Economic problem and how is it related to the concept of opportunity cost

a. Economic problem and how is it related to the concept of opportunity cost

Economic problem exists because humans have finite resources to satisfy all their wants and needs. The resources are limited in two different ways. They can be used for one reason at time, for example machinery can be used to do one thing at a time. Resources are also limited in physical quantity. The human wants and needs are endless and people must make a choice what to satisfy first. Opportunity cost arises when one decides to use the resources they have to satisfy a specific need first over another need. Opportunity cost is the loss that arises due to sacrifice of the next best option.

b. An occasion this week where the concept of opportunity cost applied to you

This week I sacrificed going to a movie and bought soft drinks and a pizza. The opportunity cost is the movie and the entertainment I would have had if I had gone to a movie. The movie is the opportunity cost since it is the next best alternative I would have used the money with.

c. Difference between normative and positive statements

Normative statements carry a value judgement and are subjective in nature. They are based more on opinions rather than established facts which are made by looking at the evidence available. An example of a normative statement is the government is right in enforcing minimum prices for wines and beer in a bid to control alcohol consumption in the country. Positive statements are statements that have objective explanations. These statements can be tested by analyzing the evidence available. Analyzing the evidence can lead to these statements being rejected or amended appropriately. An example of a positive statement is that if the government increases the tax they charge on wines and beer, the profits for brewer companies will fall. The main difference between these two statements is that normative statements are based on opinions and positive statements are based on facts.

2. Demand and Supply graphs

a.

Supply curve

P

Equilibrium

Demand curve

Quality of hats

Demand is the willingness of a customer and his ability to buy the service or goods at their price. Quantity demanded is the exact quantity of a service or a good that consumers buy at a particular price. In the diagram above, the demand curve indicates the demand for hats while the equilibrium point shows the quantity of hats demanded at that price.

Change in demand can be caused by a variety of reasons depending on the product. Change in demand for hats can be caused by reasons such as change in fashion and the weather. During the cold weather, people buy more hats and this changes the quantity demanded. The cold weather will result to a change in the demand curve. Also, a change in fashion that includes people wearing hats can result to change in quantity demanded. If a fashion style that includes wearing of designer hats, their demand can increase significantly and will result to changes in the quantity demanded.

b. Difference between demand and quantity demanded

This week, I passed near a jewelry shop and saw shiny silver necklaces. Everyone would want such a necklace if price was not a factor consideration. However, only few people actually buy them due to the fact that they are very expensive. The demand for such necklaces is different from the quantity demanded.

3. Change in supply

Since the supply of people offering yoga services decreased, the price increased from Po to P1 and the Quantity decreased from Qo to Q1.

b)

The government closed a number of restaurants in town after health inspection. The few restaurants that remained open raised their food prices and this resulted in reduction of total demand for their services.

4. Elasticity demand curve

Increase in taxi fare leads to increase in tax revenue,

hence, leading to decrease in demand

The drivers are assuming that even if their prices increase, the demand will not decrease.

b) Realistic assumption

No, it is not a realistic assumption because if they increase their prices, the demand of their services will reduce which may result in lower revenues than before.

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