Scarcity Forces Society To Confront Three Critical Issues

Scarcity Forces Society To Confront Three Critical Issues What Are Th

Scarcity forces society to confront three critical issues. What are those issues and explain how they are related to the problem of scarcity. Contrast positive and normative economics. How can economists carry out normative analysis? Suppose that Frank is considering giving Mike eight paperback books in exchange for 2 CDs. Discuss the conditions under which this trade would be mutually beneficial. Also discuss the conditions under which Frank and Mike won't make the trade. Many resort hotels remain open in the off season, even though they appear to be losing money. Why would they do that? Economist Milton Friedman is famous for claiming “There is no such thing as a free lunch.” Discuss this comment. Suppose the wiz-pop market is in long-run equilibrium. Suddenly, fixed costs decrease, although variable costs remain unchanged. Discuss the short-run and long-run changes in market equilibrium.

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The concept of scarcity is fundamental to economics, as it highlights the limited nature of resources relative to unlimited human wants. Society faces three critical issues stemming from scarcity: what to produce, how to produce, and for whom to produce. These issues are interconnected, as choices made in addressing one impact the others. Scarcity compels societies to prioritize resource allocation, potentially leading to trade-offs and opportunity costs. For instance, resources allocated to healthcare may limit their availability for education, illustrating the fundamental economic problem of allocating scarce resources efficiently.

Positive economics involves analyzing facts and cause-effect relationships without making judgments about whether outcomes are desirable. It seeks to explain what is, such as the impact of a policy change on inflation rates. Normative economics, on the other hand, involves value judgments and prescriptions about what ought to be. It pertains to questions of fairness and what policies should be adopted. Economists carry out normative analysis by using positive analysis as a factual foundation and then applying value judgments to recommend policies aligning with societal goals.

Considering the trade between Frank and Mike, the conditions under which the exchange is mutually beneficial hinge on the concept of comparative advantage. If both Frank and Mike value the books and CDs differently, and the trade allows each to gain more than they would without trading, then the trade is beneficial. For example, if Frank values the books more than the CDs, and Mike values the CDs more than the books, both can benefit if the exchange reflects their relative valuations. Conversely, if one party values their holdings less than the trade, or if the trade does not improve either's welfare, then they will not make the exchange.

Many resort hotels choose to stay open during the off-season despite apparent losses due to strategic reasons. Hotels may remain open to maintain market presence, preserve customer loyalty, or benefit from seasonal employment commitments. Additionally, fixed costs like staffing and maintenance may be sunk costs that do not vary significantly with occupancy levels, so the additional revenue from remaining open can offset these fixed costs marginally, preventing the hotel from shutting down entirely and losing future business opportunities.

Milton Friedman's assertion “There is no such thing as a free lunch” underscores the idea that every resource used has an opportunity cost; nothing is truly free. Even when goods or services appear free, someone bears the cost either directly or indirectly. For example, public parks are financed through taxes, which are paid by taxpayers. The cost of providing these parks exists, and the resources could have been used elsewhere. Friedman's statement emphasizes that rational economic decision-making must consider these implicit costs, recognizing that all choices entail trade-offs.

Regarding the wiz-pop market, which is initially in long-run equilibrium, a decrease in fixed costs while variable costs remain unchanged will lead to specific market adjustments. In the short run, firms can benefit from the decrease in fixed costs as their total costs are lowered, potentially increasing profits and encouraging existing firms to expand or new firms to enter the market. However, since variable costs are unchanged, production costs per unit are unaffected, and the supply curve may shift outward due to the lower fixed costs, leading to a decrease in prices and an increase in quantity supplied.

In the long run, the market will adjust to this new cost structure. The initial increase in supply caused by reduced fixed costs will lead to a new equilibrium characterized by a higher quantity of output at a lower price level. The entry of new firms that find it profitable to operate at the lower cost structure will increase market supply further until economic profits are driven to zero. Ultimately, the long-run equilibrium will be characterized by firms earning normal profits, with prices stabilizing at the level that covers the average total costs, including the now lower fixed costs.

References

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