1.

Economic Analysis
a. What is opportunity cost? (3 points)
Opportunity cost is the cost of not choosing the next best alternative, or when
a user loses gain, benefit, or profit in order to acquire or choose an alternative.
The formula for opportunity cost is what one sacrifices over what one gains.
Opportunity costs are present in any decision or choice that someone makes.
b. Describe how economists use marginal analysis. (3 points)
Marginal analysis can be defined as the examination and consideration of
benefits of the activity in regards to the costs of that activity. Economists use
marginal analysis to maximize profits. Economists look at marginal analysis to
balance the costs and benefits of certain activities and use this to decide if
they should produce more or produce less to change consumption. Overall,
marginal analysis allows businesses to maximize profits by allowing them to
properly allocate resources to minimize production costs while increasing
consumption.
c. Describe the production possibilities frontier (PPF) and explain what it shows.
(3 points)
The production possibilities frontier (PPF) is a curve that demonstrates and
shows different combinations of amounts of goods that can be produced.One
product is listed on the y-axis and one product is listed on the x-axis. If the
output of the product on the y-axis increases, the output of the product on
the x-axis decreases and vice versa. This curve shows the different
possibilities and allows an economy to understand and interpret what they
should do to maximize profits and use all of their resources efficiently,

2. Define absolute advantage and comparative advantage

a. Absolute advantage is the ability to produce a good or service using fewer
resources or less time than other producers. Comparative advantage takes
opportunity cost into account, and is based on what other production a
producer sacrifices if they decide to produce a particular item.An individual or
business has a comparative advantage if they have the ability to produce
goods and product at a lower opportunity cost than their competitors.
3. Equilibrium
a. Draw a graph to show equilibrium price. (3 points)

b. Describe what happens when demand decreases. (3 points)

When demand decreases, the demand curve will shift to the left because at
every given price the quantity now demanded is lower. This shift will decrease
both the equilibrium price and equilibrium quantity
c. Explain what happens when a market is out of equilibrium. (3 points)
If a market is above equilibrium, the quantity of a good is greater than the
quantity demanded which creates surplus of that good. On the other hand,
when the market price is smaller than the equilibrium price, the quantity
demanded will exceed the quantity supplied, creating a price ceiling. When the
market price is bigger than the equilibrium price, the quantity supplied will
exceed the quantity demanded, creating a price floor. Yet, If there is no
regulation, in the long term, the market will automatically adjust itself to the
equilibrium price
d. Define price floor. What is the effect of a price floor? (3 points)
A price floor is the price limit on how low a good, service, or product can be
priced as. Usually a price floor is either imposed by a government or group, and
is required to be higher than the equilibrium price in order to be effective and
useful.

4. Supply and Demand

a. State the law of supply. (3 points)
The law of supply states that if other factors are kept constant and price
increases, quantity supplied will increase.
b. What causes a change in the quantity demanded? (3 points)
 Price causes a change in quantity demanded. If price increases, demand
decreases and if price decreases, demand increases. For example, if a farmer
lowers the price of his fruit on a stand, demand will increase because
consumers do not have to pay as much. If the price increases, the consumers
will not want to pay more money for the fruit than they did before.

c. Define the price elasticity of demand and explain what makes demand elastic
or inelastic. (6 points)
With all other factors staying the same, the price elasticity of demand shows
the responsiveness of the quantity that is demanded of a good when its price
changes. If a demand is elastic, small changes in price will reflect through large
changes in quantity demanded. Elastic demand is heavily influenced by the
price of an item (high responsiveness). If a demand is inelastic, consumer
demand does not change as much as price changes. It is hardly influenced by
the price of an item (low responsiveness).
5. Explain the difference between a change in supply and a change in the quantity
supplied. What might cause each of these kinds of changes? (6 points)
a. A change in supply is shown as the whole curve on a graph which represents all
of the different prices and quantities that can be supplied. If a change in supply
occurs, the whole supply curve will shift. A change in supply can be caused by
changes in production costs, price of resources, changes in technology, etc. On
the other hand, a change in quantity supplied is represented as a specific point
on a supply curve rather than the whole curve. If a change in quantity supplied
occurs, the point on the curve will shift either left or right from one point to
another. A change in quantity supplied is caused only by a change in price.