DISCUSS QUESTION
1. What is an opportunity cost? How does the idea relate to the definition of economics?
Which of the following decisions would entail the greater opportunity cost: allocating a square
block in the heart of New York City for a surface parking lot or allocating a square block at
the edge of a typical suburb for such a lot? Explain.
- The opportunity cost of a decision is the value of the good or service forgone, because in a
world of scarcity, choosing one thing means giving up something else.
- Economics is concerned with the allocation of scarce resources among competing uses.
- Allocating a square block in the heart of New York City for a surface parking lot carries greater
opportunity cost because the land there is more valuable and in high demand, alternative uses for
that land could generate significant economic value.
2. Cite three examples of recent decisions that you made in which you, at least implicitly,
weighed marginal cost and marginal benefit.
- Stay at home and drink water or go out and buy boba milk tea:
+ marginal cost: bus fare
+ marginal benefit: I can go to Sephora next to the boba milk tea shop and pick up stuff,
enjoyment of the boba milk tea.
- Choosing between purchase a streaming service (Netflix, Hulu, Disney+...) or not:
+marginal cost: renewable account monthly to maintain owning the entertaining source
+marginal benefit: access to exclusive content, movies, shows.
-Choosing a late-night snack: pizza or cup noodle?
+marginal cost: delivery fee, health harming
+marginal benefit: satisfy my hunger
3. What is “utility” and how does it relate to purposeful behavior?
- utility: satisfaction obtained from consuming a good or service.
- relates to purposeful behavior by providing a framework for understanding how individuals
make choices to maximize their subjective well-being and satisfaction within the constraints of
scarcity.
7. What are economic resources? What categories do economists use to classify them? Why
are resources also called factors of production? Why are they called inputs?
- Economic resources: all natural, human, and manufactured resources that go into the production
of goods and services.
- Categories: land, labor, capital, entrepreneur ability.
- Because they are the fundamental elements involved in the production process. They are also
called "inputs" because they are the inputs required to produce goods and service.
8. Why is money not considered to be a capital resource in economics? Why is entrepreneurial
ability considered a category of economic resource, distinct from labor? What roles do
entrepreneurs play in the economy?
- For economists, capital (or capital goods) includes all manufactured aids used in producing
consumer goods and services, money produces nothing, so it not considered an economic
resource
- Entrepreneurial ability is distinct from labor because it encompasses the ability to identify
opportunities, make decisions, bear risks, innovate, and efficiently allocate resources in ways that
significantly impact economic development and progress.
- Entrepreneurs are central to economic growth, job creation, and market dynamism.
9. Explain the typical shapes of marginal-benefit and marginal-cost curves. How are these
curves used to determine the optimal allocation of resources to a particular product? If
current output is such that marginal cost exceeds marginal benefit, should more or fewer
resources be allocated to this product? Explain.
- MB: the curve slopes downward from left to right
- MC: the curve slopes upward from left to right
- If the MB curve lies above the MC curve, it indicates that the additional benefit gained from
producing more units exceeds the additional cost. In this case, it is beneficial to allocate more
resources to the product because society gains more than it loses with each additional unit
produced.
-If the current output level is such that MC exceeds MB, allocating fewer resources to this
product would be advisable because the costs of production outweigh the benefits.
10. Suppose that, on the basis of a nation’s production possibilities curve, an economy must
sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it desires, but it can
get the robot from another country in exchange for 9,000 pizzas. Relate this information to the
following statement: “Through international specialization and trade, a nation can reduce its
opportunity cost of obtaining goods and thus move outside its production possibilities curve.
- The nation can move beyond its domestic production possibilities curve because it can now
obtain more of both goods (pizzas and robots) than it could produce domestically. It can consume
at a point outside its curve by trading for the robot and not sacrificing the full 10,000 pizzas.
