Environmental & Resource Economics: Opportunity Cost, Market Systems, and Supply & Demand

What is opportunity cost?

The cost of forgoing the next best alternative when making a decision.

What was the economic gain above opportunity cost for the home investment example?

5.5% economic gain above opportunity cost.

What is the average return of the stock market mentioned?

7.5% a year.

What are the property tax and maintenance costs for a home valued at $400K?

Property tax: $4,500 (1% of home value); Maintenance costs: $4,500 (1% of home value).

What is central planning in a command economy?

A system where the government makes all economic decisions regarding production and distribution of goods.

What are some outcomes of central planning in a command economy?

Low unemployment rates and access to necessary health care services.

What is the primary function of a market in a free market economy?

To provide information for decision makers and reduce transaction costs.

What is Gross National Happiness (GNH)?

An alternative measure to GDP introduced in Bhutan to assess economic and moral progress.

What does the government control in a command economy?

Wages, production, distribution of goods, and quality of products.

What is the problem with government control in a command economy?

Governments may lack specific knowledge about the needs of consumers, such as in the pizza example.

What is a mixed economy?

An economic system that combines elements of free markets with government control, as seen in Saudi Arabia.

What does the Production Possibilities Frontier (PPF) illustrate?

All possible production combinations of two goods at full production capacity.

What causes the PPF to shift outward?

Increases in the quantity or quality of resources.

What are the implications of the Law of Increasing Opportunity Costs?

As more of one good is produced, the opportunity cost of producing additional units increases.

What happens during PPF rotations?

Only one side of the PPF moves outward if an increase in resources benefits only one product.

How is opportunity cost calculated on the PPF?

By comparing the loss of one good to the gain of another during production shifts.

What does the optimal choice in economics refer to?

The decision that best serves the objectives of the decision maker after comparing alternatives.

What is the significance of Bhutan's first legal code regarding happiness?

It states that if the government cannot create happiness for its people, there is no purpose for the government.

What role do markets play in coordinating buyers and sellers?

Markets provide a forum for participants to engage in trade and exchange goods.

What is the effect of government regulation on unemployment in a command economy?

It typically leads to low unemployment rates due to job regulation.

What is the main critique of central planning in economies?

The concentration of power in the hands of those who administer economic decisions.

What does the term 'scarcity' refer to in economics?

The limited availability of resources to meet unlimited wants.

What is the impact of technological changes on the PPF?

Technological advancements can lead to outward shifts in the PPF by improving productivity.

What does the Production Possibility Frontier (PPF) represent?

The trade-offs between two goods, showing the maximum possible production levels with limited resources.

What are the three fundamental questions of economics regarding resource allocation?

1) What to produce? 2) How to produce? 3) For whom to produce?

What determines how much of each good to produce?

Specialization and increased productivity.

What is the significance of exchange in economics?

Exchange allows access to a diverse range of goods and services produced.

How do firms decide on the production process?

Firms must determine the number of workers, machinery, technology, and organization of production.

What is the role of division of labor in production?

It increases productivity and helps achieve productive efficiency.

What factors influence who receives the goods and services produced?

Income and prices determine purchasing ability in a market economy.

How do prices function as a rationing mechanism?

Prices influence the distribution of income between buyers and sellers, affecting access to goods and services.

What is the relationship between growth and efficiency in economics?

Growth can lead to efficiencies, such as economies of scale, where costs per unit decrease as production increases.

What is the 'Invisible Hand' concept in economics?

It suggests that free markets can determine equilibrium in supply and demand without direct intervention.

How does the Invisible Hand address high prices in a market?

High prices create incentives for competition, leading to lower prices as consumers switch to cheaper alternatives.

What happens when there is a shortage of a good?

Prices rise until equilibrium is reached, incentivizing firms to increase supply and consumers to reduce demand.

What are the implications of the Invisible Hand?

Agents pursuing self-interest can contribute to societal well-being, leading to efficient resource allocation.

What are some limitations of the Invisible Hand?

Monopoly power, externalities, the tragedy of the commons, and imperfect information can lead to market failures.

