Question 8
Microeconomics is the study of the allocation of resources within and across individual markets, and the determination of relative prices and quantities in those specific markets. Little or no attention is paid to the behaviour of the aggregate economy. Macroeconomics is the study of the determination of aggregates such as aggregate output, employment, the price level, the unemployment rate, and the exchange rate. When doing macroeconomics, little or no attention is paid to what is going on in the individual markets for specific products.
Question 9
In the answers that follow, note that the statements are made ceteris paribus. In other words, the predicted result of a change in some specific price is made under the assumption that nothing else changes.
a) As the price of ski-lift tickets rises, you are likely to substitute toward other leisure activities (whose price has not increased) and thus reduce your purchases of ski-lift tickets.
b) As the hourly wage for your weekend job rises, the opportunity cost of not working rises. So you are more likely than before to decide not to go skiing, and to work instead.
c) As the fine for speeding rises, the cost of being caught speeding clearly increases. The benefit of driving over the speed limit is presumably unchanged, however. So an increase in the value of speeding tickets is likely to cause you to reduce your speed (and to watch more carefully for hidden police cars!).
d) The higher the weight placed on the assignment, the greater is the incentive for you to work hard on that assignment (and thus hopefully receive a higher grade on the assignment and on the course). This is one obvious reason why professors like to put significant weight on midterm exams – to get students to work hard early in the course rather than leaving all the work to the few days before the final exam!
e) As tuition fees for one specific institution increase, you are likely to substitute toward other institutions whose fees have not increased, and thus reduce your desire to attend the first institution. (For small changes in tuition fees, this effect may be very small because of the perceived large differences between some educational institutions.)
Question 10
There are two reasons why the specialization of labour is more efficient than self-sufficiency. First, since individual abilities differ, specializing allows each person to focus their energies on what they do best, leaving everything else to be done by others. As a result, total output will rise. Second, as people specialize, they often “learn by doing” and become even better at their specific task. Thus specialization often leads to improvements in ability that would not otherwise occur.
Question 11
The market for doctors’ services depends heavily on the specialization of labour. A person with back pain will not know what is wrong. They go to a general practitioner (GP) who is somewhat familiar with a broad range of symptoms and illnesses. The GP may rule out the simplest possible causes for the pain, and in the process determine that the patient requires the services of a specialist who diagnoses and treats the patient’s back. The patient is referred to this specialist who may diagnose a ruptured disk and perform the delicate surgery necessary to solve the problem. Given this reliance on specialization, the market depends on having relatively more GPs who see a large number of patients and act as “gatekeepers” for patients to the more specific specialists.
Question 12
Traditional systems: Behaviour is based primarily on tradition, custom, and habit.
Command systems: Decisions about production and consumption are determined by a central planning authority.
Free-market systems: Production and consumption decisions are made privately, by decentralized producers and consumers.
Mixed systems: These economic systems contain elements of tradition, command, and free markets.
Question 13
This quote, if put to a group of students, would stimulate much interesting discussion, not only about views on how alternative economic systems work, but also about the words used to describe them. The term planned economy, for example, describes the conscious use of centralized decision making for key economic decisions, but the results of that process often look anything but planned, with shortages in some sectors, surpluses in others, and often a rather dispirited and unmotivated private sector. On the other hand, the unplanned decentralized market economy––though surely not perfect—creates a much more orderly looking set of outcomes.
Problems
Question 14
In general, the opportunity cost (measured in dollars) for any activity includes three things:
· the direct (dollar) cost of the activity, plus