Check your understanding 1. What is "scarcity"? How is it different from "shortage"? 2. What are the basic economic questions? 3. Define and explain the terms: "market economy", "command economy", "capitalism"? and "socialism". 4. What is a circular flow model? 5. Worked Problem (Krugman et al.,2014, pp.44) Rare earths are important for the operation of lasers, cell phones, computer hard drives, and many of the appliances we use daily. But they are also scattered about in small amounts, making them very difficult and expensive to mine. China currently controls about 95% of the world's production of rare earths. Meanwhile, the United States is the largest producer of chicken in the world. Fortunately, the United States and China can trade with each other. But what if China refused to export rare earths, forcing the United States to find ways to extract these rare earths on its own? What if China stopped importing chicken and reverted to self-production? Suppose that China and the United States can produce either chicken or rare earths-a hypothetical example based on an actual trading pattern. Assume that the production possibilities for rare earths and chicken are as follows: Quantity of rare earths (thousands of tons) 20 China Production Possibilities Quantity of rare earths (thousands of tons) 16 U.S. Production Possibilities Quantity of chicken (billions of pounds) Quantity of chicken (billions of pounds) Calculate the opportunity cost of rare earths and chicken for both countries. Does the United States have a comparative advantage in producing rare earths? Suppose China wishes to consume 64 billion pounds of chicken and 12 thousand tons of rare earths. Show this point on a graph of the production possibilities. Is this possible without trade?