CAS EC 101 Lecture Notes - Lecture 12: Economic Equilibrium, Competitive Equilibrium, Demand Curve

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3 Nov 2016

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Summary of dwl from price controls: when distribution of income is very unequal, wtp is not a good measure of consumer value. Cs and ss isn"t a great measure of efficiency: but suppose the distribution of income is equitable and wtp is a good measure of consumer value. Ss= wtp- mc: raising or lowering the price with price controls causes a fall in the quantity sold from q* to qc. This reduces social surplus by the dwl (area of triangle between. Q* and qc: if price controls reduce price, then there is excess demand and nonprice rationing. If the goods obtained by those with the highest wtp, the only. But if the goods are obtained by those with a lower wtp, there will be more dwl and ss is reduced even more. Purpose of taxes: governments tax goods and services for a number of reasons. To discourage the consumption of certain goods and services.

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Q 1: Below is a production possibilities table for consumer goods and capital goods : Production Alternatives Capital Goods Consumer Goods A 0 70 B 3 65 C 6 55 D 9 40 E 12 20 F 15 0 a. Show these data graphically. Upon what speciﬁc assumptions is this production possibilities curve based? b. If the economy is at point C, what is the cost of one more unit of capital good? Of one more unit of consumer good? Explain how the production possibilities curve reﬂects the law of increasing opportunity costs. c. If the economy characterized by this production possibilities table and curve were producing 7 units of capital goods and 45 units of consumer goods, what could you conclude about its use of its available resources? d. What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production? e. Assume consumer good are bread and cookies here. What happens to this frontier if disease kills half of the economy’s hens and cows? Q 2(a): How does self-interest help achieve society’s economic goals? Why is there such a wide variety of desired goods and services in a market system? In what way are entrepreneurs and businesses at the helm of the economy but commanded by consumers? b. Why is private property, and the protection of property rights, so critical to the success of the market system? c. How the market system decides what to produce, how to produce it, and who obtains it. Q 3: How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers. i. Supply decreases and demand is constant. ii. Demand increases and supply increases. iii. Supply increases and demand decreases. b. Explain why the price in competitive markets settles down at the equilibrium intersection of supply and demand. Explain what happens if the market price starts out too high or too low. c. Consider the following events: Scientists reveal that consumption of oranges decreases the risk of Corona Virus and, at the same time, farmers use a new fertilizer that makes orange trees more productive. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.

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Fill in the blanks.

a. ___________ is the study of choice under conditions of scarcity.

b. ____________exists if we desire more of something than we can have.

c. ___________when you give up one thing to get something else.

d. ___________the value of the next-best alternative given up when that choice is made.

e. ___________a system for coordinating the production and distribution of goods and services.

f. ___________physical items produced in an economy, such as jeans, tennis rackets, popcorn, cars, and homes.

g. ______________activities produced in an economy, such as education, entertainment, and health care.

h. _____________a collection of people who share a common bond, such as those living in a city, a country, or even the entire world.

i. ____________minimal requirements of things such as food, water, and shelter that are necessary for survival.

j. ___________things that are desired but are not essential to life.

k. ______________the time and effort people contribute to the production process.

l. _____________anything long lasting that is created by humans for use in production.

m. ___________ any long-lasting good that is used to make other goods or services.

n. ______________refers to the skills and knowledge of workers.

o. ___________are the basic elements from which all goods and services are produced.

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Question 26 pts

Which of the following is not a reason why specialization and trade are beneficial to society?

	Specialization fosters learning by doing, thus lowering the unit-costs of products
	Firms and workers become less dependent on others for producing goods and services

	The total output of economic goods may be increased even without any increase in resources
	Scarce resources are utilized more efficiently by exploiting differences among them

Question 27 pts

Laissez-faire capitalism limits the government's economic functions to the following, except:

	Protecting private property rights
	Establishing a legal environment to enforce contracts among individuals

	Setting prices of individual goods and services
	Preventing individuals and firms from coercing others

Question 28 pts

A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:

	Roundabout production
	A coincidence of wants

	Freedom of enterprise
	Division of labor

Question 29 pts

The market system is said to be characterized by "consumer sovereignty." This is because:

	A sovereign government determines which consumer goods will be produced
	Firms must match their production decisions to the consumers' choices

	The prices of consumer goods are regulated by a sovereign government
	Consumer goods are considered to be more important than capital goods

Question 30 pts

Consumers express self-interest when they:

	Seek the lowest price for a product
	Reduce business losses

	Exclude others in their thinking
	Collect economic profits

Question 311 pts

Refer to the above graph with three demand curves. An "increase in quantity demanded" would be illustrated by a change from:

	Point 5 to point 1
	Point 4 to point 1

	Point 2 to point 5
	Point 4 to point 6

Question 32 pts

The table below shows the weekly demand for hamburger in a market where there are just three buyers.

