cant buy everything. Many things would still be scarce. For example, you would still have only a finite

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• Imagine that you won millions of pounds on the National Lottery. Would your ‘economic problem’ be

solved?For most people it would certainly be eased! But it would not be solved. As the old saying goes, money can’t buy everything. Many things would still be scarce. For example, you would still have only a finite amount of time to enjoy what the money could buy: there are only 24 hours in a day, and we do not live for ever. Then, for many lottery winners, happiness has proved elusive. Friendships and family relationships may become strained or even be destroyed and it may be very difficult to trust people’s motives. Do they really want to be my friend, or are they merely after my money?

• Would redistributing incomes from the rich to the poor reduce the overall problem of scarcity?

Yes, to the extent that the gain to the poor is greater than the cost to the rich. Nevertheless, it is difficult to give a categorical answer to this question. It could be argued that £1 gained by a poor person is more valuable to them than £1 sacrificed by a rich person: the more money you have the less valuable to you is each additional £1. If this is so, there would be a net gain in human welfare by such as redistribution.The problem, however, is in comparing one person’s happiness with another: happiness is not something that lends itself to measurement.

• In what way does specialisation reduce the problem of scarcity?

If people specialise in jobs in which they are relatively able, total production (and hence consumption) in the economy will be larger than if everyone tried to do a little of everything. Part of the reason is that people would be spending much of their time doing things in which they had little or no ability; part is that a lot of time would be wasted in moving from job to job; part is that concentrating on just one job allows people to develop skills. It is the same for countries: total world production and consumption can be higher if countries specialise in producing those goods at which they are relatively efficient and then trading with other countries (see the ‘law of comparative advantage’ in section 13.2).

• (See next page.)

Answers to end-of-chapter questions

Chapter 1: Economic Issues

(Essentials of Economics, 8e John Sloman, Dean Garratt ) (Solution Manual, For Complete File, Download link at the end of this File) 1 / 2

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• Which of the following are macroeconomic issues, which are microeconomic ones and which could be

either depending on the context?(a) Inflation.(b) Low wages in certain service industries.(c) The rate of exchange between the pound and the euro.(d) Why the price of cabbages fluctuates more than that of cars.(e) The rate of economic growth this year compared with last year.(f) The decline of traditional manufacturing industries.(g) The decline in house prices (h) A reduction in the supply of credit by financial institutions (a) Macro. It refers to a general rise in prices across the whole economy.(b) Micro. It refers to specific industries (c) Either. In a world context, it is a micro issue, since it refers to the price of one currency in terms of one other. In a national context it is more of a macro issue, since it refers to the euro exchange rate at which all UK goods are traded internationally. (This is certainly a less clear–cut division that in (a) and (b) above.) (d) Micro. It refers to specific products.(e) Macro. It refers to the general growth in output of the economy as a whole.(f) Micro (macro in certain contexts). It is micro because it refers to specific industries. It could, however, also help to explain the macroeconomic phenomena of high unemployment or balance of payments problems.(g) Micro (macro in certain contexts). In is micro because it refers specifically to the housing market.The determination of house prices is a well-researched issue typically involving analysis of housing demand and supply (see Box 2.2). However, patterns in house prices might affect macroeconomic outcomes, such as consumer spending or the total level of bank lending. In this context changes in house prices and the housing market more generally become a macroeconomic issue.(h) Either. Where the analysis relates specifically to the behaviour of financial institution, for example modelling the supply decisions of financial organisations, then it could be seen to be micro.However, where the analysis is in connection with the wider economic effects of the sector then it becomes macro. It is widely acknowledged that the aggregate flow of credit to economic agents affects the level of economic activity. This was observed during the ‘credit crunch’ that affected many countries in the late 2000s when amounts of lending dropped dramatically.

• Assume that in a household one parent currently works full time and the other stays at home to look after

the family. How would you set about identifying and calculating the opportunity costs of the second parent now taking a full-time job? How would such calculations be relevant in deciding whether it is worth taking that job?For the parent thinking of taking the job, the opportunity cost would include lost leisure time, and time spent with other family members (e.g. with the children) and the possible unpleasantness of the job. For the family as a whole, the opportunity costs would include all the adverse effects on the family: such as stress, reduced time for each other, reduced time available for household tasks, and increased burdens on the other family members.Whether these will all be taken into account depends on how carefully the decision is made, and how much the parent thinking of taking the job cares for the other family members.Giving values to the opportunity costs is very difficult and it is unlikely that the process would be a mechanical one. Most families, trying to come to a ‘rational’ decision, would simply attempt to use their judgement as to whether the extra income (plus any other benefits from the job) would be worth the sacrifices: a decision that could well turn out to be wrong, once the imagined sacrifices had become reality.

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