Question

The inhabitants of the fictional economy of Atlantis use money in the form of cowry shells. Draw a circular-flow diagram showing households and firms. Firms produce potatoes and fish, and households buy potatoes and fish. Households also provide the land and labor to firms. Identify where in the flows of cowry shells or physical things (goods and services, or resources) each of the following impacts would occur. Describe how this impact spreads around the circle. a. A devastating hurricane floods many of the potato fields. b. A very productive fishing season yields a very large number of fish caught. c. The inhabitants of Atlantis discover Shakira and spend several days a month at dancing festivals.

Short answer

Answer: In the economy of Atlantis, a devastating hurricane would flood potato fields, leading to a decrease in production and an increase in the price of potatoes. A productive fishing season would result in a surplus of fish, causing the price of fish to decrease. The introduction of Shakira and dancing festivals may lead to a reduction in labor provided to firms, decreasing the production of potatoes and fish, and may also create new goods and services, potentially altering the distribution of cowry shells in the economy.

Step-by-step solution

Draw the Circular-Flow Diagram

Create a circular-flow diagram with two loops. One loop representing the flow of money (cowry shells) and the other representing the flow of goods, services, and resources. Illustrate two types of economic agents: households and firms. Households buy potatoes and fish from firms, provide land and labor to firms. Firms produce potatoes and fish. Don't forget to include the flow of cowry shells between the households and firms.

Analyze the impact of the devastating hurricane

When the hurricane floods the potato fields, the production of potatoes decreases. This leads to a shortage of potatoes in the market. The consequence of this shortage is an increase in the price of potatoes due to higher demand and lower supply. As a result, households will pay more cowry shells for the available potatoes.

Analyze the effect of a productive fishing season

When there is a very productive fishing season, many fish are caught, resulting in a surplus of fish in the market. With an abundant supply of fish, the price of fish decreases. Consequently, households will need to spend fewer cowry shells to buy fish and may increase their consumption of fish due to lower prices.

Analyze the impact of Shakira and dancing festivals in the economy

When the inhabitants of Atlantis discover Shakira and spend several days a month at dancing festivals, they reduce their working hours, meaning less labor is provided to the firms. This decrease in labor may lead to a reduction in the production of potatoes and fish. Additionally, the increase in popularity of dancing festivals may potentially create new goods and services, like music, dance lessons, or festival tickets. The households may decide to spend a portion of their cowry shells on these new goods and services, potentially altering the distribution of cowry shells in the economy. In conclusion, by using a circular-flow diagram and analyzing different scenarios, we can understand the potential impacts that various events have on an economy and how these impacts spread around the circle.

Key concepts

Households and Firms

In the circular flow model of Atlantis, the economy is composed of two main actors: households and firms. Understanding their roles is crucial to grasping the interactions within the economy. Households are consumers who purchase goods and services, such as potatoes and fish. Moreover, households provide essential resources like land and labor to firms.

Firms, on the other hand, are the producers in this model. They utilize the land and labor provided by households to produce the goods that households crave and need. In Atlantis, firms focus on producing potatoes and fish. It is this dynamic interaction between households and firms that establishes the foundation of economic activity.

Money, in the form of cowry shells, plays a crucial role in facilitating exchanges between households and firms. Cowry shells represent the flow of money, cycling through the economy as households spend them to buy goods and firms earn them from sales, which then circulate back as wages and rent paid to the households. Thus, this dual interaction of goods and money creates a continuous cycle keeping the economic engine running.

Supply and Demand

Supply and demand are pivotal forces driving the activities within Atlantis's circular flow model. These forces determine the price and availability of goods such as potatoes and fish. When a devastating hurricane hits the potato fields, the supply of potatoes decreases drastically. With fewer potatoes available and sustained demand, prices rise as households compete to buy the limited supply.

Conversely, a productive fishing season leads to an abundance of fish in the market. This increase in supply causes the price of fish to fall, making it cheaper for households to purchase. As prices drop, households may choose to buy more fish, shifting their consumption patterns accordingly.

The principle of supply and demand shows how fluctuations in the availability of goods can significantly impact prices. This dynamic can cause households and firms to modify their exchanges of cowry shells as goods become more or less affordable.

Economic Impacts

Different events can have varied economic impacts on the circular flow model. For instance, the discovery of dancing festivals featuring Shakira thrusts entertainment into the economic spotlight, influencing both supply and demand within Atlantis. When households spend time at these festivals, they provide less labor to firms, reducing the potential output of goods like potatoes and fish.

However, the emergence of festivals also creates new economic opportunities. Festival-related services, like music events, dance lessons, and ticket sales, become a new avenue for households to spend their cowry shells. The introduction of these services reallocates spending within the economy, influencing where and how cowry shells circulate.

Similarly, these new activities prompt firms to adapt by supplying new goods and services, diversifying their production to meet household demand. The presence of such events highlights the dynamic nature of the circular flow model, where shifts in household interests and activities alter economic cycles and contribute to the evolving economic landscape of Atlantis.