Economics Homework 1 - Model
1. Give an example of a "good" not in the lecture, and an example of a "service" not in the lecture.
- Goods are "things" like footballs, cars, hamburgers, iPhones, and candy bars. Services are activities like entertainment (football games), teaching, health care, and advice.
- A "good" can be put in a bag (including a very large bag). A service cannot be put in a bag.
2. Imagine that your family has two options for dinner: eat at home, or go out to eat at McDonald's. Which option incurs more transaction costs? Identify two specific transaction costs. Which option is cheaper for your family, and why?
- Eating at McDonald's incurs greater transaction costs: gasoline for the car trip, wear and tear on the car itself, the time spent traveling to and from McDonald's, waiting for the order to be filled, and the sales tax added on by the cashier. Eating at home incurs only the transaction cost of one trip to a grocery store for many meals, rather than a trip for every meal at McDonald's.
3. Define the concept of "scarcity" in your own words, and give an example of how an increase in scarcity for a good or service increases its price. Your example might be a World Series ticket (a good) or a special medical operation (a service), or anything else you can think of that is "scarce" in an economic sense. Extra credit: when do people exaggerate scarcity in their minds?
- Scarcity refers to goods and services that cost money, which is almost everything. An example of a good that is not scarce is air.
- The scarcer something is, the more expensive it typically is, as illustrated by the examples of gold and diamonds. Sellers try to exaggerate scarcity to increase the price of what they are selling, as in "limited edition," "almost sold out," etc.
4. What is the “invisible hand”? Discuss what it is, using an example (which could be from the story in the lecture about the making of a pencil).
- The invisible hand is an unseen force that causes people to work harder for the benefit of themselves and their families, which results in benefits to others in society too. Someone who sells lemonade on a hot summer day is earning money for himself, but also providing a good that the public wants and benefits from too.
5. There are many parables by Jesus in the Gospels of Matthew and Luke (and one in Mark) which use familiar concepts of money and economics in order to teach a deeper, more profound spiritual point. Examples are at Matthew 13:18-23 and 44-46; Matthew 18:21-35; Matthew 20:1-16 and 21:33-46; Mark 12:41-44; Luke 7:36-50; Luke 12:13-21; Luke 14:15-24; Luke 15:8-10; Luke 16:1-13 and 19-31; Luke 18:9-14; and Luke 19:11-27. Pick one of these parables and explain both the economic point and the deeper spiritual point. Extra credit: why might the Gospel of Matthew have more economic parables than the Gospel of Mark does?
- Matt 25:14-30 is the Parable of the Talents, in which the master rewards those who work with their talents, and punishes the servant who wasted his talent.
- Extra credit: Matthew had been a tax collector, so the economic parables meant the most to him. Mark was probably a homeschooled child whose mother followed Jesus.
6. "Caveat emptor" or "carpe diem": pick one of these concepts and explain what it means to you.
- “Caveat emptor” means (in Latin) “let the buyer beware”: the customer alone has the responsibility ot determining the value of his purchase before he buys something. If he later finds that the good or service was not worth what he paid, then it is his own fault and his own loss.
- "Carpe diem" means (in Latin) "seize the day." Live each day like it is a special opportunity. Do not put off until tomorrow what you can accomplish today.