ECON 200 - Principles of Economics: INTRODUCTION

Phil Martinez, Economics, LCC
  Study Guide

Exam 2

SUPPLY and DEMAND

Concepts and Definitions:

What are the assumptions of the S & D model?

Maximizing Behavior
Economic Rationality

Law of Demand

Law of Supply

Ceteris paribus

The difference between Demand and quantity demanded.

The difference between Supply and quantity supplied.

The determinants (factors) of demand and their impact.

The determinants (factors) of supply and their impact.

A change in Demand versus a change in quantity demanded.

A change in Supply versus a change in quantity supplied.

Complimentary goods

Substitute goods

Normal goods

Inferior goods

The Income Effect

The Substitution Effect

Graphical and technical issues:

Slopes of the demand curve and supply curve

Direct versus inverse relationship

Positive versus negative relationship

Movement (or sliding ) along a curve versus shifting of the entire curve


Applications and interpretations:

How is Demand represented graphically?

How is quantity demanded represented graphically?

How is Supply represented graphically?

How is quantity supplied represented graphically?

How is the slope interpretted?

Why is the Demand curve sloped downward?

Why is the Supply curve sloped upward?

How to represent and interpret changes in the economy (e.g. prices of inputs, technology, resource availability, the impact of natural forces, expectations, prices of other goods, preferences, income, wealth, etc.) graphically on supply and demand graphs.


Sample PROBLEMS

1. Suppose the market for home computers is initially in equilibrium.

a. What happens to Supply or Demand for each of the changes below (increase or decrease).

b. Illustrate each of these changes on separate supply and demand graphs.

    (Draw a new graph to illustrate each new situation.)

c. How do these changes affect the equilibrium price and equilibrium quantity?

 

i. Computers become easier to use.

ii. The price of DRAM memory chips (a necessary component) falls.

iii. Software program prices rise.

iv. All college students are required to own personal computers.

v. Doctors warn of health risks from electromagnetic radiation from computer screens.
 

Multiple Choice: circle the correct answer.

 1. Which of the following will cause a decrease in the supply of chicken?

a. The price of chicken falls.

b. Health conscious consumers substitute tofu for chicken in their diets.

c. The nesting costs of chicken farmers increase.

d. New breeding technologies lowers the costs of production of chicken farmers.

e. Newspaper warnings of salmonella bacteria frighten consumers.

 2. At prices above the equilibrium price, quantity demanded is:

a. less than quantity supplied, forcing prices down.

b. less than quantity supplied, forcing prices up.

c. greater than quantity supplied, forcing prices down.

d. greater than quantity supplied, forcing prices up.

 3. On a graph, a demand line with a slope equal to zero is

a. upward sloping.

b. downward sloping, but very steep.

c. vertical.

d. horizontal.

 4. The recycling station says it will buy all our scrap aluminum for 19 cents per pound.

Its demand curve for aluminum is

a. upward sloping.

b. downward sloping, but very steep.

c. vertical.

d. horizontal.

5. With a nearly flat (or horizontal) demand curve, a shift of the supply curve will generate

a. a very small change in output

b. a very large change in output

c. a very large change in price

d. a and c

e. none of the above


Ch. 4 – The Role of the Government

Market Failure

The invisible hand of the market   =    the generation of mutual benefits via pursuit of self-interest.

The price (market) mechanism    =  the process by which independent price adjustments inform consumers and producers regarding the availability (or desirability) and relative value of goods and resources.

What is market failure?
How can a market fail?


What is a public good?
Why are public goods failures of the market?
When does a public good exist?
What is excludability?
When is a good "non-rival"?
 What is the role of the government in responding to the market’s failure to provide public goods?

What is an externality?  What is an external cost? What is an external benefit?
Why is the government justified in intervening in markets that produce externalities?
What are the options the government has to respond to externalities?
What is the goal of government intervention in response to external costs and  external benefits?

What is an imperfect market (or price system)?

What is Market Power?
What happens if the economy is dominated by a few corporations that can manipulate prices?
What is the role of government in addressing these areas:
Externalities?
Public Goods?
Market Power?
Inequity?

How does a perfectly private market address the problem equity (or inequity)?
Equity and efficiency are both goals of the economy. Can both be achieved?

The Role of Government in the Economy

What are the economic roles of government?
What does "internalizing costs" mean?
What is macro-instability?
What is stabilization policy?
How does government spending as a percent of GDP caompare with other developed nations?
What are direct expenditures and income transfers?
What are progressive, proportional, and regressive taxes?
Know the different kinds of taxes and which level of government levies them: Income, Social Security, Corporate, Excise, Property, Sales, and User charges.
Which of the above taxes are regressive?
Know the single largest expenditure at both the local and state government levels.
Know the two largest sources of Tax Revenue for federal, state, and local governments.


Government Failure
 What is government failure?
What are the opportunity costs of government programs?
When should government become involved in the economy?
What is Public Choice Theory? What is Social Choice Theory?
 Short Answer Essay Study Questions

1.Write out and Explain the Law of Demand, or

 Write out and Explain the Law of Supply.

2. Explain the difference between Demand and quantity demanded. Be sure to note what causes each to change, or

Explain the difference between Supply and quantity supplied. Be sure to note what causes each to change.

3. Explain why the Supply Line is sloped upward, or

 Explain why the Demand Line is sloped downward.

4. Explain the concept of equilibrium.

5a. Define external cost. Give an example. What is the appropriate government response to a market generating external         costs? 

        5b. Define external benefit. Give an example. What is the appropriate government response to a market generating                         external benefits?

6. What happens if the economy is dominated by a few corporations that can manipulate prices?

7. Why is the government justified in intervening in markets that produce externalities?

8. Why are public goods failures of the market?

9. How can the government respond to the market’s failure to provide public goods?

10. How can markets fail?

11.  Why is a progressive tax preferable over a regressive tax?
 Site Manager: Phil Martinez. Last Updated 11/04 prm. Constructed. by Phil Martinez

Copyright Phil Martinez and Lane Community College