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MICROECONOMICS
BU 224
Seminar
Three
Agenda
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Course Issues and Questions
Chapters Three and Four: Questions
and Problems from the text.
Review of Market Allocation
Mechanisms
Where are we going next?
Determinants of Demand
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Tastes
Number of Buyers
Income
- Normal Goods
- Inferior Goods
Price of Related Goods
- Substitute Good
- Complementary Good
Consumer Expectations
Determinants of Supply
• Resource Prices
• Technology
• Taxes and Subsidies
• Prices of Other Goods
• Producer Expectations
• Number of Sellers
Chapter 3 Questions
1. What are some examples of inferior products?
2. Who does the demanding and the supplying in the
labor market? The loanable funds market?
3. Is the price system a "just" or "fair" way to allocate
products? What about medical services?
4. What can we say about the demand and supply
curves for products which are "free", like matches,
toothpicks, and kittens?
5. Why do you think "rock" stars charge concert ticket
prices below what they could charge and still sell out
their performances?
Chapter 3 Questions
1. A survey indicated that chocolate ice cream is America’s
favorite ice-cream flavor. For each of the following, indicate
the possible effects on demand and/or supply and equilibrium
price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to
reduce the number of milk-producing cattle in their herds by
a third. These dairy farmers supply cream that is used to
manufacture chocolate ice cream.
b. A new report by the American Medical Association reveals
that chocolate does, in fact, have significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers
the price of vanilla ice cream.
d. New technology for mixing and freezing ice cream lowers
manufacturers’ costs of producing chocolate ice cream.
Market Allocation Mechanisms
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Inputs or factors of production need
to be used to produce goods and
services. The ways such inputs can
be utilized to serve the needs of
consumers are called the allocation
mechanisms.
Market Allocation Mechanisms
Four Market Allocation Mechanisms:
1. The market (price),
2. Government,
3. Random choice, and
4. First-come, first-served
Market Allocation Mechanisms
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Efficiency: If an allocation mechanism
is efficient, it means that it best
satisfies the needs and wants of a
society compared to the other
allocation mechanisms. A system of
markets and prices is generally the
most efficient way of allocating
scarce resources. As a result, it is
predominantly used in most industrial
countries today.
Chapter 4 Questions
1. If the government banned the sale and purchase of a good or
service (for example, cigarettes, or abortion services), then what
impact would this have on the market for this item?
2. If the price of televisions has increased over the last year and
people are buying more televisions, is this an exception to the law
of demand, or has there been a change in demand or supply which
could account for this?
3. Why has the price of most computers and other electronic product
been falling over the past several years while the demand for
these products has been rising at the same time?
4. Why has government been involved in setting prices---price
controls?
5. How does government attempt to correct for an inequitable
distribution of income?
6. How would an economist answer the question: "What is the
appropriate level of government involvement?"
Chapter 4 Questions
1. Suppose it is decided that rent control in New York City will be
abolished and that market rents will now prevail. Assume that all
rental units are identical and are therefore offered at the same
rent. To address the plight of residents who may be unable to pay
the market rent, an income supplement will be paid to all low
income households equal to the difference between the old
controlled rent and the new market rent.
a. Use a diagram to show the effect on the rental market of the
elimination of rent control. What will happen to the quality and
quantity of rental housing supplied?
b. Now use a second diagram to show the additional effect of the
income-supplement policy on the market. What effect does it have on
the market rent and quantity of rental housing supplied in
comparison to your answers to part a?
c. Are tenants better or worse off as a result of these policies? Are
landlords better or worse off?
d. From a political standpoint, why do you think cities have been
more likely to resort to rent control rather than a policy of income
supplements to help low-income people pay for housing?
Chapter 4 Questions
Chapter 4 Questions
Microeconomics
Questions?