ECON151explanationsLastYear1stExam

ECON151explanationsLastYear1stExam - Explanation for the...

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Explanation for the 1st exam (2006) 1. Economics doesn’t deal with individual people, business or government problems and desires. Economics deals with society as a whole- its production and distribution of goods and services with its scare resources. There are two fundamental problems that give rise to the development of economics as a field of study. These are society’s unlimited wants and the limited (scarce) resources available to satisfy these wants. Economics deals with resolving this problem in a rational way. 2. Economics has two levels of analysis: these are microeconomics and macroeconomics. Microeconomics deals with individual parts of the economy (individual product markets, individual firms or industries and their participants) where as Macroeconomics deals with the economy as a whole or the aggregates parts of the economy (general price level or inflation, unemployment, economic growth- in short it studies an aggregate picture of the economy). 3. The economizing problem refers to the question of how to satisfy unlimited wants with the limited resources we have. 4. This question illustrates the concept of incentives influence our behavior and choice. The incentive (lowering grade by one letter) discourages students from arriving to class late. That is, their choice of whether to come late or not is influenced by the severity of the punishment (incentive). 5. The question involves all the concepts described on the choice.  The fact that you have to pay additional $199 more to get a better flat screen (20’’ flat screen monitor) reflects that every choice involves tradeoff- paying extra to get better quality.  The cost of the 20” flat screen ($199) is the value of other things to you that you could have acquired if you don’t spend the money on flat screen.  The decision question here facing the buyer is not whether to buy a computer or not, but whether to get a 20”flat screen rather than 15” flat screen that comes with it- hence reflects that decisions are made at the margin. 6. The inability of society to produce beyond (to the northeast) of its production possibility curve (PPC) illustrates the concept of scarcity. Note also that the Production possibility curve (PPC) illustrates the concepts of choice, efficiency, and opportunity cost. The following notes explain how each of these concepts is illustrated with the PPC. a. Scarcity: any output combination outside the PPC (to the northeast) is unattainable because resources are limited(scarce). b. Efficiency: the PPC is a locus of efficient production methods. Any point on the PPC reflects efficient (lowest opportunity cost) production method. Any point inside the PPC curve reflects inefficient production (allocation). c. Choice: since all points on the PPC are efficient and attainable (possible), society has to choose
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ECON151explanationsLastYear1stExam - Explanation for the...

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