Deck 1: The Art and Science of Economic Analysis

Question 1

DEFINITION OF ECONOMICS What determines whether or not a resource is scarce? Why is the concept of scarcity important to the definition of economics?

Answer 1

Scarcity of resources:
Resources are called factors of production, which are necessary to produce goods and services. The availability of resources according to the consumer's requirement determines whether the resource is scarce or not. Scarce resources are not available freely and its price is more than zero.
With limited resources, economies have to meet the unlimited wants of human beings. Hence, economics takes decision about the better utilization of limited resources to optimize the consumer's utility.
Economic problems arise because of the scarce nature of resources; hence, scarcity is important in the definition of economics.

Question 2

RATIONAL SELF-INTEREST Discuss the impact of rational self-interest on each of the following decisions:
a. Whether to attend college full time or enter the workforce full time
b. Whether to buy a new textbook or a used one
c. Whether to attend a local college or an out-of-town college

Answer 2

a.
Prefer to attain college full time:
The benefit for a person in attaining a college for full time is that he/she will gain more knowledge by possessing higher degree; hence, he/she may get highly paid jobs in future. Whereas the cost is, he/she has to bear the expenses like tuition fees, books, and the earnings if the person works instead of studying.
If the cost of studying is greater than the benefit of study, then the person should work. If the benefit of the studying is greater than the cost of studying, then the person should study.
b.
Buy new text books:
The content of the used book and the new book is same. The benefit derived from the old book is not being confused due to the marking of some other people who used that book. The cost of new book is higher than the cost of old book. If the expected benefit from the old book is greater than the cost of old book, then the person should buy the old book. Otherwise, it is better to buy new book.
c.
Attain local college:
The college located in the town would have higher fee than the college located out of the town. On the other hand, students save more time if they study in the college tat located in the town. If the net expected benefit from the town college is greater than the net benefit expected from the college located output of the town, then the student should join in the college that located in the town. Otherwise, the students should join in the college that located out of the town.

Question 3

RATIONAL SELF-INTEREST If behavior is governed by rational self-interest, why do people make charitable contributions of time and money?

Answer 3

Rational self-interest and cost:
Rational self-interest is an option which is chosen to maximize the expected benefits with a given cost.
For instance, people would prefer charity as it deducts income tax amount and also satisfies the deed. So, charity could not be considered as a pure selfishness or as greed activity. Therefore, helping a needy person and feeling pleasure is also a kind of rational self-interest.
Hence, a person sometimes helps others in terms of money and time as it reduces his cost and increases his self-satisfaction level.

Question 4

MARGINAL ANALYSIS The owner of a small pizzeria is deciding whether to increase the radius of delivery area by one mile. What considerations must be taken into account if such a decision is to increase profitability?

Question 5

TIME AND INFORMATION It is often costly to obtain the information necessary to make good decisions. Yet your own interests can be best served by rationally weighing all options available to you. This requires informed decision making. Does this mean that making uninformed decisions is irrational? How do you determine how much information is the right amount?

Question 6

ROLE OF THEORY What good is economic theory if it can't predict the behavior of a specific individual?

Question 7

(Pitfalls of Economic Analysis) Review the discussion of pitfalls in economic thinking in this chapter. Then identify the fallacy, or mistake in thinking, in each of the following statements:
a. Raising taxes always increases government revenues.
b. Whenever there is a recession, imports decrease. Therefore, to stop a recession, we should increase imports.
c. Raising the tariff on imported steel helps the U.S. steel industry. Therefore, the entire economy is helped.
d. Gold sells for about $1,200 per ounce. Therefore, the U.S. government could sell all the gold in Fort Knox at $1,200 per ounce to reduce the national debt.

Question 8

ASSOCIATION VERSUS CAUSATION Suppose I observe that communities with lots of doctors tend to have relatively high rates of illness. I conclude that doctors cause illness. What's wrong with this reasoning?

Question 9

(Studying Economics) According to the text, economics majors on average make more money than most other majors and have more job opportunities. Are these the primary motivations one might have for studying economics? What are your motivations for studying economics?