BUECO5903 Business Economics – Global Homework Experts

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Topic 1: Introduction to the economic way of thinking

Question 1:

Assume that a country is presently located on its production possibilities frontier. Explain what impact (if any) the following events will have on its production possibilities frontier.

  1. (a)  The general level of education of the workforce increases;

    This represents an increase in the quality of labour (one of the resources) and will cause the production possibilities frontier to shift outwards.

  2. (b)  An economic downturn results in underutilisation of capital equipment;

    This will result in production being located inside the production possibilities frontier at an inefficient point. The position of the production possibilities frontier will be unchanged.

  3. (c)  The marketing skills of managers are improved through special training programs;

    This represents an increase in the quality of labour (one of the resources) and will cause the production possibilities frontier to shift outwards.

  4. (d)  Manufacturing firms are made to pay for cleaning up the pollution that they cause.

    This represents a decrease or redirection of resources towards cleaning up the pollution. As firms are forced to pay this cost, they will internalise it, resulting in increased production costs. The outputs of the firms will decrease with a leftward shift in their supply curves. On the aggregate level, it will cause the production possibilities frontier to shift inwards.

Question 2:

“There is no such thing as a free lunch.” (There is always a cost even if something is advertised as free.) Explain the meaning of this phrase in the context of economics with the aid of a suitable diagram.

In an economy of scarce resources, choices must be made as to what to produce using the limited available resources.

The cost (sacrifice) of making a choice is the opportunity cost, otherwise known as the best alternative sacrificed for a chosen alternative.

Using the simple production possibility frontier (PPF) approach, illustrated on the next page, it can be shown that the opportunity cost of increasing the production of good X is what we forgo in the production of good Y. The opportunity cost increases as the production of one good expands at the expense of another, reflecting the law of increasing opportunity cost.