QUESTIONS FOR REVIEW

CHAPTER 1

1. Give three examples of important trade-offs that a business manufacturing cars might have to face.

Consider a student who must conclude how to allocate her generally significant asset—her time. She can invest
every last bit of her energy contemplating financial matters, burn through all of it considering brain research, or
separation it between the two fields. For consistently she considers one subject, she allows up an hour she could
have utilized examining the other. What's more, for consistently she spends considering, she allows up an hour that
she could have spent resting, bicycle riding, staring at the TV, or working at her low maintenance work for some
additional going through cash.

Second example on the other hand consider guardians concluding how to spend their family salary. They can
purchase nourishment, dress, or a family excursion. Or then again they can spare a portion of the family salary for
retirement or for kids' advanced degree. At the point when they decide to spend an additional dollar on one of these
products, they have one less dollar to spend on a few other great.

Another exchange off society faces is among effectiveness and equity. Productivity implies that society is getting the
most extreme advantages from its rare assets. Balance implies that those advantages are dispersed consistently
among society's individuals. At the end of the day, productivity alludes to the size of the monetary pie, and
uniformity alludes to how the pie is partitioned into singular cuts.

2. What is the opportunity cost to a business of hiring four extra workers at an annual salary of €25 000 each?

The opportunity cost of a thing is the thing that you offer up to get that thing. When
settling on any choice, chiefs ought to know about the open door costs that go with every conceivable activity. Truth
be told, they normally are. College to figure out the opportunity cost of a vacation to Disney World, you would
incorporate the money related expenses of: confirmation, travel, keepsakes. You would likewise remember the
expense of time spent for excursion. The time cost relies upon your next best use of that time; on the off chance that
it is remaining at home and staring at the TV, the time cost might be little, however on the off chance that it is
working an additional week hours at your specific employment, the time cost is the cash you could have earned. You
would exclude the expenses of nourishment and housing except if they surpassed the costs you would have acquired
had you not gone to Disney World. All things considered, you would as it were incorporate the extra costs, not the
total costs of food and lodging.

3. Water is necessary for life. Is the marginal benefit of a glass of water large or small?

The Marginal Benefit of an extra cup of water is small, because water is in great supply. A rational decision maker
takes an action if and only if the marginal benefit of the action exceeds the marginal cost. it is known that water is an
essential element for survival. but people are willing to pay much more for other unnecessary luxury items than for a
glass of water. The reason is that a person's willingness to pay for a good is based on the marginal benefit that an
extra unit of the good would yield. The marginal benefit, in turn, depends on how many units a person already has.

4. Why should policy makers think about incentives?

Incentives change the manner in which individuals act towards things, both great and awful. On the off chance that
there are no impetuses, individuals won't have any desire to do anything. In the event that there are such a large
number of motivations, an excessive number of individuals will attempt to do something very similar. The
arrangements with respect to charges and such depend on motivating forces. On the off chance that policymakers
can give great impetuses alongside an expansion in charges individuals will take to it superior to if there were no
incentives.

5. Why isn’t trade among countries like a game, with some winners and some losers?

Trade is not about competition between countries resulting in 'winners' and 'losers' because trade makes all countries
better off.
For example, trade between the United States and China isn't care for a games challenge in which one side successes
and the opposite side loses.
Actually, the inverse is valid: Trade between two nations can improve every nation off. To perceive any reason why,
consider how trade influences your family. At the point when an individual from your family searches for work, she
contends with individuals from different families who are searching for occupations.
Families likewise go up against each other when they go shopping in light of the fact that every family needs to
purchase the best products at the most minimal costs. In a sense, every family in an economy rivals every single
other family.
Notwithstanding this challenge, your family would not be in an ideal situation disengaging itself from every other
family.

On the off chance that it did, your family would need to develop its own nourishment, make it’s possess garments,
and manufacture its own home. Plainly, your family increases much from its ability to exchange with others.

