Economics provides a range of choices to decision makers regarding the outcomes or impacts of alternative courses of action. Describe the two types of economic analysis (see table on page 3). Come up with three questions of your own as examples for each type of analysis, which relates to your community.
a. The two types are positive and normative analysis. Positive analysis predicts the consequences of alternative action by asking “What is?” and What Will be?”
b. Positive
i. If two volunteer fire departments merge, which station and trucks will they use? ii. If minimum wage goes up, how many post office workers will be out of a job and how many post offices will close? iii. If the tax rate goes up, how many people will cut the amount that they are spending on goods?
c. Normative
i. Should the government step in and stop the merge? ii. Should the government change the minimum wage rate? iii. Should the government change tax rates?
B) Define in your own words and use examples to illustrate:
a. Opportunity cost
i. Define: cost of an alternative that must be omitted in order to follow a certain action. ii. Example: picking weather you should go and party (could fail test) or stay home and study (could pass test)
b. Ceteris paribus
i. Define: Latin meaning that one variable may affect other variable. ii. Example:
c. Marginal change
i. Define: small one-unit change in value ii. Example: studying for 1 extra hour with higher grade on test by 5 points
d. Scarcity
i. Define: resources people use to make merchandise that is restricted. ii. Example:
e. Production possibilities curve
i. Define: curve that shows the likely combinations of products that market can produce ii. Example: comparing tons of corn per year with tons of copper per year
f. Principle of diminishing returns
i. Define: when a company tries to manufacture additional output in presented production by increasing the amount of personnel working for the company. ii. Example: Lawn Care Company could start with 5 people and only be able to mow or care for 3 yards per day. But if they add 10 more people they are able to take care of 9 yards per day.
g. Real value
i. Define: value of money in terms of what can be bought ii. Example: the cost of books goes down as the cost of movies goes up.
h. Human capital
i. Define: understanding and skills gained by a employee in the course of schooling and experience ii. Example: At Valmont (Valley, Ne) Welders need a degree to be able to weld at the company standards.
i. Natural Resources
i. Define: resources from nature ii. Example: textbooks and notebooks come from trees.
j. Factors of production
i. Define: resources used to produce goods and services ii. Example: Natural Resources, Labor, Physical capital, Human capital, and Entrepreneurship.
C) Application 5 on page 43 shows the change in real value of minimum wage between 1974 and 2007. What do I mean by "real"? What happened? Is this a problem; why or why not? What if anything should we do about it?
a. “Real” means the value of money in terms of what can be bought. As minimum wage per hour goes. So does weekly income and cost of standard basket of goods, but number of baskets goes down. I think that it could be a problem because the cost of things are going up, so to be able to buy the items that are needed, the minimum wage needs to go up. We should raise the cost of minimum wage if the cost of goods goes up.
D) Critical Thinking: Just barely covering their cost, a company supplying parts to a manufacturing plant had to raise their price 20% for a part that was selling for $20 each. The manufacturer, however, protested saying they had a production run going at a fixed price to their customer so could the supplier continue to provide at the original cost for another couple of weeks. The supplier agreed and told his marketing department to put the price back to its original level for two weeks. The marketing department then gave the manufacturing plant a 20% discount for two weeks to make everyone happy.
A week later the boss came running in and said “What have you done, we are not covering cost anymore.” The marketing manager, said, “But boss, I did just what you said.”
Who is correct? At what price are they selling the part? Show your math.
a. They both are correct. The boss wants to make more money to cover his fixed cost. Plus the boss wants to make the customers happy. The Marketing manager is trying to make the boss happy.
b. Math Work
i. Original Cost: $20.00 ii. Markup Cost:
$20 * 20% = $20*1.20 = $24.00 iii. Discount Cost:
$24/20% = $24/1.20 = $20.00