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INTOECO - A57

1. What is the definition of economics?

● The study of how individual society choose to use source of resources and know what incentives
could make them analyze their market.

2. What is the difference between microeconomics and macroeconomics? Name 1 example for
each.

● Microeconomics- deals with individual behavior to work through output markets and input
markets such as monopoly and oliography they think as “fit together” example market economy
● Macroeconomics- deals with aggregate behavior that functions the study of both goods market
and the money market and have demand curve for price levels

3. What are the characteristics of market economy and command economy? Point out the
differences between the two

● Market- the government can not control your property. Can make a free market. Not enough
resources to trade it all.
● Command- direct to the government it can have taxes, subsidy, price control to balance the rich
and poor and to distribute the allocate properly.

4. What is the difference between equity and efficiency? Relate these concepts to income.

● Efficiency is concerned with the optimal production and allocation of resources given existing
factors of production (Higher or lower income depends on the productivity of the employee)
● Equity is concerned with how resources are distributed throughout society (distribution of
income)

5. What are the factors that a person considers in decision making (economic transactions)? Explain
each briefly

● Scarcity - refers to the basic economic problem, the gap between limited – that is, scarce –
resources and theoretically limitless wants. (Check wallet)
● Incentives - are what motivates you to behave in a certain way, while preferences are your needs,
wants and desires. (Why should I buy this?)
● Opportunity costs - A benefit, profit, or value of something that must be given up to acquire or
achieve something else. (Why shouldn't I buy this?)

6. What is the opportunity cost of going to Barn on Happy Thursdays?

● Being productive
● Family dinner
● Rest

7. Explain the law of diminishing marginal benefit. Relate it to eating in a buffet

● The law of diminishing marginal benefit is defined as decreasing benefit from consuming only one
product or service over a period of time; while the law of increasing marginal cost is defined as
consuming only one kind of product or service without trying out other opportunities. This
concept applies to studying during finals week.
● A person increases consumption of a product while keeping consumption of other product
constant. In buffets, there is a tendency to get that certain favorite food again while eating others
in a constant manner. But the more you eat food in the buffet, the lower the satisfaction level.

8. Explain the law of increasing marginal cost. Relate it to lifting weights.

● It states that adding more of one factor of production will at some point yield lower per-unit
returns. The more you lift weights, there is an increase in energy consumption which will require
more, as the action is continuously performed.

9. Show the 3 marginalism conditions. What is my course of action in each one?

● If marginal benefit is greater than marginal cost, consumers will mostly buy or do more of it.
● If marginal cost is greater than marginal benefit, consumers tend to buy or do less of it.
● If marginal benefit is equal to marginal cost, consumers tend to buy or do it in a constant manner.
They don’t add or deduct it.

10. Relate both law of diminishing marginal benefit and law of increasing marginal cost to studying.
Up to what point should a person study? Graphically show this as well.

● For instance a student has an exam the next day, he/she studies the whole night for it. He/she
then finishes early and learns a lot from reviewing, however, he/she does not feel confident. So
he/she decides to review it again three more times; and at the fourth time, her/his head aches,
he/she becomes mentally drained and gets an information overload that when she tries to review
again she gets mental blocked. This is one instance where the law of diminishing marginal benefit
 can be applied to studying. On the other hand, the student who decided to study the whole day
and night for an exam the next day misses out on the opportunity to go out with his/her friends
to a party. This is now an example of the law of increasing marginal cost. A person should only
study to a point wherein he/she can feel confident about herself and also when his/her body
signals that he/she is tired and drained already. Too much studying can cause stress and can lead
to sleep deprivation which can cause memory loss and mental blocks. Therefore, rest is still
important when preparing for an exam.

11. Using comparative and absolute advantage, explain why people trade.

Absolute Advantage

● It is the ability of a country, individual, company or region to produce a good or service at a lower
cost per unit than the cost at which any other entity produces that same good or service. So it
means that you are capable to produce more given product using less of a given resource than
your competitor. For example, the United States may produce 700 million gallons of wine per
year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage
because it produces more gallons of wine and the same amount of time as the United States.

Comparative Advantage

● It is a monetary law alluding to the capacity of any given financial actor to produce or deliver
products and services at a lower opportunity cost than other financial actor. Which implies that
the capacity of the economic actor to create a specific good at a lower fringe and opportunity cost
over another and/or it can deliver products and services at a lower opportunity cost, not as a
matter of course at a more prominent volume.

12. Explain how the invisible hand works in an economy

● By definition, it is the unobservable market force that helps the demand and supply of goods in a
free market to reach equilibrium automatically. The word or the phrase “invisible hand” was made
by Adam Smith and it can be seen in his book called “The Wealth of Nations”. He presumed that
an economy can work or function well in a free market setup where everyone will work for his or
her interest. He suggested that if people were allowed to trade freely, self interested traders
present in the market would compete with each other, leading markets towards the positive
output with the help of an invisible hand by means of buy and sell franchise. In a free market
scenario where there are no regulations or restrictions imposed by the government, if someone
charges less, the customer will buy from him. The seller end up getting the price and the buyer
will get better goods at the desired price.

13. What is market failure? What are the ways the government can correct these failures?

● Market failure is an event in which there is an inefficient allocation of goods and services wherein
an individual or a certain group of people are benefit more but not necessarily making others
benefit less. This happens when an individual or a certain group pursue self-interests and lead to
an inefficient result. There are a number of ways to correct market failures. First the government
can control monopoly power through price regulations, taxation, and trade practices restriction.
Through these the government can prevent unfair competition and price discrimination.
Secondly, through the use of public goods wherein the government can sell goods and services
limited only to what the consumer can pay. Third, the government can either nationalise
industries or should regulate private firms. Lastly, the government can tax a certain group of
people who benefit exclusively from a certain good or service.

14. Explain and draw the circular flow model

● The circular flow model is one of the basic models in economics that shows the flow of products
and money in the economy. The output market is a place wherein firms can sell products to earn
profit and household can buy them. Households are consumers who buy the products sold by the
firm. They also provide capital, land, and labor to firms. Input market is where employment
happens. Firms hire households for labor or buy something that households produce needed by
firms to make their product, households then earn a profit. Firms uses labor and capital provided
by households to produce their product and profits from selling in the market.
15. What happens in the circular flow model if prices are not equal to marginal cost?

● When prices and marginal costs are not equal the flow of products and profits is unequal.
Therefore market failure arises in the economy.