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Answers Seminars Principles of Economics
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Answers to all the questions of all the seminars of the course Principles of Economics.
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Principles of economicsUniversiteit Leiden, Bachelor International Business Law, 2017-2018
Week 1: Introduction, Demand and Supply
Chapter 1 (p. 24-25): Qs. 2, 5, 8, 10, 11; Pb. 4, 5, 6
Question 2
“Buy 2, get 1 free.” Explain why the “1 free” is free to the buyer but not to society.
It’s free to you, but someone (society) bears the costs. The resources are (privately or collectively)
owned by members of society. Resources have been used in producing the third unit. These
resources could have been used to produce something else (opportunity costs).
Question 5
Marginal analysis
Marginal analysis is the comparison of marginal benefit and marginal costs, for decision making.
Marginal benefits is the extra benefit of consuming 1 more unit of output of some good or service.
Marginal cost is the extra cost of producing 1 more unit of output.
Coming to class. A benefit could be a higher grade, the cost would be time spend, which could be
used earning a wage.
Question 8
Economic resources
Economic resources are the land, labor, capital and entrepreneurial ability used in the production of
goods and services. The categories used to classify them are:
Land
o Natural resources (‘gifts of nature’) used to produce goods and services.
Labor
o The physical and mental talents and efforts of people used to produce goods and
services.
Capital
o Human-made resources (buildings, machinery, and equipment) used to produce
goods and services.
Entrepreneurial ability
o The human talent that combines the other resources to produce a product, make
strategic decisions, and bear risks.
They are also called factors of production or inputs, because they are combined to produce goods
and services.
1
,Question 10
Marginal-benefit and marginal-cost curves
They look like a cross. Optimal output is when MB = MC (where the two lines cross). If current
output is such that marginal costs exceeds marginal benefit, fewer resources should be allocated to
this product.
Question 11
Production possibilities curve
A production possibilities curve is a curve showing the different combination of goods and services
that can be produced in a fully employed economy, assuming the available supplies of resources
and technology are fixed.
Quality of education increases
The productivity rises, the curve moves outward.
The number of unemployed workers increases
It means no full employment, the curve doesn’t move because the curve assumes full
employment.
2
, A new technique improves the efficiency of extracting copper from ore
More production with existing resources, the curve moves outward.
A devastating earthquake destroys numerous production facilities
Fewer resources, the curve moves inward.
Problem 4
Budget line
A budget line is a line that shows various combinations of two products a consumer can purchase
with a specific money income, given the products’ price.
a)
b) The slope of the budget line from trading with Kwame is 1-3.
c) The slope of the budget line from trading with Friday is 1-2.
d) Kwame’s line features a larger set of attainable combinations of coconuts & fish.
e) I would rather trade with Kwame.
3
, Problem 5
Production possibilities curve
a. This curve is based on the assumption that there are only two goods, full
employment, fixed resources and technology.
b. At point C, the cost of two more automobiles is 9 forklifts. At point C, the cost of six
more forklifts is two automobiles. The production possibilities curve reflects the law
of increasing opportunity costs by the fact that the curve concaves. The law of
increasing opportunity costs is the principle that as the production of a good
increases, the opportunity cost of producing an additional unit rises. Opportunity
cost is the value of the good, service, or time forgone to obtain something else.
c. If the economy was producing 3 automobiles and 20 forklifts, the resources would
not be fully employed. It is producing at a point within the curve.
d. To produce outside the curve, there are more resources needed (it is not yet
attainable).
Problem 6
Production possibilities curve continued
a. Improvement technology forklifts means that the curve moves upwards.
b. Improvement technology automobiles means that the curve moves to the right.
c. Improvement technology both means that the curve moves upwards and to the right.
Chapter 2 (p. 47-48): Qs. 3, 5, 11; Pb. 3
Question 3
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and
bequeath land, capital, and other property. Private property and the protection of property rights
are critical to the success of the market system. Encourage people to cooperate by helping to
ensure that only mutual agreeable economic transactions take place. ‘Why what anyone stock a
store, build a factory, or clear land for farming if someone else come on or the government itself,
good take that property for his or her own benefits?’ This encourages investment, innovation,
exchange and therefore economic growth
4
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