0011 Elements of America’s Market Economy in a Global Setting (SMR 5.2)

Question 1

A Market Economy is ruled by ______ as well as _________.

Answer 1

the principle of supply and demand, division of labor (i.e. assembly line)

Question 2

What is a liberal market economy? Particularly what is is known as, what does it value and what is it often criticized for?

Answer 2

Economic system in which private individual and firms, rather than the govt make the great majority of economic decisions

Known as capitalism (used by most western democracis)

Private enterprise is seen as important for individual freedom

Often criticized for its lack of attention to fairness and equal opportunity

Question 3

Why is the US economy considered a mixed economy?

Answer 3

Because while business owners can hire whoever they want, they do have to abide by minimum wage laws and other laws in the govt. (i.e. for cars, there is emission requirements)

Question 4

What is the circular flow model in a mixed economy?

Answer 4

the modern economy works through this model where the product market creates products for the household which can afford the products because they’re part of the resource market in creating the products. The govt gets involved by providing certain federal subsidies to businesses and households, buying cars for police, etc. and tax the people to pay for it

Question 5

What is the main debate present with a mixed economy?

Answer 5

Debates over free market control and govt intervention

Question 6

Why is there competition in economy?

Answer 6

Because firms seek to gain a larger portion of the market

Question 7

What are advantages of increased competition? (2)

Answer 7

• Resources utilized most efficiently to produce goods most wanted by society
• Consumers pay lowest possible prices

Question 8

What is Price Setting?

Answer 8

How different markets set their prices

Question 9

How does a Liberal Market set prices?

Answer 9

“Free” competition creates the price equilibrium through supply and demand

Question 10

How does a Socialist Market set prices?

Answer 10

Basic price ranges are set (variable cost) and competition determines the exact price

An example of this would be the Affordable Care Act that limits how much people have to pay for healthcare

Question 11

How does a Communist Market set prices?

Answer 11

both production and consumption prices are set by the community (often the state); no profits

Question 12

What is a price ceiling?

Answer 12

An artificial cap on the price of a good (i.e. rent control, a city could say that you can not charge more than x for rent)

This is shown below the equilibrium price on the Supply and Demand graph (opposite of what you would think)

Question 13

A price ceiling results in ______ prices, but ______ wait times

Answer 13

lower, long

i.e. because rent control exists, tenants usually stay longer, meaning it might take longer to get into an apt

Question 14

What is a price floor?

Answer 14

An artificially imposed minimum price (i.e. minimum wage, govt stepped in to say this is the least amount you can pay for someone to work)

This is shown above the equilibrium price on the Supply and Demand graph (opposite of what you would think)

Question 15

What can a price floor result in?

Answer 15

Can result in labor surplus either because not enough people want those jobs or you can pick and choose what jobs you want

Question 16

What occurred in the Great Depression to increase the price floor?

Answer 16

in the 1930’s during the Great Depression, the govt killed and set free livestock to bring prices up

Question 17

Global Competition is made possible because of _______.

Answer 17

Specialization, allowing people to develop expertise in specific tasks leads to the optimal production of goods and services

Question 18

What are three aspects of Global Specialization?

Answer 18

1. A wage disparity, lower wages attract more firms
2. Skills, some countries might have better skills that make production easier
3. Lax laws in other countries create difference in working hours and competition

Question 19

What is off-shoring?

Answer 19

Relocating a company from one country to another

Question 20

What is out-sourcing?

Answer 20

sourcing an aspect of the company to another country perhaps for cheaper labor (i.e. call centers)

Question 21

Why do off-shoring and out-sourcing exist?

Answer 21

Because it allows companies to produce at a place of optimal labor and material supply

Question 22

What is Marginal Analysis?

Answer 22

Examining additional benefits and costs

Question 23

How do substitutes influence the law of supply and demand?

