Question

Short essay questions

1) Describe the circular flow of the economy by discussing the two markets where households and firms meet

2) Describe the differences between tradeoffs and free lunches in terms of a PPF.

3) Suppose Ramen noodles, an inexpensive but a quite tasty dish, are an inferior good. Why do grocery stores in college towns, that is, towns with a large fraction of college students, stock a lot of Ramen noodles?

Answer 1

Circular flow of economy with households and firms:

Households are consumers and they are also the providers of the factors of production i.e land, labour, capital and entrepreneurship. Firms are the producers. Households receive rent, wages and profit from firms and spend this income on goods produced by the firms. Firms receive money from households for goods produced by them and use it to pay rent, wages and profit. This forms a cycle. Hence, it is called circular flow of the economy.