Three Principles Describe How Economy as a Whole Works

11284 Words Aug 28th, 2012 46 Pages
Solutions to Quick Quizzes
Chapter 1
1. There are many possible answers. 2. There are many possible answers. 3. The three principles that describe how the economy as a whole works are: (1) a country’s standard of living depends on its ability to produce goods and services; (2) prices rise when the government prints too much money; and (3) society faces a short-run tradeoff between inflation and unemployment. A country’s standard of living depends largely on the productivity of its workers, which in turn depends on the education of its workers and the access its workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing
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Friday’s opportunity cost of catching one fish is 15 coconuts, since he can gather 30 coconuts in the same amount of time it takes to catch two fish. Friday has an absolute advantage in catching fish, since he can catch two per hour, while Crusoe can catch only one per hour. But Crusoe has a comparative advantage in catching fish, since his opportunity cost of catching a fish is less than Friday’s. 3. If the world’s fastest typist happens to be trained in brain surgery, she should hire a secretary because the secretary will give up less for each hour spent typing. Although the brain surgeon has an absolute advantage in typing, the secretary has a comparative advantage in typing because of the lower opportunity cost of typing.

The supply curve is graphed in Figure 2.
Price of Pizza Slice

$2.50 2.00 1.50 1.00 0.50 0 200 400 600 800 1000 Number of Pizza Slices Supplied Supply

The demand curve is graphed in Figure 1.

Price of Pizza Slice

$2.50 2.00 1.50 1.00 0.50 0 2 4 Demand

Figure 2 Examples of things that would shift the supply curve include changes in prices of inputs like tomato sauce and cheese, changes in technology like more efficient pizza ovens or automatic dough makers, changes in expectations about the future price of pizza, or a change in the number of sellers. A change in the price of pizza would not shift this supply curve; it would only
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