Question

1. What is the economic problem? Why does scarcity affect everyone?

2. Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or why not?

3. The following table shows output per hour for Martha and Stewart who make gift baskets and potholders:

	Output per Hour
	Martha	Stewart
Gift Baskets	10	16
Potholders	26	24

What is the opportunity cost of a potholder for Martha? What is the opportunity cost of a potholder for Stewart? Who has a comparative advantage in producing potholders? Who has comparative advantage in producing gift baskets?

Answer 1

(1) sometimes called the basic or central economic problem – asserts that an economy's finite resources are insufficient to satisfy all human wants and needs.

a) Scarcity increases Inequality

-When commodities become a scarce product and services, then it become more unequally distributed

- Scarcity raises prices which hurts the poor more than the rich

- Economic decline eliminates the income of the least-skilled

-The political power of advantaged groups will prohibit or prevent redistributive policies favoring the poor in a long-term scarcity

b) Scarcity Threatens Democracy

-Historically, empire, civilization and political order under influence of scarcity need autocratic rule, high levels of stratification, cultural support for authoritarianism and deprivation for the common man

-Authoritarian political systems are more conductive to survival in scarcity in comparison to the democracies

-Scarcity leads to government’s failure and lose legitimacy

-A prolonged economic crisis in a democracy generally results to an authoritarian government to resolve the crisis and then re-establishing a stable social order

c) Scarcity has a greater effect on poor societies

-Conflict, violence and revolutions among people will be more regular and frequent

-Inequalities in societies will increase

-Governments in poor or least developed countries have less capacity for dealing with scarcity

-Resource wars among nations might wipe out some Third World countries by powerful nations

(2)

The U.S. can benefit from trading with less productive countries as long as it produces the goods for which it has a comparative advantage and trades to receive the goods for which it does not.

(3) The opportunity cost of a gift basket for Martha is 2 potholders. The opportunity cost of a gift basket for Stewart is 1.5 potholders. Stewart has a comparative advantage in the production of gift baskets. His opportunity cost of producing a gift basket is lower.