Answer 23

Demand can change depending on substitutes. For example, for a product like strawberries there are many substitutes (like blueberries or cherries), so if the price for strawberries go up, consumers will buy less because there is something similar they can buy

The substitution effect along with the law of diminishing utility helps to shape the demand curve

Question 24

What is the Elasticity of Demand?

Answer 24

Elasticity shows how sensitive quantity is to a change in price.

Question 25

What is an example of a product with high elasticity of demand?

Answer 25

There are a lot of substitutes for pizza like burgers or burritos so if the price of pizza goes up, the demand for pizza is relatively elastic and the demand curves goes down

Question 26

What is an example of a product with low elasticity of demand?

Answer 26

when the price of gas goes up or down, people don’t buy that much less or more gas because there is no valid substitute for gas, so this is regularly inelastic

Question 27

What are other inelastic products (aka products with not many substitutes)

Answer 27

Healthcare, electricity and coffee

Question 28

What is the Elasticity of Supply?

Answer 28

How sensitive price is to a change of quantity

Question 29

A _____ curve of supply shows an inelasticity. What does that mean?

Answer 29

steep, meaning that a large change in price leads to only a small change in quantity. For example, an airplane is time consuming to make so even if a customer pays more, it will still take just as long to make it

Question 30

What is an example of a product that has a relatively elastic supply?

Answer 30

T-shirts, because producers can respond quickly to a change in price and make more

Question 31

What is an example of a product that has an inelastic supply?

Answer 31

A Vincent Van Gogh painting, because even if the price goes up, the quantity won’t change

Question 32

What is the Diamond Water paradox?

Answer 32

Water is essential for life while diamonds do nothing but sparkle, however water is very cheap to buy and diamonds start around $3,000 per carat. Why is this? The total utility we get from water is very high but since it is so plentiful, the marginal utility is really low, on the other hand, diamonds are rare and have to be mined. Since there are relatively few diamonds, the additional satisfaction of another one is relatively high and we’re willing to pay more for it and we value it more than water

This shows how relative scarcity can contribute to a product’s value

Question 33

How can relative scarcity contribute to a product’s value?

Answer 33

Something that is very scarce can be seen as very valuable like the example of diamonds or an old vintage comic book but relative scarcity doesn’t also mean something will be a higher price, it depends on how much utility (happiness) we get from it and that depends on tastes and preferences of customers

Question 34

Companies use _______ to see the trends in what people are buying

Answer 34

Consumer price index

Question 35

Why does a free market benefit both conumers and companies?

Answer 35

A free market means that a company can not be better off without making consumers better off. Companies making things that aren’t desirable have to adjust or they’ll go under.

Question 36

How are entrepreneurs incentivized in a market economy?

Answer 36

Entrepreneurs are incentivized to be efficient because it saves them time and money. Like Milton Friedman said: “Nobody spends somebody else’s money as carefully as he spends his own”

Question 37

While Adam Smith spoke of a free market economy with no government involvement, our government has to be involved for the betterment of society and the public. What is an example of this?

Answer 37

The FDA regulates and rejects wheat that contains rodent pellets.

The govt directly controls the markets for National Defense and for public education

The govt also creates rules that prevents price gouging during an emergency

Question 38

What is price gouging?

Answer 38

Raising the price of essential items during an emergency

Question 39

How does price-gouging highlight the tradeoff between equality and efficiency?

Answer 39

Anti-price gouging laws are enacted in 34 states but many economists say that these laws promote inefficiency and make the problem worse. They argue that allowing prices to increase in times of crisis encourages others outside the disaster zone to haul in and sell essential goods. If prices don’t get higher, there isn’t incentive for others to bring this stuff in. Furthermore, higher prices for things like batteries, sleeping bags and generators mean that people who don’t really need them won’t buy them making them more available

Question 40

What is below cost or predatory pricing?

Answer 40

Where a business drives out competitors by charging lower prices even at a short term loss. Walmart does this and as an effect has shut down many mom and pop shops, but the Government & Supreme Court allows this despite lawsuits