Refer to the above table. At a price of $6, the weekly market quantity demanded for hamburger is:

	17
	23

	24
	18

Question 33pts

If farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the near future, then this would cause a(n):

	Movement up along the current supply curve of corn
	Movement down along the current supply curve of corn

	Leftward shift in the current supply of corn
	Rightward shift in the current supply of corn

Question 34 pts

Which of the following will not cause the supply curve to shift?

	A technological change in the production of the good
	A change in the prices of other goods that producers could be producing

	A change in the costs of resources needed to produce the good
	A change in the price of the good

Question 35 pts

All of the following would affect the position of the supply curve for cranberries, except the:

	Price of agricultural land for cranberries
	Cost of fertilizers for cranberry production

	Popularity of cranberry drinks
	Development of a new pest control for cranberries

Question 36 pts

When high-school and college graduates apply for jobs in the labor markets,

	Job applicants and employers are both "buyers".
	Job applicants are the "sellers" while employers are the "buyers".

	Job applicants and employers are both "sellers".
	Job applicants are the "buyers" while employers are the "sellers".

Question 37 pts

Refer to the figure above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S₁ to S₂?

	A decrease in consumer incomes, assuming corn is a normal good
	The development of a more effective insecticide against corn rootworm

	An increase in the price of fertilizer
	A change in consumer tastes away from cornbread

Question 38 pts

Which is of the following statements is correct?

	If demand increases, then price will decrease
	If demand decreases, then price will decrease

	If price decreases, then demand will decrease
	If price increases, then demand will decrease

Question 39 pts

Which would be a likely cause of an increase in the demand for pizza?

	A decrease in the price of hamburger sandwiches
	A health report showing eating pizza reduces stress

	A reduced desire for take-out and fast-food dining
	A decrease in the prices of cheese, pepperoni, and mushrooms

Question 40 pts

A market for a product reaches equilibrium when:

	Price falls further after there is a shortage
	The price rises further after there is a surplus

	Buyers intend to buy a quantity equal to the quantity that sellers intend to sell
	The actual quantity bought by buyers equals actual quantity sold by sellers

Question 41 pts

A higher price reduces the quantity demanded for a product because:

	Individuals can afford less of the product and will switch to substitutes
	The financial assets of individuals increase

	Individuals will buy more of the product and less of its substitutes
	The purchasing power of individuals increases

Question 42 pts

The idea of the Law of Demand, as applied to electric cars, assumes which of the following to be constant?

	Price of electric cars
	How much sellers are charging customers for electric cars

	Price of gasoline cars
	Quantity of electric cars demanded by buyers

Question 43 pts

Use the following graph of the demand for coffee:

Refer to the above diagram of three demand curves for coffee. An increase in the price of coffee, other factors constant, would cause a:

	Movement from point a to point b
	Movement from point b to point a

	Shift from D₁ to D₂
	Shift from D₁ to D₃

Question 44 pts

Which of the following factors will decrease the current demand for a product?

	A decrease in the current price of a complementary product
	A decrease in the current price of a substitute product

	An increase in the current price of a substitute product
	An expected increase in the future price of the product

Question 45pts

In competitive markets, a surplus or shortage will:

	Cause shifts in the demand and supply curves that tend to eliminate the surplus or shortage
	Cause changes in the quantities demanded and supplied that tend to intensify the surplus or shortage

	Cause changes in the quantities demanded and supplied that tend to eliminate the surplus or shortage
	Never exist because the markets are always at equilibrium

Question 46 pts

Which of the following would cause a leftward shift in the supply curve for car washes?

	A decrease in taxes on car washes
	An increase in the price of car washing equipment

	A decrease in the price of water
	An increase in the number of cars in the city

Question 47pts

The market system automatically corrects a surplus condition in a competitive market by:

	Raising the price of the commodity in question while decreasing the quantity demanded
	Raising the price of the commodity in question while increasing the quantity demanded

	Reducing the price of the commodity in question while increasing the quantity demanded
	Reducing the price of the commodity in question while decreasing the quantity demanded

Question 48 pts

A leftward shift of the supply curve for oil in the United States is most likely to result from:

	A decrease in the world price of oil
	An increase in the costs of exploration and drilling for oil

	An increase in the subsidy for oil exploration and drilling
	A decrease in the fees that oil companies must pay for drilling licenses

Question 49 pts

A fall in the price of milk, used in the production of ice cream, will:

	Decrease the supply of ice cream
	Have no effect on the supply of ice cream

	Increase the supply of ice cream
	Cause a movement along the supply curve of ice cream

Question 50 pts

Refer to the above graph, which shows the market for beef where demand shifted from D₁ and D₂. The change in equilibrium from E₁ to E₂ is most likely to result from:

	An increase in the cost of cattle feed
	A decrease in consumer incomes

	A decrease in the tax on beef products
	An increase in the price of pork

CAS EC 101 Lecture Notes - Lecture 12: Economic Equilibrium, Competitive Equilibrium, Demand Curve

CAS EC 101 Full Course Notes

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