I’m working on a micro economics project and need support to help me learn. Make sure to: 1. must mention the question number clearly in their answers. 2. Avoid plagiarism. 3. No pictures containing text will be accepted and will be considered plagiarism. 4. All answers must be typed using Times New Roman (size 12, double-spaced. Q1: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why? 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). Q3: Pick any two principles of economics from Chapter 1 and explain each with an example. (From the slides) 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.
Q1: Define price ceiling and price floor and give an example of each. Which leads to a shortage? Which leads to a surplus? Why?
Price ceilings and price floors are important tools in economic policy that influence market outcomes.
A price ceiling is a government-imposed maximum price that can be charged for a good or service. It is set below the equilibrium price, the price at which supply equals demand. Price ceilings are typically used to protect consumers by preventing prices from rising too high. A classic example of a price ceiling is rent control in metropolitan areas. In cities with high demand for housing, governments may impose rent control to limit the amount landlords can charge for rent. The aim is to make housing more affordable for low-income individuals.
Price ceilings often lead to shortages because they create a situation where the quantity demanded exceeds the quantity supplied at the capped price. In the case of rent control, if the government sets the maximum rent below the market equilibrium rent, landlords may find it unprofitable to rent out their properties. As a result, there may be fewer available rental units, and individuals looking for housing might have trouble finding a place to live.
A price floor, on the other hand, is a government-imposed minimum price for a good or service. It is set above the equilibrium price. Price floors are often implemented to protect producers’ incomes, especially in agriculture. The most common example of a price floor is the minimum wage, which sets the lowest legal wage that employers can pay their workers.
Price floors tend to lead to surpluses because the price is artificially set above the market equilibrium. In the case of the minimum wage, if the government mandates a wage rate higher than what employers would normally pay, it can result in a surplus of labor, leading to higher unemployment rates. Employers may not be able or willing to hire as many workers at the higher wage rate, leaving some individuals without jobs.
In summary, price ceilings and price floors both have their specific purposes in addressing economic concerns, but they often lead to unintended consequences. Price ceilings can result in shortages, making it difficult for consumers to obtain the goods or services they need. Price floors can lead to surpluses, which may result in unemployment or wasted resources. Policymakers must carefully consider these implications when implementing such measures.
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).
When a nation has a comparative advantage in the production of agricultural produce compared to another country, it means that it can produce these agricultural goods at a lower opportunity cost. In economic terms, the opportunity cost is what must be given up to produce one more unit of a particular product. Here’s an explanation of the available options and why some economists favor import restrictions:
Export: The nation with a comparative advantage in agricultural produce should consider exporting these goods. By specializing in the production of agricultural products, they can produce more efficiently and at lower costs than other countries. When they export, they can earn foreign exchange and boost their economy.
For example, let’s say Country A can produce wheat more efficiently than Country B. Country A can dedicate its resources to wheat production, export it to Country B, and in return, import goods that Country B produces more efficiently. This mutually beneficial trade allows both countries to consume more goods at a lower overall cost.
Import Restrictions: While free trade is generally beneficial, some economists favor import restrictions for various reasons:
- Protection of Domestic Industries: Import restrictions, such as tariffs or quotas, can protect domestic industries from foreign competition. For example, if Country A imposes tariffs on imported agricultural produce, it can shield its domestic farmers from cheaper foreign agricultural products.
- Preserving Jobs: Restricting imports may be seen as a way to preserve jobs in specific sectors. For instance, protecting the domestic steel industry through import restrictions can prevent layoffs in steel mills.
- National Security: In certain cases, economists argue that industries related to national security, such as defense, should not rely heavily on foreign suppliers. Restricting imports of critical goods ensures a country’s self-sufficiency in times of crisis.
However, it’s important to note that while these arguments have their merits, economists also point out the drawbacks of import restrictions. Trade restrictions can lead to retaliation from trading partners, higher prices for consumers, and reduced overall economic efficiency. Therefore, the decision to restrict imports should be made judiciously, considering both short-term and long-term consequences.
Q3: Pick any two principles of economics from Chapter 1 and explain each with an example. (From the slides)
- Two principles of economics from Chapter 1 are “People face trade-offs” and “The cost of something is what you give up to get it.”
- People face trade-offs: This principle recognizes that individuals and societies have limited resources, and thus, they must make choices. For example, a student who decides to spend more time studying for an exam may trade off leisure time with friends.
- The cost of something is what you give up to get it: This principle highlights the concept of opportunity cost. When making decisions, individuals must consider what they are sacrificing. For instance, if someone chooses to attend a concert, the opportunity cost might be the income they could have earned by working during that time.
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 cars and computers. The PPC represents the maximum possible combinations of cars and computers that an economy can produce, given its resources and technology. Points on the curve represent efficient allocation, while points inside the curve indicate underutilization, and points outside are unattainable.
- Opportunity cost: The opportunity cost of producing one more car is the number of computers that must be sacrificed. For example, if the economy moves from point A to point B on the PPC to produce one more car, it might have to give up producing three computers. Thus, the opportunity cost of one car is three computers.
- Any combination outside the PPC is not possible because it exceeds the economy’s production capacity with existing resources and technology. It implies a need for resource expansion or technological advancement to reach such points.
- Mankiw, N. G. (2019). Principles of Microeconomics. Cengage Learning.
- Krugman, P. R., & Wells, R. (2018). Microeconomics. Worth Publishers.
- Perloff, J. M. (2018). Microeconomics: Theory and Applications with Calculus. Pearson.