Ap Economics Assignment
AP Economics
September 2013
Naked Economics: Undressing the Dismal Science
Chapter 1: The Power of Markets
-The two basic assumptions that economists make about individuals and firms are that individuals act to make themselves as well off as possible, and that firms attempt to maximize profits.
-The role and significance of prices in the market economy has to do with supply and demand. If there are the same amount of buyers as products, the price will settle. If there are more buyers than products, the price of the product will rise. And, if there are more products than buyers, the price of the product will decrease. This occurs until the supply of the product matches the demand of the product.
-The thing that is so great about the market economy is that “the market economy is a powerful force for making our lives better” (Wheelan 20). It creates competition among different businesses, which results in newer, cheaper, and better products.
Chapter 2: Incentives Matter
-Adverse selection relates to efficient outcomes in the market economy because undesired results occur when buyers and sellers have access to different information because the “bad” products are more likely to be selected. “Perverse incentives” relates to the market economy because it is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. The principal-agent relates to the market economy because the problem has to do with the struggle of leading one party (the agent) into acting in the best interests of another (the principal) rather than in his or her own interests. Lastly, the prisoner’s dilemma relates to the market economy and its efficient outcomes because it shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so, and it is applicable in numerous situations, one being the way renewable resources are exploited.
Chapter 3: Government and the Economy
-Externality
September 2013
Naked Economics: Undressing the Dismal Science
Chapter 1: The Power of Markets
-The two basic assumptions that economists make about individuals and firms are that individuals act to make themselves as well off as possible, and that firms attempt to maximize profits.
-The role and significance of prices in the market economy has to do with supply and demand. If there are the same amount of buyers as products, the price will settle. If there are more buyers than products, the price of the product will rise. And, if there are more products than buyers, the price of the product will decrease. This occurs until the supply of the product matches the demand of the product.
-The thing that is so great about the market economy is that “the market economy is a powerful force for making our lives better” (Wheelan 20). It creates competition among different businesses, which results in newer, cheaper, and better products.
Chapter 2: Incentives Matter
-Adverse selection relates to efficient outcomes in the market economy because undesired results occur when buyers and sellers have access to different information because the “bad” products are more likely to be selected. “Perverse incentives” relates to the market economy because it is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. The principal-agent relates to the market economy because the problem has to do with the struggle of leading one party (the agent) into acting in the best interests of another (the principal) rather than in his or her own interests. Lastly, the prisoner’s dilemma relates to the market economy and its efficient outcomes because it shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so, and it is applicable in numerous situations, one being the way renewable resources are exploited.
Chapter 3: Government and the Economy
-Externality