeconomics studies the behavior of individual economic actors such as
consumers and business firms. Macroeconomics studies the behavior of the
overall economy. By analogy, microeconomics looks at the individual pieces of
a jigsaw puzzle; macroeconomics looks at the whole puzzle (or large sections of
the puzzle).

A balanced federal budget and a balance of trade are considered secondary goals of macroeconomics, while growth in the standard of living (for example) is considered a primary goal. Why do you think that is so?

A balanced federal budget or balanced trade are means to an end, not ends in
themselves. The objective is to make people better off by raising the standard
of living; a balanced federal budget may help us achieve that objective, but a
balanced budget per se is not what people care about

Macroeconomics is an aggregate of what happens at the microeconomic level. Would it be possible for what happens at the macro level to differ from how economic agents would react to some stimulus at the micro level? Hint: Think about the behavior of crowds.

If you are at a concert, you might want to stand up to get a better view. But if
everyone stood up, nobody would have a better view. So what is true at the
individual level may not be true at the aggregate level. Macroeconomic effects
may be different from the sum of microeconomic effects.

How did John Maynard Keynes define economics?

Keynes said that economics, “is a method rather than a doctrine, an apparatus
of the mind, a technique of thinking, which helps its possessor to draw correct
conclusions.” His point was that economics is a way to look at the world, not a
set of answers about it.

Why is it unfair or meaningless to criticize a theory as unrealistic?

The economy is extremely complex; it is impossible to understand without
some degree of abstraction. Theories are deliberate simplifications. Done
correctly, a good theory allows us to see important relationships by shielding
us from the virtually infinite “noise” of reality

Suppose, as an economist, you are asked to analyze an issue unlike anything you have ever done before. Also, suppose you do not have a specfic model for analyzing that issue. What should you do? Hint: What would a carpenter do in a similar situation?

You should build and test a model to help you understand the problem.

What is globalization? How do you think it might have affected the economy over the past decade?

Globalization refers to the growing economic, cultural, and political
relationships among the peoples of the world. Globalization provides greater
economic and cultural variety, and the benefits of increased trade (see next
chapter). It also makes the nations of the world more interdependent, which
has both good and bad implications.

Why do you think that most modern countries’ economies are a mix of command and market types?

Market economies have proven very good at raising standards of living. Yet
markets also have some failings that can only be solved by central direction; an
example of such a failing is pollution, which markets generally do not handle
very well. Another reason for command elements in economies is that political
elites are always reluctant to give up their authority.

Can you think of ways that globalization has helped you economically? Can you think of ways that it has not?

The answer to this question will vary from individual to individual. For the
average American, globalization has reduced the prices paid for many goods,
but it has also made it harder to find an unskilled job.