The chapter’s third and final section deals with comparative economic systems. Students will read in almost every chapter of this book about a market economy. Contrasting it with planned and traditional economies is a good way to gain some insight into the concept at the outset. We emphasize that actual economies are rarely, if ever, well represented by the extremes; instead, actual economies are mixed economies, with varying degrees of government ownership and planning. Students are introduced to Karl Marx’s argument for a centrally planned economy. While Marx had many things right, we argue that central planning has not been successful in proving itself as an efficient way of organizing an economy, allocating resources, or generating prosperity for a large fraction of the population.
Answers to Study Exercises
Fill-in-the-Blank Questions
Question 1
a) land, labour, capital; factors
b) opportunity cost
c) production possibilities boundary
d) scarcity (because points outside the boundary are unattainable); downward (or negative); the opportunity cost associated with any choice
e) constant; increasing
f) increases (meaning that more units of good B must be given up to get an extra unit of good A)
Question 2
a) self; self-interest
b) incentives created by market prices
c) firms; households; governments
d) increase (maximize); increase (maximize)
e) margin; (marginal) cost
Question 3
a) division; specialization
b) trade
c) money
d) globalization
Review Questions
Question 4
Any realistic production possibilities boundary displays scarcity, the need for choice, and opportunity cost.
Scarcity: The production possibilities boundary (PPB) separates attainable combinations of goods from those that are unattainable. Thus scarcity is shown by the existence of some unattainable bundles of goods.
Choice: Because of scarcity, societies must somehow choose how resources are to be allocated; thus a particular point on the PPB must be chosen.
Opportunity Cost: The slope of the PPB is negative, revealing the opportunity cost that is unavoidable every time a choice is made. For the economy as a whole, the decision to produce more of one good must involve a decision to produce less of some other good.
Question 5
Consider any country’s production possibilities boundary, and suppose the two products are X and Y. A technological improvement in industry X shifts the PPB out (along the X axis), increasing the maximum amount of X that can be produced. Note that the maximum amount of Y that can be produced has not changed. But since the PPB has shifted out, there are many combinations of both goods that are now available that were not before, and some of these involve producing more of both goods. Thus, even though the technology for producing Y has not changed, the technological improvement in X does allow the country to choose to produce more of both products.
Question 6
The central ideas illustrated by the two-good version of the production possibilities boundary (PPB) are scarcity, choice, and opportunity cost. Exactly the same ideas can be illustrated in a more realistic three-good version of the model, which is more complicated to draw, or by the much more realistic N-good version of the model (with N ³ 4), which is impossible to draw. Thus the assumption of only two goods is merely a simplifying one: it allows us to easily grasp and illustrate some central points that would be more difficult to understand in the more general N-good case.
Question 7
a) If all Canadian families had $80,000 of after-tax income (roughly the Canadian average), it would be difficult to say that real poverty existed in Canada. At this level of income, all families would easily have enough income to provide the essentials of food, shelter, and clothing, and could also have much beyond these essentials. However, there would still be many things that these families could not afford, such as expensive university education, expensive vacations, a cottage in the country, etc. Defining poverty with any precision is difficult, and we will say more about this in Chapter 18.
b) Would scarcity exist in such a setting? Yes, certainly. By scarcity we mean simply an excess of wants over the resources available to satisfy those wants. And scarcity would exist for each of those families because most (if not all) of them would still desire to have more than they actually had.
c) Scarcity is an excess of wants over the resources available to satisfy those wants. Poverty—at least in its “absolute form”—is concerned with a level of resources below some threshold of sufficiency. One can conceivably eliminate poverty, as in part (a), but that would not eliminate scarcity.