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10 PRINCIPLES OF ECONOMICS
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Solution: a. At point A, society has more consumer goods and services in the current period. Point C, however, provides the possibility of a larger quantity of consumer goods and services in the future because of additions to the economy s stock of capital resources. Here the economy s productive capabilities and thus production-possibilities frontier will expand (perhaps through the addition of a new factory) and thereby provide an increased output of consumer goods and services in a future period. b. As discussed in a., society must forgo purchases of consumer goods and services now if it is to increase its capital and thereby expand production capabilities. Thus, people must be willing to save, and have
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CHAPTER 1: Introduction to Economics
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fewer goods and services now, so that resources can be used in the current period to produce capital goods. Solved Problem 1.4 Figure 1-4 presents a production-possibility frontier for food and clothing. a. What is the opportunity cost of increasing food production from 0 to 2 million units, from 2 million to 4 million units, and from 4 million to 6 million units b. What is happening to the opportunity cost of increasing food production from 0 to 6 million units c. Explain how the shape of the production-possibility frontier implies increasing costs for the production of clothing.
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12 PRINCIPLES OF ECONOMICS
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Solution: a. In increasing food production from 0 to 2 million units, production of clothing decreases from 16,000 to 15,000 units. Thus, the opportunity cost of producing the rst 2 million units of food is 1 thousand units of clothing. The opportunity cost of a second and third additional 2 million units is 2,000 and 3,000 units of clothing, respectively. b. The opportunity cost of increasing food production is increasing from 1,000 units of clothing to 2,000 to 3,000 units of clothing. c. Increasing clothing and food costs are re ected in a concave (outward-sloping) production-possibility frontier. Moving down the frontier from point A to points B, C, D, E, and F shows that to produce 2 million incremental units of food (the 2-million-unit-length horizontal dashed lines in Figure 1-4), we must give up more and more units of clothing (the vertical dashed lines of increasing length). Solved Problem 1.5 Explain how division of labor and specialization enhance production in an advanced society. Solution: Through the division of labor and specialization, the population within a given geographic region, instead of being self-suf cient and producing the full range of goods and services wanted, can concentrate its energies and time in the production of only a few goods and services in which its ef ciency is greatest. Thus, specialization and division of labor allow greater output. By then exchanging some of the goods and services so produced for different goods and services produced similarly within a different geographic region, the regions populations as a whole end up consuming a larger number and greater diversity of goods and services than would otherwise be the case.
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Demand, Supply, and Equilibrium
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In This :
Demand Supply Equilibrium Price and Quantity Government and Price Determination Elasticity True or False Questions Solved Problems Demand
The demand schedule for an individual speci es the units of a good or service that the individual is willing and able to purchase at alternative prices during a given period of time. The relationship between price and quantity demanded is inverse: more units are purchased at lower prices because of a substitution effect and an income effect. As a commodity s price falls, an individual normally purchases more of this good since he or she is like-
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14 PRINCIPLES OF ECONOMICS
ly to substitute it for other goods whose price has remained unchanged. Also, when a commodity s price falls, the purchasing power of an individual with a given income increases, allowing for greater purchases of the commodity. When graphed, the inverse relationship between price and quantity demanded appears as a negatively sloped demand curve. A market demand schedule speci es the units of a good or service all individuals in the market are willing and able to purchase at alternative prices, i.e., Qd = f (P). Example 2.1 Table 2.1 gives an individual s demand and the market demand for a commodity. Column 2 shows one individual s demand for corn the bushels of corn that one individual is willing and able to buy per month at alternative prices. We nd, for example, that the individual buys 3.5 bushels of corn each month when the price is $5 per bushel. If there are 1,000 individuals in the market, the market demand for corn is the sum of the quantities the 1,000 individuals will buy at each price. So for example, 1,000 individuals collectively are willing to purchase 3,500 bushels of corn each month at $5 per bushel. The market demand is shown in the last column, which shows the typical relationship between quantity demanded and price, i.e., more units of a commodity are demanded at lower prices. The market demand for corn is plotted in Figure 2-1 and the curve is labeled D. Note that the demand curve is negatively sloped. The market demand for a good or service is in uenced not only by the commodity s price, but also by the price of other goods and services, Table 2.1
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