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Chapter 4 Market Efficiency, Market Failure, and Government Intervention
Markets are efficient mechanisms for allocating resources. However, in the real world, markets can “fail” as a result of departures from the idealized competitive market structure. This chapter assesses the efficiency of markets in terms of maximizing consumer and producer surplus, and explains the circumstances under which market failures can occur. Government intervention in markets in the forms of price floors, price ceilings, and taxes is also examined.
We have the Short Answer Questions to consider.
We can re-arrange the class into small groups for the review of the Short Answer Questions.
We will review Chapter 1 Short Answers - Chapter 3 Short Answers:
Chapter 1 Short Answer Questions:
1. What are some examples of the types of issues analyzed by microeconomics? What are some topics examined by macroeconomics?
2. Briefly describe how macroeconomics and microeconomics are related. How do they differ?
3. Explain: Economic theories must be tested.
4. Why do economists develop models (“stylized facts”) to help with analysis? Discuss the strength and weakness of such an approach.
5. Evaluate: “There is more than one concept of economic efficiency.”
6. At the start of the war in Iraq, homeowners in the United States found it difficult to find plywood. The U.S. military, at the same time, was constructing buildings in Iraq. How do the two situations reflect economic tradeoffs?
7. What is the opportunity cost of you taking this economics class?
8. What are some ways you use marginal analysis in your life?
9. Explain the meaning of the phrase “People respond to incentives.”
10. Briefly explain why private markets are generally efficient at providing goods and services.
Chapter 2 Short Answer Questions
1. Explain how a free market economy decides what to produce.
2. Briefly describe the four types of resources used in production.
3. Suppose you are a restaurant owner. What is your output? What resources do you need and how would you classify them under the four categories?
4. Describe the main differences between production efficiency and allocative efficiency. Do you think the economy is efficient? Why or why not?
5. Suppose a worker decides to become a stay-at-home mom or dad. What are the opportunity costs of the decision?
For #6 and in the time being, just explain your answer, I will post a reference to a link that permits graphing online for our use.
6. In 2007 a tornado wiped out the town of Greensburg, Kansas. The governor complained that not enough National Guard units could be sent to the town because so many were deployed to Iraq. Use a production possibilities curve to illustrate this situation.
For the time being, just explain your answer, I will post a reference to a link that permits graphing online for our use.
7. There is much debate regarding immigration into the United States. Using a production possibilities frontier graph, show what would happen if all immigration were halted.
8. Economists maintain that there is a tradeoff between current consumption and future consumption. Explain what they mean.
9. What are some of the factors that contribute to economic growth?
10. What is meant by the statement “International trade is a positive-sum game”?
Chapter 3 Short Answer Questions
1. What are the determinants of demand?
2. Evaluate the following in terms of the shifts in demand: Industries that sell inferior goods do well in an economic downturn.
3. Explain the difference between a change in demand and a change in quantity demanded. Why might this distinction be important to a business manager?
4. What happens to the supply curve when certain inputs used to make the products are banned? What are some examples of such cases?
5. Suppose a union successfully raises wage rates. How would the increase result in a decrease in supply?
6. Assume that Wal-Mart finds that its inventory of pink leather jackets is unexpectedly rising. Illustrate this situation using a supply/demand diagram. Explain how price adjustments would be used to reduce the excess inventory.
7. Using supply/demand analysis, explain the reason that the increased production of ethanol (a gasoline additive made from corn) is raising the price of tortillas (a type of bread made from corn). What effect would this price rise have on poor people?
8. Suppose suppliers expect a sudden drop in the market price. How might the expectation become a self-fulfilling prophecy?
For the time being, we can skip #9, I will post a reference to an online link that allows graphing illustrations online.
9. Graph the following table and find equilibrium price and quantity. Suppose that the demand for good XYZ rises by 5 units at every price because of clever advertising. What happens to equilibrium price and quantity? Under what conditions would it be profitable to advertise?
10. Suppose there is an outbreak of E. coli (a harmful bacteria) in a certain type of vegetable. If the authorities were to remove the vegetable from the market, what would happen to the price of the vegetable? Suppose the growers could not reassure consumers that future outbreaks will not occur. What would be the long-term effect on equilibrium price?
Begin Chapter Five: Powerpoint Introduction.
HW: gmsmith@shanahan.org
Finish Short Answer questions if we do not finish them in class.