PREVIEW QUESTION
1. Match each term with the correct definition.
a. The next-best thing that must be forgone in order to produce one more unit of a given
product: opportunity cost
b. The pleasure, happiness, or satisfaction obtained from consuming a good or service:
utility
c. The social science concerned with how individuals, institutions, and society make
optimal (best) choices under conditions of scarcity: economic
d. Making choices based on comparing marginal benefits with marginal costs: marginal
analysis
5. For each of the following situations involving marginal cost (MC) and marginal benefit
(MB), indicate whether it would be best to produce more, fewer, or the current number of
units.
- 3,000 units at which MC = $10 and MB = $13: MB>MC, produce more
-11units at which MC=$4andMB=$3: MB<MC, produce fewer
-43,277 units at which MC = $99 and MB = $99: MB=MC, no need to produce more or less
-82 units at which MC < MB: produce more
-5 units at which MB < MC: produce fewer
6. Explain how (if at all) each of the following events affects the location of a country’s
production possibilities curve.
-The quality of education increases: A more educated workforce is likely to be more productive
and innovative. They can contribute to the efficient use of resources and the development of new
technologies, which can increase the country's overall productive capacity.
-The number of unemployed workers increases: Unemployed workers represent a waste of labor
resources. If a significant portion of the workforce is unemployed, the country is not fully
utilizing its labor potential, which can lead to a decrease in overall production capacity.
-A New technique improves the efficiency of extracting copper from ore: Efficiency
improvements in resource extraction mean that the country can produce more copper with the
same amount of resources. This increases the productive capacity of the country and allows for
the production of more copper or the reallocation of resources to other goods and services.
-A devastating earthquake destroys numerous production facilities: When production facilities
are damaged or destroyed, the country's productive capacity is reduced. This means that it can
produce fewer goods and services with the available resources until the damaged facilities are
repaired or replaced.
PROBLEMS
1.Potatoes cost Janice $1 per pound, and she has $5.00 that she could possibly spend on
potatoes or other items. If she feels that the first pound of potatoes is worth $1.50, the second
pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth
$0.30 per pound, how many pounds of potatoes will she purchase? How many pounds will she
purchase if she has only $2 to spend?
- She will purchase 3 pounds of potatoes.
- If she has only $2 to spend, she will purchase 1 pound.
5. Refer to the following production possibilities table for consumer goods (automobiles)
and capital goods (forklifts):
a. Show these data graphically. Upon what specific assumptions is this production possibilities
curve based?
-Assumptions: fixed resource, fixed technology, full employment
b. If the economy is at point C, what is the cost of one more automobile? Of one more forklift?
Which characteristic of the production possibilities curve reflects the law of increasing
opportunity costs: its shape or its length?
- The cost of one more automobile is 4.5 forklifts,
- The cost of one more forklift is 2 automobiles.
- Its length
c. If the economy characterized by this production possibilities table and curve is producing 3
automobiles and 20 forklifts, what could you conclude about its use of its available resources?
- This suggests that the economy is not operating at its full potential. There may be unemployed
resources or inefficiencies in resource allocation.
d. Is production at a point outside the production possibilities curve currently possible? Could
a future advance in technology allow production beyond the current production possibilities
curve? Could international trade allow a country to consume beyond its current production
possibilities curve?
- Production at a point outside the production possibilities curve is currently not possible
- A future advance in technology could allow production beyond the current production
possibilities curve
- International trade can allow a country to consume beyond its current production possibilities
curve. By trading with other nations, a country can obtain goods and services it cannot efficiently
produce domestically.
6. Refer to Figure 1.3. Suppose that the cost of cheese falls, so that the marginal cost of
producing pizza decreases. Will the MC curve shift up or down? Will the optimal amount of
pizza increase or decrease?
- The MC curve will shift down because the cost of producing each additional pizza has
decreased.
- With the decrease in production costs (lower MC), it becomes more economically viable to
produce additional pizzas. As a result, the optimal amount of pizza will typically increase.
