Take an example of a two-goods economy and explain the concept of opportunity cost with the help of the Production possibility curve (PPC). Also, draw a PPC and explain why any combination outside the PPC is not possible.
Q1: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which
leads to a surplus? Why? [2.5 Marks]
Q2: Export or Import, what is the option available for a nation if it has a comparative advantage in the production of agricultural produce over the other country? Explain. Why do a group of economists favor the policies that restrict imports? (Minimum 500 words). [2.5 Marks]
Q3: Pick any two principles of economics from Chapter 1 and explain each with an example.
[2.5 Marks]
Q4: Take an example of a two-goods economy and explain the concept of opportunity cost with the help of the Production possibility curve (PPC). Also, draw a PPC and explain why any combination outside the PPC is not possible. [2.5 Marks]
Requirements: 500word
Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University ةيدوعسلا ةيبرعلا ةكلمملا ميلعتلا ةرازو ةينورتكللإا ةيدوعسلا ةعماجلا College of Administrative and Financial Sciences Assignment 1 Macroeconomics (ECON 201) The due date for Assignment 1 is 7/10/2023 Course Name: Macroeconomics Student’s Name: SEU | ELITE Course Code: ECON201 Student’s ID Number: Semester: 1st CRN: 13828 Academic Year:2023-24-Ist For Instructor’s Use only Instructor’s Name: Students’ Grade: / 10 Level of Marks: General Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via the allocated folder. • The due date for Assignment 1 is 7/10/2022. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well-presented, marks may be reduced for poor presentation. This includes filling in your information on the cover page. • Students must mention the question number clearly in their answers. • Late submissions will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answers must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism). • Submissions without this cover page will NOT be accepted.
Assignment 1 Questions: Week 1, 2 & 3 Q1: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why? [2.5 Marks] Q2: Export or Import, what is the option available for a nation if it has a comparative advantage in the production of agricultural produce over the other country? Explain. Why do a group of economists favor the policies that restrict imports? (Minimum 500 words). [2.5 Marks] Q3: Pick any two principles of economics from Chapter 1 and explain each with an example. [2.5 Marks] Q4: Take an example of a two-goods economy and explain the concept of opportunity cost with the help of the Production possibility curve (PPC). Also, draw a PPC and explain why any combination outside the PPC is not possible. [2.5 Marks] Answer: Q1 A- A price ceiling is a government-imposed maximum price that can be charged for a particular good or service. It is set below the equilibrium price in an attempt to make the product more affordable for consumers. The purpose of a price ceiling is typically to protect consumers from price increases and ensure access to essential goods or services. Example of a price ceiling: Rent control policies in some cities set a maximum limit on the amount landlords can charge for rent. For instance, if the market equilibrium rent for an apartment is $1,500 per month, the government may impose a price ceiling of $1,200 per month. A price floor, on the other hand, is a government-imposed minimum price that must be paid for a particular good or service. It is set above the equilibrium price and is intended to ensure that producers receive a fair income or to support certain industries Example of a price floor: Minimum wage laws establish a price floor for labor, setting a legal minimum wage that employers must pay their workers. For instance, if the market equilibrium wage is $10 per hour, the government may impose a minimum wage of $12 per hour.
