Lessons in Microeconomics - Essay Example

?Lesson and 2 The opportunity cost of doing one thing is the value of what else one could have done instead of that. Going to college has several benefits like if one can hold a bachelor degree then his future earnings can be round about 590,000 dollars. Also, the employment and labor force participation rates for people ageing 25 and over have increased with higher levels of education. People who have attained higher degree are eligible in doing charitable causes at a higher rate than those with less education. Higher education has proved to be beneficial in voting matters also. Education is an asset. It has provided benefits like self awareness, ability to think wisely and critically, having the ability to meet different people, which are less tangible and will help a child to grow up being a better individual. However, there are certain costs that have to be incurred for going to college. The opportunity costs of going to college include several components. First, the opportunity cost of one going to college includes the money that he or she would have earned instead of attending classes. It also includes the amount of wages that were foregone by not doing work and just attending college. In opting for going to college, one has also lost the opportunity to build up a career and the associated income that could be earned instead of not going to college. The greatest opportunity cost of going to college is the wage income that the individual has to forgone for attending classes. 2. The margin is considered to be a very significant concept in the area of business and economics. In economics the concept of margin is related to a wide range of topics including utility, revenue, costs, profit, product, etc. We are quite familiar with the terms of marginal utility, marginal revenue, marginal costs, marginal profit, marginal product and so on. The term margin mainly stands for the difference in the value of a variable when one additional unit of some other variable is used. For example, marginal utility of a product refers to the increase or decrease in total utility of an individual due to one unit increase in the consumption of the product. The concept of margin is very essential in economic decision making. The level of p of goods, the level of production of goods, etc are always determined by considering marginal requirement. For example, a firm is a profit maximizer in the sense it will always produce a commodity in such a way that its profit is maximized. In a perfectly competitive market, the firm will maximize its profit when marginal costs will b equal to its marginal revenue. The firm will continue to increase its production until marginal revenue becomes equal to its marginal cost. The point of equality is considered to be the equilibrium point of the firm. Thus the concept of margin is very important in economic decision making. Without the consideration of margin requirement it is not possible to conduct economic activities in optimum ways. However, it is not always necessary that all kinds of economic decisions are taken using the marginal concept only. For example, in a perfectly competitive market the break even point of a firm is not determined by any marginal concept. The break even point is relevant in short run production. This point mainly refers to the point of shutting down of production. A firm in a perfectly competitive market will shut down or stop production in short run when its average variable costs become greater than its average revenue, i.e. its average revenue even fail to cover the firm’s average variable costs. Thus the concept of average is important in taking shut down decision. 3. There has been a huge debate over the tax cut policy by bush administration in 2001 and 2003. Bush tax cuts mainly refer to two important tax policies created and implemented during the Presidential era of George W. Bush. Through these policies, the Bush administration mainly lowered tax rates in the United States. These tax policies effectively lowered marginal tax rates for almost all tax payers of the United States. These tax policies, however, became exposed to much debate. Different people and different parties expressed differing opinions on these tax cut policies. While some provided positive views for these policies, some had their normative views regarding these policies. Some of the positive arguments for these tax cut policies are as follows: First, the supporters of these policies argued that the pace of economic growth of the country will increase that will in turn create more jobs within the economy. Second, the proponents of these tax policies also argued that lowering tax rates for the rich people would increase tax receipts from the wealthiest section of the country as the policies aimed at reducing tax rates without resorting to any kind of tax shelters. Some normative arguments against these tax cuts are as follows; First, the opponents of these tax policies were of the opinion that these policies will shift the tax burden from the rich section of people to the middle and low income classes. Second, the opponents were also of the opinion that these tax policies would exert negative impact on economic growth by increasing government budget deficit. The economists like William Gale, Simon Johnson were of the opinion that these tax cuts would result in reverse wealth redistribution and would increase income inequality in the country. They were also of the opinion that these tax cuts would not results in much increase in government tax receipts. Lesson 3 : 1a. It is called Production Possibility Frontier which shows the different combination of two goods that an economy can produce efficiently, with given amount of resources and time. 1b. Marginal cost of an output is the cost of the additional inputs required to produce one additional unit of that output. Opportunity cost is measured in the number of units of the second good forgone for one or more units of the first good. In this case, marginal cost is equal to opportunity cost = 2. This is because, increasing production of corn entails losing the opportunity to produce some amount of beans. 1c. Slope= -2. The slope of PPF describes numerically the rate at which output of one good can be transformed (by re-allocation of production resources) into output of the other. It is also called the (marginal) "opportunity cost" of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin. It measures how much of good Y is given up for one more unit of good X or vice versa. The shape of a PPF is commonly drawn as concave from the origin to represent increasing opportunity cost with increased output of a good. 2. Any point on the PPF represents that the economy can produces the combination of two good efficiently, with given amount of resources. But this is possible only in theory. In reality, economies struggle to reach optimum level of production. This is because scarcity forces the economy to forego one choice for the other. The slope of PPF is negative which reveals that if one increase the production of corn, then the production of beans automatically decreases. 3. a. Farmer 2 will have absolute advantage in corn than the farmer 1 because if both them direct their efforts in growing corn only, then farmer 2 will produce 400 units of corn while farmer 1 will be able to produce only 300 unit of corn. similarly farmer 2 will also have absolute advantage in bean as if both them direct their efforts in growing bean only, then farmer 2 will produce 160 units of corn while farmer 1 will be able to produce only 150 unit of corn. 3b. Farmer 1 has comparative advantage of growing corn as less units of beans have to be sacrificed for growing one unit of corn compared to farmer 2. On the other hand, farmer 2 has comparative advantage in growing beans. 3c. Farmer 1 should produce corn as it has comparative advantage in growing corn over farmer 2. Farmer 2 should grow bean as it has comparative advantage in producing bean over farmer 1. 4. If a company invest $ 1 billion d in the research of an anti cancer drug then the incentives and disincentives will be as follows: The incentive is that if the company becomes successful in producing an anticancer drug then it will be able to generate huge income as the demand of this drug in the market is huge. The disincentive will be that it would not be possible to enjoy this high income in long run, as other firms will follow the same footprint and enter into the market of anticancer drug and the level of competition will increase and the price will decrease. 5. Yes, it is possible for one of the person to have absolute advantage in neither skill. No, it is not possible for a person to have comparative advantage in neither skill. Reference Mankiw, N,G 1998. Microeconomics. Elsvier. Read More