SUPA Economics: Chapter 2 objectives

Explain the concept: allocation of a factor.

Allocation of a factor refers to deciding what to do with things. For example: a pool contractor could dig the holes for inground pools by hand, however, his human capital would be put to better use if he used a excavator.

Compare labor intensive and capital intensive techniques. Explain how a choice is made among techniques when technology offers an array of more labor or more capital intensive techniques.

Labor intensive means that a lot of human work is needed. Capital intensive means a lot of money or machines is needed. A choice is generally made depending on which technique is cheaper in the specific situation.

Describe a bliss point.

A bliss point is when an individual has gained the maximum utility from a good or service. Consuming more will result in negative utility. A bliss point is reached when there is no more ultitly to be offered at the margin.

Explain the statement: One might say that according to economic theory, a good life is a life of good balance.

A good life is a life of good balance, because with good balance comes equality to all things. Having balance, means that the risks taken are less which means that we can have more utility and we will be satisfying ceteris paribus in the process.

Illustrate the following assertion: a society's endowment is finite, but is not fixed.

A society's endowment is finite but not fixed because certain products only have certain amounts produced but nobody knows the actual number. For example, Apple only produced a certain amount of Iphone X's but nobody actually knows the true number of Iphone X's that were produced.

Define:technique and technology. Describe the relationship between these concepts.

A technique is a way of combining steps in order to get the job done. Technology is the set of techniques that have been developed over the years. Technology and techniques are related because you can have techniques without having technology, but you can't have technology with the techniques.

Identify the motive that we assume drives the choices of all individuals all the time.

All individuals are driven to choose the thing that gives maximum utility

Define:capital. Distinguish between production and financial capital.

Capital is wealth in the form of money or other assets owned by a person or organization. Capital is for particular purposes such as investing or starting a company and is produced by the means of production. Production capital is when certain tools or machines are made available to the public. But financial capital is more broad and refers to anything can be a form of financial capital as long as it has a money value and is used in the pursuit of future revenue. Generally financial capital is spoken about with respect to equity and debt.

Explain the concept of a constrained optimization problem. Identify the constrained optimization problem we all face.

Constrained optimization refers to how people maximize utility with scarcity as a factor. The constrained optimization that we all face now is how to spend our scarce time on things that we really should do versus the stuff we want to do. For example, teens nowadays have to decide between studying for a test or playing Fortnite on the Xbox.

Define: discount rate. Describe what the discount rate measures. Comment of the following assertion: The "right" discount rate is 10%.

Discount rate is the waiting period you are required to wait in order to minimize the rate of interest. Discount rates measure the interest rate charged, for example if you take out a $10,000 loan now for a car it will become $15,000 at a later time. In my opinion,there is no 'right' discount rate. Discount rate should vary from person to person depending on the person's credit and financial status.

Describe society's endowment. Explain the relationship between society's endowment and scarcity.

Endowment- all the natural and human resources from which all goods and services are produced. The relationship between endowment and scarcity is that endowment generally may not be able to be fixed, but it is finite. Since endowment is finite scarcity becomes an issue.

Describe how a changing discount rate can affect one's choices. Give an example.

If you change the discount rate, people might make their choices differently since if a discount rate gets higher, the more choices one would make that will affect them in the current moment. For example, if the discount rate on a car loan for a Lamborghini Veneno is less than the discount rate for a car loan on a Jeep Wrangler, a person who is looking for a new car is more likely to take out a loan on the Lamborghini than on the Jeep as it would mean paying back less money over time.

Define: marginal product. State the assumption of diminishing marginal product. Explain this assumption using an example.

Marginal Product is the additional output that comes from an additional unit of input. The assumption of diminishing marginal product is that the productivity will decrease in marginal productivity. Ex: Adding workers to a factory means you will produce more, but after you add so many people, each person that you add helps less than their predecessors.

Define: marginal utility. State the assumption of diminishing marginal utility. Explain this assumption using an example.

Marginal utility is how much satisfaction something brings at a particular time. When you consume more of a good the utility from consuming the good is diminished as more and more of the good is consumed. For example, the first gulp of water, that I take after running a race in a track meet has more utils than the next gulp of water. Each gulp gains less and less utils til there is no more utils to be gained.

Define: natural resources and labor. Give examples of each.

Natural resources are things that are found on earth; such as oil, trees, and coal. Labor is physical work done by a human; such as a carpenter,construction worker, or hunter.

If I say "You're nuts to want to jump out of an airplane- even with a parachute." Does that make you nuts? Explain in terms of our model.

No, it doesn't make me nuts. It doesn't make me nuts because I may gain many utils by jumping out of the plane while you may not. Even though it is the same activity.

Specify the arrangement of these terms as they are used in our model: factors, allocated, process of production, techniques,technology, goods and services.

