Question

In: Economics

1) Explain scarcity, factors of production and production possibilities curve. 2) Why is per capita GDP...

1) Explain scarcity, factors of production and production possibilities curve.

2) Why is per capita GDP so much higher in the US than in Mexico?

3) Explain the demand curve, the supply curve, and equilibrium point.

4) What external benefits are generated by higher education?

Solutions

Expert Solution

1) Scarcity means that there are limited resources in the society and people have unlimited wants, but since there are limited resources, they can't produce all the goods and services to satisfy their unlimited wants.

The factors of production are the inputs used in the production of goods and services that we consume. The four main factors of production are land, labor, capital and entrepreneurship. Land is the first factor of production which is used to produce goods and services. Now, land includes not only free space to produce a finished product but also the inputs which comes from land, for example raw materials such as wood, coal, etc. The income which is earned from land is called as Rent. Labor is the second factor of production i.e. it is the work done by human beings on land to produce the goods and services. Many people are hired in firms to work for the firms either to produce a product or a service and the income which they receive in return for the work is called as Wage. Capital is the third factor of production and capital includes machines and tools which help in producing the goods. If you visit a factory you can see there are many machines which are helping to produce a good or if you visit a corporate office you can see computers and laptops which people are working on. These machines are known as capital. The income earned from capital is called as interest. Entrepreneurship is the last factor of production and they are the ones who run the business i.e. they bring together the other three factors of production together in order to produce a good or a service. The income earned from entrepreneurship is known as profit.

Production Possibilities Curve (PPC) is a graph which shows the various combinations of goods and services that an economy can produce efficiently given the available factors of production and the available technology. PPC shows the maximum possible output that can be produced with the above factors of production and technology.

2) Mexico is a developing country whereas the US is an developed country. In the US, labors are highly skilled workers and the entrepreneurs use advanced technology and capital so that there is higher productivity of the labor and machines and hence greater output is produced. So, the per capita GDP is much higher in the US than in Mexico.

3) The demand curve is a downward sloping curve as it shows the inverse relationship between price and quantity i.e. when the price increases, the quantity demanded falls and when the price decreases, the quantity demanded rises.

The supply curve is an upward sloping curve as it shows the direct relationship between quantity supplied and price i.e. when the price increases the quantity supplied increases and when the price falls the quantity supplied also falls.

The equilibrium point is the point where the demand curve and the supply curve meet.

4) The external benefits that are generated by higher education are:

(a) Less Poverty - When people are highly educated, they don't fall trap into poverty and they can work at a decent place where they can earn at least the amount required for a minimum standard of living. So,there is economic growth of a country.

(b) Improved Health - When people are educated they don't fall trap into poverty and can have good nutritious food and can afford proper medicines and hospitals when they fall sick. So, the overall health of the population improves.

(c) New Ideas and technology - With more people being highly educated, more the chances that new research ideas would emerge in order to make the society a better place to live in and how to use the already available resources in a more efficient way.


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