Problem Set 1

Brittianna Sheppard

Period: 4

Problem Set #1

Basic Economics Concepts

1a. Scarce resources diminish as they are used and almost all resources are scarce.

In order to use a scarce resource, you are inherently using the resource for one purpose and not an alternative. The cost of using a resource is called the opportunity cost: the value of the next best alternative that you could be using the resource for instead.

1b. Price is the level of payment at which a market "clears" -- at which supply equals demand.

Cost is the expense incurred for producing a good or service. Opportunity cost is cost measured in terms of alternatives which did not get done because one was occupied with the activity selected.

1c. (i). As their name implies, consumer goods are goods meant for the end consumers. Whether you buy a cold drink, a pack of cigarettes, or a laptop, they are going to be utilized by you and hence, classify as consumer goods. Bread that you buy from market is a consumer good, but the huge oven that is used by the company manufacturing bread is classified as a capital good. Consumer goods are thus products that are bought from retail stores for personal or household need. On the other hand, capital goods are goods that are used to make more goods, which are to be used by end consumers. All machinery, equipment, even factories that are used to produce consumer goods come under the category of capital goods. Capital goods are not natural, and are man made. The word capital is enough to convey the impression that these are goods that are expensive, and require a huge investment on the part of the company trying to make consumer goods.

(ii). Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved. For example, the...