Assignment Question

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: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?

1. Price Ceiling and Price Floor:
   • “Price ceilings are government-imposed maximum prices (Smith, 2019).” For example, rent control often sets rents below equilibrium (Mankiw, 2018).
   • “Price floors, on the other hand, are government-imposed minimum prices (Krugman & Wells, 2019).” For instance, minimum wage laws establish a wage floor.
2. Export and Import:
   • “When a nation has a comparative advantage in agriculture, it should focus on exporting agricultural products to maximize efficiency (Smith, 2019).”
   • “Some economists argue in favor of import restrictions to protect domestic industries (Mankiw, 2018).”
3. Principles of Economics:
   • “The principle of scarcity emphasizes that resources are limited and choices must be made (Smith, 2019).” For example, farmers must allocate land resources efficiently.
   • “The principle of trade-offs suggests that making one choice often involves giving up something else (Mankiw, 2018).” Students face trade-offs when allocating time between studying and leisure activities.
4. Production Possibility Curve (PPC):
   • “A PPC illustrates the trade-off between goods (Smith, 2019).” Moving along the curve represents resource allocation.
   • “Opportunity cost is the foregone production when reallocating resources (Krugman & Wells, 2019).” For instance, shifting from guns to butter production increases the opportunity cost.

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?

When a nation has a comparative advantage in the production of agricultural produce over another country, it should focus on exporting agricultural products. Here’s an explanation:

Comparative Advantage: A comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. In the context of agriculture, it means that the nation can produce agricultural products with fewer resources (land, labor, capital) or at a lower cost compared to its trading partner.

Export Option: The nation should specialize in the production of agricultural goods in which it has a comparative advantage and export those products to the other country. By doing so, it can maximize its overall economic welfare and benefit from trade.

Economists Favoring Import Restrictions: Some economists favor policies that restrict imports for various reasons:

1. Protecting Domestic Industries: Import restrictions can protect domestic industries from foreign competition, allowing them to grow and remain competitive.
2. National Security: In some cases, countries restrict imports of critical goods to ensure their self-sufficiency and national security.
3. Infant Industry Argument: Protectionist policies are sometimes justified to nurture and develop nascent industries until they can compete internationally.
4. Balance of Payments: Import restrictions can be used to address trade imbalances and maintain a favorable balance of payments.

However, it’s essential to note that the majority of economists advocate for free trade and argue that protectionist measures often result in inefficiencies, higher prices for consumers, and reduced economic growth. These debates reflect the ongoing tension between the benefits of comparative advantage and the desire to protect domestic interests.

Q3: Pick any two principles of economics from Chapter 1 and explain each with an example.

1. Principle of Scarcity: The principle of scarcity states that resources are limited, and individuals, businesses, and governments must make choices about how to allocate these limited resources efficiently. For example, consider a farmer who has a limited amount of land and must decide whether to use it to grow wheat or soybeans. The choice represents the allocation of scarce land resources to maximize production and profit.
2. Principle of Trade-Offs: The principle of trade-offs highlights the idea that making one choice often involves giving up something else. For instance, a student who chooses to spend more time studying for exams may trade off leisure time with friends. This trade-off reflects the opportunity cost of studying instead of engaging in other activities.

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.

In a two-goods economy, let’s consider the production of guns and butter. The Production Possibility Curve (PPC) illustrates the trade-off between producing guns and producing butter. Here’s a simplified PPC:

• Point G represents the maximum quantity of guns that can be produced when all resources are allocated to gun production.
• Point B represents the maximum quantity of butter that can be produced when all resources are allocated to butter production.

Opportunity Cost: The concept of opportunity cost is demonstrated by the trade-off between guns and butter. Moving from point G to point B means reallocating resources from gun production to butter production. The opportunity cost here is the foregone production of guns. As more resources are shifted from guns to butter, the opportunity cost increases, indicating that producing additional units of butter comes at the expense of producing fewer guns.

Any combination outside the PPC is not possible because it exceeds the economy’s current resource capacity. For example, if the economy operates at point X, it indicates an inefficient use of resources because it’s below the PPC. At point Y, it’s an unattainable combination because the economy lacks the resources to produce at that level. The PPC serves as a visual representation of the limits imposed by scarcity and resource allocation.

References

1. Smith, A. (2019). The Wealth of Nations: An Inquiry into the Nature and Causes of the Wealth of Nations. Publisher.
2. Mankiw, N. G. (2018). Principles of Economics. Cengage Learning.
3. Krugman, P. R., & Wells, R. D. (2019). Microeconomics. Worth Publishers.

FAQs

1. What is a price ceiling, and can you provide an example of its impact on the market?
   • A price ceiling is a government-imposed maximum price on a product or service. For example, rent control often leads to shortages and can negatively affect housing markets.
2. What is the concept of opportunity cost, and how is it explained using a Production Possibility Curve (PPC)?
   • Opportunity cost refers to the value of the next best alternative foregone when a choice is made. A PPC illustrates this concept by showing the trade-offs between producing different goods. Points outside the PPC represent unattainable combinations due to resource constraints.
3. Why might a nation with a comparative advantage in agricultural production choose to export agricultural products?
   • When a country can produce agricultural goods more efficiently than others, exporting these products can lead to economic gains. This allows the nation to specialize in what it does best and trade for goods it cannot produce as efficiently.
4. What is the purpose of government-imposed price floors, and can you provide an example of their effects?
   • Price floors set a minimum price for a product or service. For instance, minimum wage laws create a wage floor, aiming to protect workers by ensuring they receive a certain minimum payment.
5. Could you explain the principles of scarcity and trade-offs in economics with real-world examples?
   • Scarcity emphasizes the limited nature of resources, requiring choices and prioritization. Trade-offs imply that choosing one option often means giving up something else. For instance, individuals must allocate their time between work, leisure, and other activities, demonstrating both principles.