One tradeoff that society faces is between efficiency and equity. Define each term and explain this tradeoff. What do they have to do with government policy?

Efficiency means that society is getting the most it can from its scarce resources. Equity means that the benefits of those resources are distributed fairly among society’s members. In other words, efficiency refers to the size of the economic pie, and equity refers to how the pie is divided. Consider, for instance, policies aimed at achieving a more equal distribution of economic well-being. Some of these policies, such as the welfare system or unemployment insurance, try to help those members of society who are most in need. Others, such as the individual income tax, ask the financially successful to con-tribute more than others to support the government.

 

 

6. Under what conditions might a government intervention in an economy improve the market outcome? Hint: Market failure: Market power & Externalities

Markets rarely meet all these criteria, and when deviations from the ideal occur, the result is said to be market failure. Of course, most deviations from the ideal are minor and do not impose significant costs on society. But when deviations are significant there is often a call for the government to do something about the problem. For example, markets can deviate significantly from the competitive ideal -- e.g., firms may acquire significant market power, undertake deceptive practices, collude, etc. When this happens, government intervention can produce markets that operate more efficiently than they would on their own.
If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society, government intervention might achieve a more equal distribution of economic well-being.

 

7. Explain in detail why productivity is so important in an economy and what steps the government can take to increase productivity?
Almost all variation in living standards is attributable to differences in countries’ productivity—that is, the amount of goods and services produced from each hour of a worker’s time. The fundamental relationship between productivity and living standards is simple, but its implications are far-reaching. If productivity is the primary determinant of living standards, other explanations must be of secondary importance. For example, it might be tempting to credit labor unions or minimum-wage laws for the rise in living standards of American workers over the past century. Yet the real hero of American workers is their rising productivity.

 

8. Adam Smith used the term “invisible hand” in his 1776 book The Wealth of Nations. Prices are the instrument with which the invisible hand directs economic activity in a Market Economy. Explain the theory by defining the Market Economy.

"Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

 

9. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run. Demonstrate your answer by explaining Philips Curve.
What does the Phillips Curve tell us? It says that there is a trade-off between unemployment and inflation. When the inflation rate is falling, the unemployment rate is rising. And when the unemployment rate is falling, the inflation rate is rising. Policies that improve one of the issues will worsen the other issue.

10. Aslan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He anticipates that it will cost him $10,000 to purchase, repair and restore the car, and that he can sell the finished car for $13,000. When he has spent a total of $10,000 on the project, he discovers that he needs to replace the engine. It will cost Aslan $4,000 to replace the engine. He can sell the car without the new engine for $9,000. What should he do? Explain your answer taking into consideration marginal cost and marginal benefit analysis.

Marginal changes small incremental adjustments to a plan of action.

 

You must decide whether or not to attend graduate school (Master Degree) after your graduation of Alma University. How might you use marginal analysis to make your decision? What principles would help you to do so?

We use one of the tens principle of economic is “How people make decision” The cost of something is what you give up to get it.
Whether to go to class or sleep in?
Whether to go to college or to work?

The opportunity cost of an item is what you give up to get that item.

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