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Basic economic
ideas and
resource allocation
Air can be regarded as a free good because no price can be attached to it.
However, fresh air is more of a problem because it might be possible to think
of examples where a price could be charged for fresh air.
The extent to which a country will be able to shift its production possibility
curve to the right will depend on a number of possible factors. For example, the
ease with which it is possible for labour to migrate into an economy, increasing
the quantity of labour. Also, how easy it is to improve the quality of labour,
such as through improvements in the capital equipment used or through an
improvement in the quality of education and training in an economy.
There have been numerous examples of financial support for firms since
the financial crisis of 20072008. The main argument in favour of this
intervention is to prevent firms going out of business, leading to an increase in
the level of unemployment in an economy. The main argument against such
intervention is that this may encourage inefficient firms to stay in business
and there will be an opportunity cost involved, i.e. the money used to support
such a firm could have been spent in other areas of the economy.
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Table 1.7 shows the proportion of the workforce that works in the different
sectors of an economy whereas Table 1.6 shows the contribution of each
sector to the output of an economy. If the percentages for an economy in
Table 1.7 are lower than in Table 1.6, this will indicate more capital-intensive
production. For example, only 1 per cent of the workforce in Argentina works
in the primary sector and yet they produce 8 per cent of the total output.
Bangladesh, on the other hand, has 19 per cent of output from the primary
sector, but it needs 52 per cent of the workforce to produce this output.
Barter relies on what is called a double coincidence of wants, i.e. you have
to need something that somebody else is willing to exchange and they need
to have something that you are willing to exchange. Such a coincidence will
not always occur, and even if it does, there is still the issue of agreement on a
satisfactory means of exchange.
Money is much more effective as a means of exchange because it eliminates
the need for a double coincidence of wants.
A private good has the characteristics of being rival and excludable. This is
why it is possible to charge a price for such a good.
A public good has the characteristics of being non-rival and non-excludable.
This creates a free rider problem, which is why it is not possible to charge a
price for such a good.
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The entrepreneur
1
There is not a specific answer to this question. It will depend on the research
carried out.
Amtrak
1
Advantages could include the fact that a railway line could be kept open, even if
it is not making a profit, and this would maintain employment in the industry.
Disadvantages could include the fact that a government might not be able to
run the service as efficiently as a private sector enterprise, largely because there
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Possible advantages include the fact that with a market economy, the price
mechanism would have more of a role in the allocation of scarce resources in
an economy, leading to greater efficiency.
Possible disadvantages include the fact that some businesses might not be able
to survive in a market economy, leading to an increase in unemployment. Also,
because prices would no longer be determined by a government, it could lead
to higher rates of inflation.
The characteristics of a private good that need to be described are rivalry and
excludability. The characteristics of a public good that need to be described
are non-rivalry and non-excludability.
Education in Mauritius
1
A merit good can be defined as something that will benefit both individuals
and the wider economy. If it is provided through the market mechanism,
consumption may be less than would otherwise be the case. This is why
certain facilities, such as public libraries, can be regarded as examples of a
merit good. Entrance is free and people are encouraged to visit them. In this
particular case study, it is stressed how important they can be in a democracy.
Answers to Activities
Positive or normative
1
Normative
Positive
Normative
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Normative
Positive
Normative
Normative
Positive
quantity)
The characteristics:
uuAcceptability
uuDivisibility
uuPortability
uuDurability
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uuScarcity
uuStability of supply
uuRecognisability
uuUniformity
uuStability of value.
The functions:
uuA medium of exchange
uuA measure of value or unit of account
uuA standard for deferred payment
uuA store of value or wealth.
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