Economics for the global manager Essay Example | Topics and Well Written Essays - 1750 words

Economics for the global manager - Essay Example All benefits have a corresponding cost. The air we breathe, kept clean through laws costing millions of dollars to enforce, is not free. If your friend treats you for lunch, it is not free for you either, because the time you spent with your friend has an opportunity cost that may probably be more than the price of the lunch. 3. Why might the government want to influence transactions The government wants to influence transactions for many reasons. First, as in nations with free market economies, the government wants to make sure the market's rules are fair as part of its mandate to keep the people happy. One danger of a free market economy is explained by what is called asymmetric information: sellers may hide vital information from buyers that does not allow a fair price to be paid for a good (think second-hand car dealers). Otherwise, people cheated all the time will be aggravated and may move to change the government. Second, the government wants to control the supply and flow of money in the economy, because if they do not, there will be trouble in the form of inflation that can lead to social unrest (Solomon 1972 cited in Samuelson 1992, p. 712). Third, the government wants to influence transactions, like the Fed setting interest rates, Congress cutting budget deficits, or the Commerce Department ne gotiating trade agreements, because of the add-on effects that these actions (all are forms of market intervention) have on the nation's macroeconomic conditions. And fourth, government wants to ensure the country's patrimony is safe, for example to prevent some scam artist from selling the Statue of Liberty to foreigners. 4. What does the spillover or externality principle measure Use examples. This principle measures the costs or benefits of externalities, activities that affect others, without meaning to, either positively in the form of benefits not paid for or negatively in the form of inconvenience or costs for which they are not compensated. An example of the first (called external economies) is having a wife who is a doctor (you can consult her for "free" or, at least, you don't have to pay someone else to prescribe the right medicine). An example of the second (called external diseconomies) is driving recklessly on the freeway, which makes many other drivers nervous and increases their consumption of tranquilizers. 5. Currently our demand for gasoline is rising as our economy is expanding. However, we expect OPEC to keep the supply stable. Use a graph to show what your prediction is for the price of gasoline. USE A GRAPH INDICATING WHEN THE DEMAND INCREASES. I predict the price will increase, because as shown in the graph on Figure 1, with the supply constant and the demand increasing, the demand curve shifts to the right, moving the equilibrium point to the right, with the effect of increasing the equilibrium price, or the point at which the current supply curve intersects the increased demand curve, from p to p'. At price p, the gasoline market is in equilibrium, that is, supply equals demand. OPEC's move holds the supply curve steady, but an expanding/growing economy needs more fuel,