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1. What are the three basic questions that all economic systems must answer? Any economic system is to answer these questions, regardless of the political system. What (what products and quantities) is to be produced? The question can be answered only by the fact that consumers are paying their own money for established products. How the products should be produced (by whom, quantity, which resources are used, technology)? The question is usually solved by the risk and the business of choice. For whom is the product, that is, as a national product divided between individuals and families? Every economic system addresses these issues in their own way, for one the first place is in a question for whom. Other systems allocate priority questions what and how. However, any system solves these problems due to the fact that on the one hand, the material needs of society are limitless, and on the other hand, economic resources, i.e. facilities for production are limited.
2. Compare and contrast command or central economies with free market type economies. Collectivist economy is often called a planned economy. If a country has a planned (collective) economy, it is almost completely planning production and assortment of all goods and services and is regulating prices of all products and the level of wages. In this type of economy, there is no competition, and therefore, there is no inverse relationship between producer and consumer. Free market economy model relies on a strategy aiming the production of the country for export. The economy successfully combines a large influx of foreign capital, growth of monetary savings, and intensive introduction of advanced scientific and technological progress.
3. What are the essential assumptions used, when production possibility curve is drawn? Production possibility curve shows the combinations of maximum volume of received profits.
Any point on the PPC is to be effective: it is a combination of profits, with which it is impossible to increase the production of one product without a corresponding reduction in the production of another. Classification of points on the PPC:
A - All resources are directed to the production of good Y;
B - Effective production, all resources are fully utilized;
C - Efficient production, all resources are fully utilized;
D - All resources are directed to the production of good X;
F - Not efficient production, not a rational use of resources. An increase of one good can happen when another increase, the production capacity of the economic system is not loaded;
E - Beyond the reach of the economic system.
4. Explain why the Production possibility curve is concave or bowed out. Non-linear: a convex shape PPC - the law of increasing opportunity cost (increased production of consumer goods for each additional unit requires the reduction of production by increasing size).
5. Differentiate between demand and quantity demanded. How would you demonstrate the difference on a linear demand curve? Give an example. Demand - is the number of goods or services that consumers are willing to buy at a specific price chosen from a number of possible in a given period of time. Quantity demanded depends on buyers’ income, the prices of goods and services, the expectations of customers, their tastes and preferences. Linear demand curve has a constant slope. The slope of the curve is defined as the change in the price change of goods. In this case the slope of the demand curve - is a constant, since each price increase for one dollar leads to a decrease in demand for two units. However, the constant slope of the demand curve does not mean that elasticity will be constant. The reason is that the slope - is the ratio of the changes in two variables, while the elasticity - is the ratio of change of variables, expressed as a percentage.
6. Explain the income and substitution effects in the law of Demand. Give an example. Factors, which affect demand at constant prices for the product in question is called non-price determinants of demand. Among the most significant non-price determinants of economists distinguished:
Consumer income; for the majority of normal quality goods income growth causes an increase in demand at the same price. However, for the relatively inferior goods with relatively lower quality income growth encourages consumers to replace relatively inferior goods of higher quality and thus it reduces the demand.
The price on the replacement item leads to a reduction of demand for it, and, as a consequence, increases the demand for the main product. (An example is the situation of 70-80's., when demand for alternative energy sources: nuclear, solar, wind, etc. appeared when oil prices boosted the market).
7. With the help of a graph, explain the difference between price floors and price ceilings.
Price ceilings are usually used to deter inflation, for the solution of social problems, such as the availability of any product for poor population. The need for such price regulation occurs during wars and natural disasters. Deficit is the inevitable companion of the queue and the "black" market. All this forces use different methods of normalization of goods, especially cards, coupons, etc.
Lower limits prices can be set for domestic support, to address social issues (law on the minimum wage).The practice of using price "floor" for the support of agricultural products was provided in many countries, i.e. government sets a minimum price below which to sell or to buy is restricted. There is an excess supply at high price, the surplus production.
8. What is excluded from the measurement of GDP? The calculation of the GDP includes the value of final goods and does not include the cost of intermediate goods, because the value of final goods already includes the value of all used in their production of intermediate goods. GDP should be set to exclude non-production deals. Non-productive transactions are of two basic types: purely financial transactions; sale of second-hand goods.
9. Explain in detail the Expenditure method of calculating GDP. For the calculation of GDP this method added the following values: (1) consumer spending (C), (2) gross private investment in the national economy (Ig); (3) public procurement of goods and services (G); (4) net exports (NX), which is calculated as the difference between exports and imports of the country. Thus, the GDP = C + Ig + G + NX
10. Define GDP and explain its various components. What is the difference between nominal and real GDP? Gross Domestic Product GDP) the market value of all final goods and services (that is intended for direct consumption), made for the year in all sectors of the economy in the state for consumption, export and storage, regardless of the nationality of the factors of production used. GDP is one of the most important indicators of economic development, which describes the end result of the production activity of economic entities resident in material and non-material production. Nominal (absolute) GDP differs real (inflation-adjusted) GDP. Real GDP accounts the extent to which GDP growth is determined by the real output growth, not price increases.
11. Define Economics and explain the key elements that comprise your definition. As a science, economics – is a field of knowledge that studies the economic actions of a man, his actions and interests. It is intended to determine how to most effectively use the limited resources - natural resources, capital, and labor reserves.
12. Compare and contrast "public goods", "private goods", normal goods and inferior goods, substitutes and complementary goods. The principle of division is associated with the mutual dependence of the properties of consumer goods: a complementary and substitute goods. Complementary products together satisfy the same need, for example, cameras and chemicals for amateur photographers. Interchangeability is almost never absolute, but in certain conditions acceptable - beef and pork, scooter and motorcycle, etc. Price reduction on one of the elements of the pair of complementary goods increases the demand on the other. For substitute goods the situation is reversed: reducing the price of one element of the pair leads to a decrease in demand for the other. Typical commercial terms: cash products (owned by the seller at the time of conclusion of the contract), future goods (in the process of production or acquisition subject to the seller after signing the contract of sale), goods sold at a loss in order to attract customers (including advertising purposes), goods designed to cater to leisure customers. Consumer goods - are designed to meet human needs. Manufacturing goods - are used in the production of resources. Private goods are granted to those who paid for them. Public – are enjoyed by all citizens, without an exception.