Chapter 4 Reading Homework:
Read Chapter 4 and answer the following:
1. What are the ten important characteristics of
the American market system?
2. State the four fundamental questions faced by
any economic system.
3. Describe how the market system answers
each of these four questions.
4. Define normal profits and economic profits
and explain the difference between them.
6. Describe the guiding function of prices.
7. Explain the role of competition and the
“invisible hand” in promoting economic efficiency.
Chapter 4 Reading Homework:
Any questions from the reading?
My Notes:
Focus on the first 3 “fundamental questions that
every economic system must answer.”
a. What will be produced?
b. How will goods and services be
produced?
c. Who will get the goods and services?
In a market economy, it is self-interest, competition,
and the guiding function of prices that answer all
these questions.
Normal Profit vs. Economic Profit
Normal Profit – business makes enough to cover its
explicit costs plus enough to pay the entrepreneur an
amount equal to what he or she could make doing
something else (what’s that called?)
Economic Profit – profit over and above normal profit.
It is an added reward to the entrepreneur and what
lures new companies into an industry.
Choosing to produce more capital goods now will lead
to increased economic growth in the future. Some
sacrifice in current consumption will lead to higher
consumption later on.
Producing at Point D will
lead to greater economic
growth.
Choosing to produce more capital goods now will lead
to increased economic growth in the future. Some
sacrifice in current consumption will lead to higher
consumption later on.
Producing at Point D will
lead to greater economic
growth.
What is the opportunity cost of moving from point C to
point B?
F – E units of Good X OR
EF units of Good X
Calculating Opportunity Costs
Output Problem:
No Problem! Set your two quantities equal and solve.
Bru’s Farm
Reff’s Farm
Corn (1000
bushels)
22.5
10
Wheat (1000
bushels
15
15
Reff’s Opportunity cost for corn:
10 bushels corn = 15 bushels wheat
1 bushel corn = 15/10 = 1.5 bushels wheat
Reff’s Opportunity cost for wheat:
15 bushels wheat = 10 bushels corn
1 bushel wheat = 10/15 = 2/3 bushels corn
Check yourself: The opportunity costs for the two goods
should be inverses of each other. Is 1.5 the inverse of 2/3?
YES! Because 1.5 = 3/2, which is the inverse of 2/3.
Calculating Opportunity Costs
Output Problem:
Bru’s Farm
Reff’s Farm
Corn (1000
bushels)
22.5
10
Wheat (1000
bushels
15
15
Output: Opposite Goes Over
Reff’s Opportunity cost for corn:
15/10 bushels wheat
1 bushel corn = 15/10 = 1.5 bushels wheat
Reff’s Opportunity cost for wheat:
10/15 bushels corn
1 bushel wheat = 10/15 = 2/3 bushels corn
Check yourself: The opportunity costs for the two goods
should be inverses of each other. Is 1.5 the inverse of 2/3?
YES! Because 1.5 = 3/2, which is the inverse of 2/3.
Calculating Opportunity Costs
Input Problem:
Acres required to produce Acres required to
1000 bushels corn.
produce 1000
bushels wheat
Bru’s Farm 4
6
Reff’s Farm 9
6
Input: Opposite Goes Under
Reff’s Opportunity cost for corn:
9/6 bushels wheat
1 bushel corn = 9/6 = 1.5 bushels wheat
Reff’s Opportunity cost for wheat:
6/9 bushels corn
1 bushel wheat = 6/9 = 2/3 bushels corn
Check yourself: The opportunity costs for the two goods
should be inverses of each other. Is 1.5 the inverse of 2/3?
YES! Because 1.5 = 3/2, which is the inverse of 2/3.
Calculating Opportunity Costs
Input Problem: Maurer’s Axiom:
Set equal those things that are equal and solve.
Reff’s Opportunity cost for corn:
What it is this graph really showing you?
It IS NOT showing you that
9 bushels of corn = 6 bushels of wheat.
It IS showing you that:
9 acres_____ =
6 acres______
1000 bushels corn
1000 bushels wheat
So: 9 __ = 6__
corn
wheat
(now cross-multiply)
So: 6 corn = 9 wheat
So: 1 corn = 9/6 = 1.5 wheat
Calculating Opportunity Costs
Input Problem: Maurer’s Axiom:
Set equal those things that are equal and solve.
Reff’s Opportunity cost for wheat:
What it is this graph really showing you?
It IS NOT showing you that 6 wheat = 9 corn.
It IS showing you that:
6 acres_____ =
9 acres______
1000 bushels wheat
1000 bushels corn
So: 6 __ = 9__
(now cross multiply)
wheat corn
So: 9 wheat = 6 corn
So: 1 wheat = 6/9 = 2/3 corn
Check yourself: The opportunity costs for the two goods
should be inverses of each other. Is 1.5 the inverse of 2/3?
YES! Because 1.5 = 3/2, which is the inverse of 2/3.
Calculating Opportunity Costs
Input Problem: Maurer’s Axiom:
Set equal those things that are equal and solve.
In Italy, an automobile can be produced by 8 workers in
one day and a washing machine by 3 workers in one day.
In the United States, an automobile can be produced by 6
workers in one day, and a washing machine by 2 workers
in one day.
Italy’s opportunity cost for automobiles:
Italy: 8 workers = 3 workers so 8__ = 3__
1 auto
1 w.m.
1 auto 1 w.m.
3 auto = 8 w.m.; 1 auto = 8/3 washing machines.
Calculating Opportunity Costs
Input Problem: Opposite Goes Under
In Italy, an automobile can be produced by 8 workers in
one day and a washing machine by 3 workers in one day.
In the United States, an automobile can be produced by 6
workers in one day, and a washing machine by 2 workers
in one day.
Italy’s opportunity cost for automobiles:
Input: Opposite Goes Under
Opportunity Cost for 1 auto = 8/3 washing machines.