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Define Opportunity Cost and Explain its Relationship to Economics

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Define opportunity cost and explain its relationship to economic reasoning.

Give some examples.

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In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, and so on.

Opportunity cost need not be assessed in monetary terms, but rather can be assessed in terms of ...

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Economic questions

1. What determines price in a free market?

2. What are the conditions of perfect competition. Name each and explain with an example how the real markets can violate one of more of these conditions. Finally, and this is important, why would a firm want to violate them.

3. What is the relationship between inflation and unemployment. Be sure to state, in numerical, percentage value, the natural rate of unemployment. Explain as well the danger we face if the unemployment rate drops below that natural rate.

Natural Rate of Unemployment: _____ %

4. At what point does a profit maximizing firm produce?
5. At what point does a profit maximizing firm shut down?
6. Why would a profit maximizing firm continue producing when it is not making a profit (but is meeting its variable costs?
7. Define Gross Domestic Product (GDP) its components. What was the approximate size of the US GDP last year.

Size of US GDP: $______________________

8. What are opportunity costs, and how do they help a firm decide which of its many products to produce to maximize profit.?

9. Define inflation and explain why is it harmful?

10. How do the laws of supply and demand determine that a basketball player can earn $2.2 million, but a teacher earns only $52,000.00? Is this outcome fair?

11 & 12
When explaining the solutions to the following two questions, be sure to use the economic terminology below: (substitute details from the question into the parenthetical and bracketed verbiage.
The (change, i.e., whatever has happened in the hypothetical) has caused the [Demand or Supply] curve to shift [left or right] causing movement along the [supply or demand, i.e., the other curve] curve to a new, [higher or lower] equilibrium point.

11. As a result of a hurricanes Katrina and Rita, thousands of Cajun evacuees immigrate to Little Rock. What will happen to the price of the average dinner at a Cajun restaurant ceteris paribus?

12. A series of hurricanes destroys the tomato harvest throughout the South. What will happen in the tomato market as a result of the bad tomato harvest ceteris paribus?

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