Eco-111 Paper #1
1. What is the mechanism by which the "invisible hand" pushes markets to equilibrium?
Price is what drives economic activity in the market. Price will be determined by what the good or service is worth to the buyer and how much the seller believes the consumer is willing to pay. Equilibrium is balanced when the sellers have sold all they want to sell at a given price and when buyers have brought all they have brought at a given price. The “Invisible hand” is a description used to refer to the free market is at work with no government intervention.
2. Explain the two main causes of market failure and give an example of each.
Externality and market power are the two main causes of market failure. Pollution is an example given in the text. Pollution itself may not cause a corporation any money but it will negatively effect the population in the surrounding area. A good example of market power is monopolies. If there isn’t enough competition, a single entity is able to dictate the price (unlike the invisible hand). A monopoly will create a decrease in demand and thus negatively effect the market. It’s why we have legislation to help prevent monopolies or company mergers that could lead to the path of a monopoly. Microsoft is an example of a monopoly, where the government had to get involve.
3. Use a production possibilities frontier to describe efficiency.
Resources, money, and labor are a few factors for the production possibilities frontier. Trade is a way for two entities to maximize their production (comparative and absolute advantage). If the United States is better at producing barrels of oil, and China is better at making car stereos, the two countries can trade and thus maximize their output.
4. What is the difference between a positive and a normative statement? Give an example of each.
A positive statement is a statement about what is, what was, and what probabley will be, and that contains no indication of approval or disapproval. Ex . A rise
Price is what drives economic activity in the market. Price will be determined by what the good or service is worth to the buyer and how much the seller believes the consumer is willing to pay. Equilibrium is balanced when the sellers have sold all they want to sell at a given price and when buyers have brought all they have brought at a given price. The “Invisible hand” is a description used to refer to the free market is at work with no government intervention.
2. Explain the two main causes of market failure and give an example of each.
Externality and market power are the two main causes of market failure. Pollution is an example given in the text. Pollution itself may not cause a corporation any money but it will negatively effect the population in the surrounding area. A good example of market power is monopolies. If there isn’t enough competition, a single entity is able to dictate the price (unlike the invisible hand). A monopoly will create a decrease in demand and thus negatively effect the market. It’s why we have legislation to help prevent monopolies or company mergers that could lead to the path of a monopoly. Microsoft is an example of a monopoly, where the government had to get involve.
3. Use a production possibilities frontier to describe efficiency.
Resources, money, and labor are a few factors for the production possibilities frontier. Trade is a way for two entities to maximize their production (comparative and absolute advantage). If the United States is better at producing barrels of oil, and China is better at making car stereos, the two countries can trade and thus maximize their output.
4. What is the difference between a positive and a normative statement? Give an example of each.
A positive statement is a statement about what is, what was, and what probabley will be, and that contains no indication of approval or disapproval. Ex . A rise