Economic choices

We face economic choices because the resources are limited and our wants are unlimited. Thus, we face the problem of scarcity and we have to make choices. The limited resources are used to produce the goods and services most demanded by the economy. What does the PPF curve represent? What does the outward movement of the PPF curve represent? Is it possible to have a level of consumption that exceeds the level of production represented by the PPF? If so, how?

The production possibility frontier represents the various combinations of goods and services that can be produced given the available resources and technology. It shows the classes of goods that can be produced when all available resources are utilized efficiently. An outward movement of the PPF may be a result of changes in resource availability or in technology and it reflects economic growth. It is possible to consume more than the level of production represented by the PPF by consuming goods that have been produced in the past i. e. savings or consumer goods that have been produced outside the economy i. e. imports.

 Define marginal cost. Marginal cost is the cost of producing one extra unit. It is calculated as the change in total cost divided by the change in output. Define opportunity cost is the next best alternative forgone. It is the sacrifice made for one good in terms of others.  Explain what inflation is and how it is calculated Inflation is the sustained rise in the price level of an economy. There are two sources of inflation namely demand-pull inflation and cost-push inflation.

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Demand-pull inflation is caused when there is an increase in aggregate demand in excess to supply and cost-push inflation is caused when an increase in the cost of production leads to a fall in aggregate supply. Consumer Price Index (CPI) is a means used to measure inflation. It is a method used to measure the cost of a fixed basket of goods and services and thus reflects the purchasing power of consumers. The CPI is calculated by taking price changes in each item in the fixed basket of goods and averaging them.

The items in the basket are assigned weights according to their importance and changes in the CPI are used to gauge the price changes associated with the cost of living. Define ceteris paribus and explain its significance to economic analysis Ceteris paribus means all else remaining constant. When an analyst uses this term in economic analysis, he/she wants to focus on the effect of a change in one independent variable on a dependant variable without having to worry about other independent variables that might also have an effect on the dependant variable.

For example, if there is a decrease in the price of coffee, ceteris paribus, there will be more coffee consumption. We ignore the possibility that the price of tea and other substitutes of coffee might have increased, causing people to switch to coffee or any other such possibility. So ‘ceteris paribus’ holds a lot of significance in economics as it is used to derive conclusions about independent and dependant variables.  Describe and discuss the circular flow of money leave government and foreign trade out of the picture.

The circular flow of money involves households and firms in an economy where is no government and no foreign trade. The firms produce goods and services that are demanded by the households. The firms pay wages to labor hired and the labor which is part of the households use these wages to purchase the goods and services. When households buy the goods that are produced, the money flows to producers and when firms pay wages, money flows to households. Hence households and firms are interdependent.  Define Gross Domestic Product (GDP) and discuss what is and is not included with the calculation of GDP.

Gross Domestic Product measures the market value of all final goods and services produced during the year in an economy regardless of who owns those resources. There are two ways of calculating GDP namely the expenditure approach and the income approach. In the expenditure approach, the total expenditure on all final goods and services produced during the year is used to calculate GDP and in the income approach, GDP is calculated by adding up all payments made to the owner of resources used for production in a given year.

The goods and services not sold in the market are not taken into account when calculating GDP. For example, housewives cooking and cleaning or a farmer growing tomatoes but not selling them in the market will not be included when measuring GDP even though there has been production. Discuss the difference between nominal and real GDP? If a news report mentions GDP without any adjective, it is most probably referring to which: nominal or real? Nominal GDP is calculated based on the current prices prevailing when the output is produced.

However real GDP takes the effect of inflation into account and the real GDP figure is adjusted for inflation and presents a more realistic picture when year-to-year comparisons are made. When only GDP is mentioned, it is most probably referring to nominal GDP. 1Discuss the major categories of economic resources (inputs to production). There are four categories of economic resources namely land, labor, capital and entrepreneurship. Land comprises of all natural resources such as oil, water, minerals etc. Labor is the workforce who utilizes its skills to produce goods and services.

Capital is the goods that are produced to further aid in the production of other goods and services. Entrepreneurship is the accumulation of resources to produce new or improved products or technology.  Explain why the U. S. Congress choose 3% inflation rather than zero inflation as the benchmark for price stability.  List and discuss some of the reasons that the U. S. government has committed itself to avoiding significant inflationary effects (in other words, discuss some of the negative effects of inflation).

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