Question

1. What are some of the requirements for Economic Models?

2. What does a production possibilities curve depict?

3. How does one calculate Fixed Costs, Variable Costs, Marginal Costs, and Profits?

4. How does the government examine Cost-Benefit analysis?

5. What are the impacts of Human and Physical Capital in a Global Economy

6. What are the three types of efficiency necessary to achieve economic efficiency?

Answer 1

1. Economists rely on economic theories, or models, to analyze real-world issues. Economic models are simplified versions of reality. One purpose of economic models is to make economic ideas sufficiently explicit and concrete so individuals, firms, or the government can use them to make decisions. Economists use economic models to answer questions.

Developing an Economic Model has following requirements:

• Decide on the assumptions to use in the developing model.
• Formulate a testable hypothesis.
• Use economic data to test the hypothesis.
• Revise the model if it fails to explain the economic data well.
• Retain the revised model to help answer similar economic questions in the future.

2.Production Possibility Curve shows the maximum combinations of goods and services that can be produced by an economy in a certain time period, given that all resources are used efficiently; used to illustrate opportunity cost. The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.

3.The Total Cost is sum total of Total Fixed Costs and Total Variable Costs. Variable costs vary based on the amount of output produced.  Fixed costs remain the same regardless of production output.

Total Cost = Total Fixed Costs + Total Variable Costs.

Marginal cost is the extra, or additional, cost of producing one more unit of output. It is the amount by which total cost and total variable cost change when one more or one less unit of output is produced.

Marginal Cost = Change in Total Cost / Change in Quantity of Product Produced.

Profits = Total Revenue - Total Cost.

Where total costs = Explicit costs (rent, labour costs, raw materials +) and Implicit costs (opportunity cost of capital/working elsewhere).

Total Revenue = Price * Quantity

Normal profit occurs at an output where average revenue (AR) = average total costs (ATC).

4. Cost benefit analysis is a method of weighing of the costs of implementation against the harm it is designed to prevent and its likelihood. It is a form of hybrid rulemaking that was statutorily created. The government analyzes the proposed rule to see what economic impact it would have on the regulated industry, along with how much it would cost to enforce the rule and if the costs of enforcement outweigh the benefits of enforcement. A government conducting a cost-benefit analysis must consider
social and political consequences.

A cost-benefit analysis (CBA) should begin with compiling a comprehensive list of all the costs and benefits associated with the project or decision. An analyst or project manager should apply a monetary measurement to all of the items on the cost-benefit list, taking special care not to underestimate costs or overestimate benefits.Finally, the results of the aggregate costs and benefits should be compared quantitatively to determine if the benefits outweigh the costs. Accordingly a decision is to be taken whether to go with the project or dump it.