an intro to economics, and an attempt at understanding it (Chapter 1 Q&A)

16/09/2012 § Leave a comment

Answers to the practice questions of #1 on page 20 of the textbook.

(a) Economics is the study of the allocation of scarce resources. Scarcity is the most basic economic problem in which the wants and needs of people meets limited resources. Allocation is the distribution of such resources within an economy.

A production possibility curve demonstrates the opportunity cost, growth, and potential development of a country. The axes depict the product or resource which the country is allocating. When point A (or B) is on the line of a PPC curve, resources are being used efficiently, and when a point resides within the curve, a country’s resources are NOT being used efficiently. Sometimes the curve itself will shift on the graph, growing or shrinking in area. This shift represents the country’s production potential and shows how much a country can produce out of its available resources. Economics focuses on how to use, allocate and distribute the different products and resources, as shown on this graph, that are available to a country.

(b) The government is not more effective in the allocation of scare resources than the free market. Typically, a government spends and controls its economy inefficiently because it has no motivation or self-interest to produce more and make a profit. Though a slightly extreme example, Fidel Castro tried to use a socialist command economy to control (via the government) Cuba’s economy. Such command economies with authoritative powers like the government dictating production proved to be ineffective for all people.

Free markets, however, contain individuals who share a mutual interest in giving and getting. They aim to produce a lot and profit a lot while exchanging goods and services in the market. Independent and motivated individuals that constantly cycle money through the economy efficiently is what has proved to be beneficial for societies and we can see proof in this in the countries that are all beginning to shift towards (or are already) market economies, such as China or Serbia, who is trying to adapt a market economy through its current financial crisis.

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