Economics: The Study of Choice

1. What does scarcity mean in the context of economics? Within economics, what is the relationship between scarcity, the concept of choice and the concept of a tradeoff?

2. Over the last decade, what is the opportunity cost of increases in defense spending related to wars in Afghanistan and Iraq?

3. People respond to incentives and disincentives. Markets reward individuals according to what they produce; communism rewarded people according to their needs. How might these different systems affect the work ethic of individuals?

Confronting Scarcity: Choices in Production

1. Economists contend that in order produce an increase in living standards in the future, we will likely have to consume less today. Explain how this works. Use the concept of the Production Possibilities Frontier (PPF) to illustrate your explanation.

2. Describe and discuss the two primary distinctions between a market economy and a command economy. Provide some examples of circumstances where economists feel that the government would be justified in intervening in the economy. Explain why you agree or disagree.

3. A point location inside the Production Possibilities Curve (PPF) represents what? A point located on the PPF represents what?

Supply and Demand

1. A student faced with a computer programming assignment due next week has no idea how to begin his assignment. He feels a desperate need for tutoring assistance and states that he would "pay anything' for help. If this were true, what shape would his demand curve have (price on the vertical axis & quantity of tutoring hours on the horizontal axis)? Why is this not realistic?

2. What would happen in the market for apples [i.e., to the quantity demanded & the quantity supplied] if the government set a minimum price of $5.00 per apple?

3. The Circular Flow of Money Model suggests what with regard to a minimum level of economic activity within the economy?

Applications of Supply and Demand

1. You are studying the supply of and demand for oil. For each or the following situations indicate whether supply or demand: increases, decreases or is unchanged as a result of the change noted. Explain why the change occurs (or does not occur) in terms of shift factors for demand and supply (demand shifters, supply shifters).

a - there is a decrease in the price of natural gas (a substitute good)

b - there is a change in the price of oil itself

c - improvements in horizontal drilling and fracking technology lead to an increase in oil production

d - a terrorist attack on an oil tanker loading facility in Saudi Arabia removes 3 million barrels per day from the world oil market (urn of a total of 80 million barrels per day)

e - a new vehicle that gets 90 miles to a gallon of gas is introduced

f - Congress ends the subsidies currently provided for the production of ethanol (which is currently mixed with gasoline as a substitute for some of the gas from oil).

2. Explain why investors demand higher dividend payments when a company reaches a "mature' stage and no longer experiences large increases in its stock price.

3. The government imposes a price ceiling on nerf basketballs. While the price before the price ceiling was established was $3 per ball (the market equilibrium price), it is now illegal to charge more than $2 per ball. No other changes in the nerf basketball market have occurred. What will be the effect of the price ceiling on the quantity demanded and the quantity supplied?