ECON 1000 Lecture Notes - Lecture 5: Economic Equilibrium, Shortage

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17 Jul 2019

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In capitalist systems, allowing markets to operate freely is considered to be desirable, but it is generally accepted that market forces cannot be permitted to operate for all the goods and services required by society. Some goods and services are public goods and services", which means that they can only be provided adequately by intervention. These include law and order and the military. For this reason, the government or supra-national organisations may choose to introduce and maintain systems that will ensure that such goods and services are produced, and may fix prices either above or below the equilibrium price. A maximum price is sometimes imposed in order to protect consumers. This will result in a situation in which the quantity demanded will exceed the quantity supplied, provided the maximum price is struck below the equilibrium price (figure 4). There are numerous examples of this in real life.

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2.1 Adam Smith is often called the father of economics. His famous book, The Wealth of Nations, talks about an invisible hand which automatically allocates goods to the persons most able to put them to good use. The invisible hand operates through the price mechanism for goods and services, so that individuals who trade on the market, while seeking only their own good, are actually efficiently allocating society's resources.

His ideas, if applied to modern capital markets, imply that these markets would efficiently allocate investment capital to the firms that would use the capital most efficiently in producing goods and services for society. But this would happen only if markets were left to operate without state intervention.

Do you think modern governments should leave capital markets unregulated? Why or why not?

2.2 Consider a business firm, organized as a proprietorship, which has $100,000 invested in assets a bank loan of $80,000 and $20,000 personal capital invested by the proprietor. If the firm becomes insolvent, who is at risk? Why?

2.3 In the following situation, moral hazard or adverse selection may be present. Indicate which you think is present, if any, and explain your choice.

a. An investor is asking for a bank loan to support a new business she wants to operate. She is unwilling to submit to a credit check.

amethystoyster422

Am I using economic concepts correctly in the following? Please correct and clarify for me if not.

In this scenario, we want to curb or decrease the use of drugs and the use of the services provided by prostitution. So, if you legalize either, and then in policy increase the prices for those goods or services, you can eliminate price-sensitive or elastic consumers, like teenagers. It does not solve the problem, but this is just an economic scenario, right? It will decrease documented use and users, but since these were black market operations, to begin with, there will always exist a black market to supply what the public markets cannot. Quality in these black markets will be poor, but prices will reflect this. Inelastic consumers, such as working adults, in the face of a price increase, will choose less expensive substitutes rather than abstain, and will even choose illegal avenues to attain before abstaining, or going without.

Another conundrum in the drug arena is the addictive vs non-addictive substances debate. Highly addictive substances like cocaine and heroin will experience less elasticity than substances such as nicotine or marijuana. Because it can be argued that addiction diminishes rational choice, increases in price that would normally cause users to refrain from use are not effective and thus do not end up lowering the quantity of drugs demanded, addiction counteracts theory and demand only decreases negligibly. Here, revenues would increase for the suppliers of such goods and services, while not even making a dent in the quantity of drugs demanded. Profits however may not increase as interdiction efforts also increase a supplier's production and distribution costs.

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Section I: Supply & Demand Analysis (Chapter 3) In each of the following 10 questions, show what happens to the Demand, Supply, equilibrium price and equilibrium quantity of copper. Show an increase by use of +, a decrease with a -, and no change with 0 (thatâs a zero, not an O or o). Although in the real world, both supply and demand are constantly changing, in the model we are using here, only one curve shifts per problem. So, if demand goes + or -, supply will be 0, and vice versa. In no case will equilibrium price or equilibrium quantity be 0. You may want to sketch out the supply and demand curve analysis to help in answering the questions. You will also be required to identify which determinant (of demand or supply) has changed, thus causing the shift. Rather than actually writing in the determinant, fill in the blank with the number that corresponds to the relevant determinant, based upon the following list. You may want to refer to the lecture notes entitled Determinants of Demand & Supply in the COURSE CONTENTS section. For questions 1 - 10, refer back to this list. Some you may want to use more than once, some you won't use at all. Copy and paste this list to an MS Word document and then print it out if you don't want to keep scrolling back and forth between this list and the question you're trying to answer. Determinants of Demand: 1. Change in buyer tastes 2. Change in number of buyers 3. Change in income 4. Change in the prices of related goods (on the demand side) 5. Change in consumer expectations Determinants of Supply: 6. Change in resource prices 7. Change in technology 8. Changes in taxes and subsidies 9. Change in prices of related goods (on the supply side) 10. Change in producer expectations 11. Change in the number of suppliers. For example, if a rightward shift in the supply curve for an item were caused by an increase in the number of producers of that item, you would indicate this be entering 11 into the relevant blank. If the demand curve shifted to the left because people didn't like that item anymore (like mimeograph machines), you'd enter 1 into the blank. Q#1 President Trump signs into law a bill that says the U.S. government will subsidize the construction of new homes, office buildings, bridges, and other infrastructure projects requiring copper. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged; Which determinant changed?: Q#2 Non-capitalist economies around the world begin a phase of rapid economic development, construction and growth, becoming increasingly wealthy, as they begin to adopt more capitalist institutions, as in China, Russia, and the former communist countries of East Europe. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged: Which determinant changed?

ECON 1000 Lecture Notes - Lecture 5: Economic Equilibrium, Shortage

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