Introduction to Economics

1. Schumpeter was the pioneer of the analysis of technical progress on economic growth and development. He looked at both business history and countries’ competitiveness. He is mostly known for having disentangled the role of innovation on firms’ and countries’ competitiveness.

(a) What is the difference between ‘invention’ and ‘innovation’? [4 marks]

(b) What are the different types of innovation according to Schumpeter? [4 marks].

(c) Search for an example of a Schumpeterian type of innovation and justify your choice on the basis of your answer to 1(b). A possible source for finding examples is the Schumpeter column of ‘The Economist’, though you are welcome to use other sources. Make sure you reference your source(s). [8 marks]
2. Consider a world with two countries, England and Portugal, each of which has an endowment of 200 units of labour. There are two sectors, Wine and Cloth, and technology is different across countries such that output of Wine and Cloth per worker differs across the two countries. Output per worker across sectors and countries is given in Table 1 below.

Table 1: Output per worker

Output/worker England Portugal
Wine 3 4
Cloth 6 2

(a) Define the concept of ‘absolute advantage’. Based on table 1, is it true that England has an absolute advantage over Portugal in every sector? [4 marks]

(b) Draw the PPF of England and Portugal in two separate diagrams, placing Wine on the x-axis and Cloth on the y-axis. What is the opportunity cost of producing Wine in England? How about in Portugal? [8 marks]

(c) Define the concept of ‘comparative advantage’. Which good does Portugal have a comparative advantage in, and why? What about England? [4 marks]

(d) Explain why England and Portugal can gain by exporting the good in which they have a comparative advantage and importing the other good. [8 marks]
3.
(a) Suppose that the price elasticity of demand for tobacco is -0.05 and the price elasticity of demand for alcoholic drinks is -2.35. If the Head of the Treasury wants to raise tax revenue but can tax only one product, which should be taxed? Explain your answer. [5 mark]

(b) In September 1993, the owners of The Times newspaper lowered its price from 45 pence to 30 pence. The volume of another newspaper, The Daily Telegraph, fell from 1,500,000 to 1,000,000. Compute and interpret a useful economic measure using this data. [5 marks]
4. The market demand for wine is described by QD = 52 – 8P, while the market supply is described by QS = 4P – 8, where QD and QS denote quantity demanded and supplied, respectively, and P denotes the price of the good in £.

(a) Draw a diagram showing demand and supply for wine, indicating the equilibrium point. [5 marks]

(b) Write down the equilibrium condition and find the equilibrium price for wine and the equilibrium quantity. Show you calculations. [6 marks]

(c) Explain the concepts of consumer surplus and producer surplus and clearly indicate the areas on your diagram which represent consumer and producer surplus in equilibrium. [4 marks]

(d) Now suppose the government introduces a specific tax t = £3 on the suppliers. In a new supply and demand diagram illustrate how the tax affects the market and find the new equilibrium price and quantity (show your calculations). Indicate the original and new equilibrium positions on your diagram. [10 marks]

(e) Calculate the tax revenue earned by the government from the imposition of the tax. How much of the tax burden falls on consumers and how much on producers? Indicate which area is the consumer tax burden and which the producer tax burden on your diagram. Show your calculations. [8 marks]

(f) Indicate which area on your diagram reflects the ‘deadweight losses’ of the tax. What are deadweight losses and why do they arise? [6 marks]
5. A manufacturer faces the following total costs of production (in £) depending on how much output is produced.

Table 2: Output and total cost of production in £

Output 0 1 2 3 4 5
TC (£) 10 25 38 48 56 60

(a) Why is there a cost of production when output is 0? [1 mark]

(b) Calculate the marginal and average costs (MC and AC, respectively) for each level of output from the table data. [5 marks]

(c) How are marginal and average costs related? [5 marks]

Topic: Introduction to Economics

Order Description
< Research and critical review>, (a) Briefly summarise the main points of the article u choose . Comment on the accuracy of the writer’s use of economic concepts.
(b) Indicate how the article pertains to topics in microeconomics or macroeconomics. Be sure to identify and discuss the model/models or economic theory/theories implicit in the article. Is the article well written? Why? Why not?
(c) What have you learned about microeconomics or macroeconomics from the article?
(d) 5 references , 3 in text citations. at least 1 academic journal
(e) provide a Word copy of the article you have reviewed for the assignment