What is an example of monopoly power affecting market efficiency?

Without competition, firms can become stagnant and exploit customers with higher prices.

What are externalities in economic terms?

Costs or benefits that affect third parties not directly involved in a transaction, potentially leading to over-production.

What is the 'tragedy of the commons'?

The depletion of shared resources due to individuals acting in their self-interest, such as over-fishing.

How does imperfect information affect market decisions?

Buyers and sellers may lack necessary information, leading to poor decision-making and market inefficiencies.

What did Adam Smith say about the division of labor?

It significantly enhances the productive powers of labor, allowing economies to produce more with the same amount of labor.

What is the difference between quantity demanded and demand?

Quantity demanded refers to the total amount of a good or service consumers demand at a specific price, while demand refers to the entire relationship between price and quantity demanded.

What does a demand schedule represent?

A demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices.

How is the demand curve represented graphically?

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded over a given period of time.

What is the general slope of the demand curve?

The demand curve generally slopes downward, indicating that at higher prices, consumers buy less.

What are normal goods?

Normal goods are those whose demand increases as income increases, such as Starbucks coffee.

What are inferior goods?

Inferior goods are those whose demand decreases as income increases, such as convenience store coffee.

What causes a movement along the demand curve?

A movement along the demand curve occurs due to a change in the price of the commodity, denoting a change in quantity demanded.

What causes a shift in the demand curve?

A shift in the demand curve occurs due to changes in factors other than price, denoting a change in demand.

Name a factor that can cause a shift in the demand curve.

Income, trends and tastes, future expectations, composition of population, and prices of related goods can all cause shifts in the demand curve.

What is quantity supplied?

Quantity supplied refers to the total amount of a good or service that suppliers are willing to produce and sell at a given market price.

What is the difference between supply and quantity supplied?

Supply refers to the entire relationship between price and quantity supplied, while quantity supplied refers to the specific amount producers are willing to sell at a particular price.

What does a supply schedule represent?

A supply schedule is a table that lists the various quantities of a product or service that a firm is willing to supply over a range of possible prices.

How is the supply curve represented graphically?

The supply curve is a graphical representation of the correlation between the price of a good or service and the quantity supplied over a given period of time.

What is the general slope of the supply curve?

The supply curve generally slopes upward, indicating that at higher prices, producers sell more.

What is the Law of Supply?

The Law of Supply states that there is a positive relationship between price and quantity supplied; as price increases, quantity supplied also increases.

What causes a movement along the supply curve?

A movement along the supply curve occurs due to a change in the price of the commodity, indicating a change in quantity supplied.

What causes a shift in the supply curve?

A shift in the supply curve occurs due to changes in factors other than price, indicating a change in supply.

Name a factor that can cause a shift in the supply curve.

Factors of production prices, technological progress, government regulation, size of industry, and natural conditions can all cause shifts in the supply curve.

What is market equilibrium?

Market equilibrium is the point where the quantity demanded equals the quantity supplied, resulting in a stable market price.

What happens when there is a market shortage?

A market shortage occurs due to a sudden increase in consumer demand, government price ceilings, or a drastic decrease in supply.

What happens when there is a market surplus?

A market surplus occurs due to a sudden decrease in consumer demand, government price floors, or a drastic increase in supply.

What is the effect of a price floor?

A price floor sets a minimum price for a good or service, which can lead to a surplus if set above the equilibrium price.

What is the effect of a price ceiling?

A price ceiling sets a maximum price for a good or service, which can lead to a shortage if set below the equilibrium price.

What does the ceteris paribus assumption mean?

Ceteris paribus means 'other things being equal' and is used to isolate the effects of one variable in economic models.

What is the relationship described by the Law of Supply and Demand?

The Law of Supply and Demand describes how the price of a good is determined by the interaction between quantity demanded and quantity supplied.

What occurs when demand increases?

When demand increases, the equilibrium price and quantity will rise.

What occurs when supply increases?

When supply increases, the equilibrium price will fall and quantity will rise.