A price ceiling generally leads to a shortage in the market. When the ceiling is set below the equilibrium price, it creates a situation where the quantity demanded exceeds the quantity supplied. This shortage occurs because the lower price reduces the incentive for producers to supply the product, while simultaneously increasing the demand from consumers. On the other hand, a price floor typically leads to a surplus. When the floor is set above the equilibrium price, it creates a situation where the quantity supplied exceeds the quantity demanded. The higher price incentivizes producers to supply more of the product, while reducing the affordability for consumers, resulting in excess supply or surplus. In summary, a price ceiling leads to a shortage because it sets a maximum price below the equilibrium, discouraging supply and increasing demand. A price floor leads to a surplus because it sets a minimum price above the equilibrium, encouraging supply but reducing demand. Q2- If a nation has a comparative advantage in the production of agricultural produce over another country, it should focus on exporting that product to the other country while importing other goods and services that the other country has a comparative advantage in producing. This allows for both countries to benefit from trade and specialization, as each country can produce and export the goods and services they are relatively more efficient at producing, while importing the goods and services they are relatively less efficient at producing. However, a group of economists favor policies that restrict imports for several reasons. One reason is to protect domestic industries and jobs from foreign competition. By restricting imports, domestic industries may be able to charge higher prices for their products, which can lead to increased profits and employment opportunities. Additionally, some economists argue that restricting imports can help reduce the trade deficit, which occurs when a country imports more than it exports. Another reason why some economists favor import restrictions is to promote national security and protect against foreign threats. For example, if a country relies heavily on imports of certain goods, such as oil or military equipment, it may be vulnerable to disruptions in the supply chain or price fluctuations. By restricting imports of these goods, a country may be able to reduce its dependence on foreign suppliers and increase its self-sufficiency. However, there are also drawbacks to import restrictions. By limiting competition from foreign producers, domestic industries may become less efficient and innovative over time. Additionally,
import restrictions can lead to higher prices for consumers, as domestic producers may be able to charge higher prices without facing competition from foreign producers. In conclusion, while a nation with a comparative advantage in the production of agricultural produce should focus on exporting that product to the other country while importing other goods and services, there are some economists who favor policies that restrict imports for various reasons. However, it is important to weigh the potential benefits and drawbacks of import restrictions before implementing such policies. Q3 The Cost of Something Is What You Give Up to Get It: This principle emphasizes the concept of opportunity cost, which refers to the value of the next best alternative that is forgone in order to pursue a certain action or decision. For instance, if an individual decides to purchase a new car, they give up the opportunity to use that money for other purposes, such as investing or saving for retirement. This principle highlights the importance of considering the trade-offs involved in decision making. Rational People Think at the Margin: This principle suggests that individuals make decisions by comparing the marginal benefits and costs of each option. Rational people weigh the additional benefits and costs of a decision before making a choice. For example, a consumer may decide to purchase an additional unit of a product if the marginal benefit of that unit exceeds the marginal cost of purchasing it. This principle highlights the importance of making decisions based on incremental changes rather than all-or-nothing choices. 4- The Production Possibility Curve (PPC) is a model that captures all the maximum output possibilities for two (or more) goods, given a set of inputs (or resources) that are used efficiently. Whilst the Opportunity Cost (OC) of a given action is the value of the next best alternative to that particular action. The PPC model is used to show the trade-offs associated with allocating resources between the production of two goods and can be used to illustrate the concept of OC as the PPC represents the maximum output possibilities, making it clear that in order to produce more of one thing, we must produce less of something else. The slope of the PPC tells us the opportunity cost of an extra unit of a good because it tells us how much less of one good can be produced in order for one more unit of the other good to be produced. • A PPC is the curve that represents all the possible and efficient combinations of production. It can be used to show the trade-off between two goods. The trade-off can also be called the opportunity cost – which is the value of the next best alternative. Using a PPC, one can increase the quantity of a good (let’s call it A) by one. The second good (let’s call it B) will decrease and however much it goes down by is the opportunity cost of good A. The gradient of the PPC, B/A or A/B is the opportunity cost of A and
B respectively. The shape of the PPC can determine whether the opportunity cost is increasing. A linear curve shows an economy in which the OC is constant (the more of good A you produce, the equal amount of good B you are forgoing per unit of A). According to the meaning of the Production possibility curve which shows all different attainable combinations of the production of two commodities that can be produced in an economy with given the resources and technology which are to be fully utilized. Therefore, any point inside the production possibility curve indicates underutilization of resources because the economy can produce more with the given resources and any point beyond the production possibility curve cannot be achieved because the economy does not have the required resources to produce such amount of output.
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