Reference no: EM133519721

BASIC ECONOMIC CONCEPTS

What is economics and how do economic concepts apply to your life? With the complexities of technology and the current global economy, it may be helpful to consider a simplified and hypothetical scenario of an ancient family of potters who lived in a remote area. While the family was skilled and efficient, they only needed a certain number of pots but still needed clothing, shelter, food, and more. After struggling to tend to their farm and being unable to sell any more pots in their area, the family moved to a village that was in need of pottery. In this village, the family no longer had to tend to the farm, build and renovate their home, or make clothing. By focusing on their skills, they were able to trade their pottery with other families who were skilled in those other areas. By collaborating with traveling merchants, the family was able to manufacture more pottery that was sold across the lands and brought wealth to the potter family.

The assignment explain basic economic concepts, such as how scarcity and incentives affect economic decisions, how marginal analysis affects allocation of time and resources, how the production possibilities frontier for countries can be impacted by opportunity costs, and if absolute advantage and specialization create opportunities for gains from trade.

1. Provide an example of a scarce resource and a free resource. What are the key differences between the two? What can cause a free resource to become a scarce resource?

2. Economists argue there is "no such thing as a free lunch," yet you've just had lunch with a friend who paid for it. Are the economists incorrect? Explain using basic principles of economics.

3. A manager notices the company's sales personnel are offering its customers deals that, while increasing revenues, are lowering profits. After reviewing the company's compensation plan, the manager finds bonuses are based on sales revenue. Explain the sales personnel's behavior using the economic principle that "people respond to incentives" and recommend a change to the compensation plan to correct this problem.

4. You have 8 hours to study for two final exams. The exam for course A is worth 25% of your grade and the exam for course B is worth 50% of your grade. The first hour you spend on studying for either exam will increase your score on it by 10 percentage points, the second hour will increase your grade on it by an additional 9 percentage points, the third hour will increase your grade on it by an additional 8 percentage points, and so forth. How will you allocate your time? Explain your answer in terms of marginal analysis.

5. How do increasing opportunity costs affect the shape of the production possibilities curve? Provide an example that illustrates the concept of increasing opportunity costs. Include a graph or illustration to support your answer.

6. Assume country A has an absolute advantage in producing all products compared to country B but country B has a comparative advantage in producing several products. Are there opportunities for gains from trade? If so, what determines the direction of trade?

7. Explain how international trade allows a country to move beyond its production possibilities frontier and create gains from trade.