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MICROECONOMICS BU 224 Seminar Three Agenda 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 • • • • • • • • • 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 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 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?