6. What does the ‘invisible hand’ of the marketplace do?

The invisible hand is a term coined by Adam Smith in 1776 when he wrote about the inquiry of the wealth of
nations the invisible hand refers to the guided process of firms and households in the market act as if they are guided
by an “invisible hand” that leads them to desirable market outcomes.

7. Explain the two main causes of market failure and give an example of each.

The two main causes of market failure are externalities which is the impact of one person’s actions on the well-being
of a bystander. The classic example of an externality is pollution and market power which refers to the ability of a
single person or firm (or a small group) to unduly influence market prices. For example, if everyone in town needs
water but there is only one well, the owner of the well is not subject to the rigorous competition with which the
invisible hand normally keeps self-interest in check.

8. Why is productivity important to businesses and to society as a whole?

Productivity is important in the economy because productivity allows for the growth of the economy. Productivity
refers to the productive necessity of the firms as they produce the outputs and people who buy the goods but are a
productive force in the labor market. The combination of productivity of firms and individuals allows for economic
growth and rise in GDP.

9. What is inflation, and what causes it?

Inflation is the overall rise in the levels of prices. Inflation and unemployment are inversely related as seen on the
Phillip's curve. Inflation is caused by government over printing of currency. The overall rise in the supply of money
in the economy causes inflation and has occurred in countries such as Germany in 1921 with newspapers.

10. How are inflation and unemployment related in the short run?

Inflation and unemployment are contrarily related in the short run. Numerous business analysts concur this is
brought about by financial strategies over yearly periods. This is straightforwardly identified with the Phillips Curve.

CHAPTER 4

1. Explain each of the following statements using supply and demand diagrams.

a. When there is a drought in southern Europe, the price of olive oil rises in supermarkets throughout Europe.

Drought damages the olive crop, reducing the supply of olives. This can be seen in Figure 2 as a shift to the left
in the supply curve for olives. The new equilibrium price is higher than the old equilibrium price.

b. When the Olympic Games were held in London in 2012, the price of hotel rooms in central London rose sharply.

The Olympic Games attracted a lot of extra visitors to Athens and they all needed
somewhere to stay during their visit. So the demand for hotel rooms in Athens increased. The result, as shown in
Figure 3, is a shift to the right in the demand curve. The equilibrium price of Athenian hotel rooms was thus
higher when the Olympics were taking place, as the figure shows.

c. When conflict breaks out in the Middle East, the price of petrol in Europe rises and the price of a used Mercedes
falls.

When a war breaks out in the Middle East, many markets are affected. Since much oil production
takes place there, the war disrupts oil supplies, shifting the supply curve for petrol to the left, as shown in Figure
4. The result is a rise in the equilibrium price of petrol. With a higher price for petrol, the cost of
operating a petrol-guzzling car, like a Mercedes, will increase. As a result, the demand for used
Mercedes will decline, as people in the market for cars will not find Mercedes as attractive as before. In
addition, some people who already own Mercedes will try to sell them. The result is that the demand curve for
used Mercedes shifts to the left, while the supply curve shifts to the right, as shown in Figure 5. The result is a
decline in the equilibrium price of used Mercedes

2. ‘An increase in the demand for mozzarella cheese raises the quantity of mozzarella demanded, but not the
quantity supplied.’ Is this statement true or false? Explain.
3. Consider the market for large family saloon cars. For each of the events listed here, identify which of the
determinants of supply or demand are affected. Also indicate whether supply or demand is increased or decreased.
Then show the effect on the price and quantity of large family saloon cars.

a. People decide to have more children.

b. A strike by steel workers raises steel prices.

c. Engineers develop new automated machinery for the production of cars.

d. The price of estate cars rises. e. A stock market crash lowers people’s wealth.

4. During the 1990s, technological advances reduced the cost of computer chips. How do you think this affected the
market for computers? For computer software? For typewriters?

5. Using supply and demand diagrams, show the effect of the following events on the market for sweatshirts.

a. A drought in Egypt damages the cotton crop.

b. The price of leather jackets falls.

c. All universities require students to attend morning exercise classes in appropriate attire.

d. New knitting machines are invented.