Once you allocate factors they are combined in a process of production. The way that goods and services are produced in these services depends on the technique. The techniques are all the possible ways of producing goods and services and technology is a set of all the techniques

Define:optimize. Explain the concept: optimal allocation.

Optimize is to change something in the procedure in order to gain the most utility. Optimal allocation refers to doing something that substitutes the time with another activity in order to gain the most utility.

Identify the ultimate determinant of how closely our decision rule reflects reality.

Our decision rule is only as close to reality as our assumptions are. Therefore, the ultimate determinant of the decision rule is based upon weak assumptions, since the weaker the assumption, the more realistic the assumption actually is.

Explain why our theory is often referred to as marginal analysis.

Our theory is referred to as a marginal analysis because our decisions to produce an item or consume another one are made on the margin.

Define: preference ordering. Specify the assumption our model makes about an individual's preferences ordering.

Preference ordering is how a person ranks choices according to how much utility they will get. We assume that an individual will make choices that will give them the most utility.

Define:present value. Explain how we use this concept in our choice process.

Present value has to deal with the price of something now is going to be higher than in the future because it deals with the future utilities as well. We use this concept in our choice process, because it helps us to make rational choices that can affect us for the rest of our lives depending on the decisions that we make.

Define:saving and investing. Identify, ceteris paribus, who you would expect to do more saving and investing: Someone with a high discount rate or someone with a low discount rate.

Saving- to put money in a static location for later use, such as a bank Investing- to put away money in order to gain money and future utility. In regards to Ceteris paribus, I would expect someone with a low discount rate will be more likely to save and invest as they are willing to wait for the outcome as they want to get more profit from their choices.

Explain the concepts: scale of production and returns to scale. Contrast these two concepts.

Scale of production: size of the process of production. Returns to scale: degree to which change in the scale of production changes level of outputs. They are dependent on each other since the scale of production effects the returns to scale.

Describe how socialization can affect an individual's discount rate.

Socialization can affect an individual's discount rate because our discount rate is constructed through personal experiences, family members, and those who we surround ourselves with. Also an individual's discount rates changes give the time and place so therefore we would be in the process of socializing with the outside world which would lead to a change in our individual discount rate.

Identify the decision rule that takes into account that choices across alternative allocations generate flows of future utilities, but does not reflect risk or uncertainty.

The decision rule states, PV1=PV2=PV3=PVn, this takes into account that every choice we make is made at a specific margin with V, being the production that is made and the preferences we have, and P, regarding the present. Therefore, the present value has reflected that the future utility has alternate choices that were taken into account when making the choices.

Identify the general rule for factor allocation given scarcity and assuming: a one period time horizon and no risk. Demonstrate that given our assumptions this is the only way to optimize.

The general rule for factor allocation given scarcity and assuming a one period time horizon and no risk is V1=V2=V3=...=Vn , where the V's reflect our productivity with respect to n, our choices. It tells us how someone maximizes their utility given a finite initial endowment in the current state of the world, and allows us to predict how she will respond to changes in her set of constraints and productivity.

Define:margin. Give an example of a margin.

The last in a series, the edge. ex: a person will gain the least amount of utility out of their final breath of air before dying.

Define: process of production.

The process of production is the process of transforming raw materials into goods or services.

Explain the purpose of starting out with such an unrealistic.

The whole reason for starting out with assumptions that are unrealistic, is so that it allows us to have a place to start and build off of. Starting with strong assumptions allows us to relax the assumptions in order to make them more realistic.

Explain the concept of discounting the future. Give an example. Identify economists' assumption about our attitude toward satisfaction that will be realized in the future.

To discount the future, means to take away the value of what the future will be to our society because all that matters is the present moment. For example, utilizing every moment in the present is better than wasting half of it in the future. Economists assume people discount the future in order to satisfy their present needs.

Define: utility, rational economic behavior, consume, and goods and services. Specify the arrangement of these terms as they are used in the model.

Utility: The satisfaction one gets from a good or service; measured in utils Rational Economic Behavior: A person will always choose the action that will derive maximum utility Consume: To derive utility Goods: tangible, can be stored, like cereal Service: Intangible, like a haircut In a model a person who is rational will consume goods or services in order to derive the maximum utility.

Example why we assume perfect divisibility of units.

We assume perfect divisibility because it allows us to build our model on marginal decision making.

Describe how the utility maximizing decision rule changes as we relax the no scarcity assumption. Explain why this new rule is, given our assumptions, the only way one can maximize utility.

When scarcity is involved, one thing may have to be cut short, even if more utility could be gained, due to the scarcity. Thus, we must optimize our activities to obtain maximum marginal utility. However, most of the time it still doesn't work because it is very hard to have zero marginal utility for all assumptions so we try to balance them.