Mid Term Summative Assessment Review

1. What is the difference between a buyer’s market and a seller’s market (S&D)?

The difference between buyers market and sellers markets are that buyers market more supply than demand. There are more goods or properties available than buyers, which gives buyers the advantage (LOWER PRICES) While seller market means that there would be more demand than supply. There are more buyers than available goods or services, which gives sellers the advantage. (HIGHER PRICES) 

2. Explain how the division of labor (specialization of labor) creates greater efficiency.  Who pointed this out?

The division of labor creates greater efficiency as specific groups of human capitals that are trained for a certain task can efficiently work together to produce a product or service.

3. What is the difference between scarcity and a shortage?

The difference between scarcity and a shortage is that scarcity will always be with us, as earth has very limited resources that we are able to use. While shortages are only temporary and are most likely to be restocked within an amount of time. 

4. Name and explain the differences between the four market structures.

Perfect competition - many buyers and sellers, identical products, free entry and exit with no high costs, no barriers to prevent someone from entering, no control over prices  

Monopolistic Competition - many buyers and sellers, different products through branding or quality, firm has some control over prices as not all the products are the same meaning they can be priced to a certain degree, low barriers to enter as new firms can enter rather easily, non-price competition meaning firms compete for quality, service, or advertising

Oligopoly - only a few large firms, each firm is highly independent meaning that the actions of one firm can affect the other (change prices), HIGH barriers to entry (high startup costs, patents, strong branding loyalties, products can be identical or different, firms are able to collaborate to set prices or output levels which can be reduce competitions

Monopoly - one singular firm that dominates the entire market (provides unique good or service), product has no substitutions as it is unique, the firm has large power over pricing setting prices and control the supply of goods, mostly ineffective as it can lead to higher prices and less innovation due to lack of competition 

5. What is a natural monopoly?  Know examples (be able to identify).

A natural monopoly is a market that runs most efficiently when only ONE large firm provides all of the outputs.This means that is another firm were to join the market they will compete by decreasing the market price, meaning that the quantity that each firm can sell decreases as well, until one or both go out of business. 

• An example of this would be public waters, as different water companies will invest large sums of money to dig up reservoirs and increase the overlapping pipes and pumping stations to transport water to the same town. This in turn leads to the firms overdoing it and using more land and water than needed, causing them to pay for unnecessary  pipes that are as beneficial to the consumers. ----> the government gets involved and assigns each firm a geographical area  to provide these services.

6. What is the income effect and how is it different from a change in income?

The income effect is the change in consumption that results in responses to change prices and NOT INCOME CHANGED, which is different from a change in income as it signifies a change in hours worked/salary, as in this income changes while PRICES NOT CHANGED

7. Know the IMPACT elasticity and inelasticity on S&D.

Elastic Impact Demand or Supply: When the quantity demanded or supplied changes significantly with a price change. This typically happens with non-essential goods or when substitutes are available.

• Example: Luxury goods, or products with many substitutes (like clothes).

• Elastic Demand: A small price change causes a large change in quantity demanded.

• Elastic Supply: Producers can easily increase production when prices rise.

Inelastic Impact Demand or Supply: When the quantity demanded or supplied changes very little with price changes. This is common with essential goods or when there are few substitutes.

• Example: Gasoline, basic medications.

• Inelastic Demand: A large price change causes a small change in quantity demanded.

• Inelastic Supply: Producers can't easily increase production when prices rise.

8. What is the law of supply/demand?

The law of demand states that there is an inverse relationship between the price and quantity demanded, which indicates that if prices were to increase then the quantity demanded would decrease in contrast to the price, and vice versa where if price decreases the quantity demanded would increase. 

9. How is a market schedule for S&D different from a market curve for S&D?

Markey Schedule - A market schedule is a table that shows the quantity of a good or service that producers are willing to supply and that consumers are willing to buy at different price levels, for a given period.

Market Curve - A graph that visually represents the relationship between price and quantity. The demand curve shows the quantity of a good that consumers are willing to buy at different price levels, and the supply curve shows the quantity that producers are willing to sell.

10. T4 In what ways can the government influence the market (3 of the S shifters).

Some ways the government is able to influence the market would be through the 

• Subsidies = A subsidy is financial assistance provided by the government to encourage the production or consumption of a particular good or service. (SHIFT RIGHT)

• Taxes = Taxes on goods or services can be levied by the government to generate revenue or discourage the production or consumption of certain products. (SHIFT LEFT)

• Regulations = Governments often impose regulations to control the way goods and services are produced, marketed, or consumed. These regulations might include safety standards, environmental rules, or licensing requirements. (SHIFT LEFT)

11. What is the difference between rationing and a price-based system?  Which would you rather have and why?

Rationing: Limits the amount of goods people can buy, usually in times of scarcity or emergency.

Price-Based System: Goods are allocated based on price, with supply and demand setting the prices.

• A price-based system is generally preferred because it’s more efficient, encourages innovation, and adapts quickly to changes in demand. Rationing is useful in crises but can be less efficient and fair.

12. What are the impacts of a price ceiling/floor?  What are examples of each?

The impacts of price ceilings are shortages and reduced quantities 

• An example of price ceiling would be rent control as it sets a maximum limit on the rent that landlords can charge for rental on properties.

The impacts of price flooring are surpluses and higher prices 

• An example of price flooring would be minimum wage as it sets the lowest legal wage that employers can pay workers, preventing wages from falling below a certain level

13. What is the Production Possibilities Frontier?  In what 3 ways can the frontier be expanded?  What does it mean if the point of production is BELOW the frontier?

The production possibilities frontier is a line on a production possibilities curve that shows the maximum possible output and economy can produce. In 3 ways that the frontier can be expanded is through increase in land, labor, and capital. When the point of production is BELOW the frontier then that inquires that the economy or firm is not using all its resources efficiently and could produce more without sacrificing other outputs.

14. According to Adam Smith, what makes up the “Invisible Hand”?  What force regulates the market?

According to Adam Smith, the principles that make up the “invisible hand” would be the collective actions of individuals pursuing their own self-interest (like seeking profits or satisfaction) that unintentionally benefits society by leading to efficient allocation of resources.

The forces that regulate the market would be supply and demand as it is the force that regulates the market. As individuals and businesses make decisions based on their own interests, the market naturally adjusts through price changes, which balance supply and demand without the need for central control.

15. What are trade-offs?  What do economists mean by the concept of “guns and butter”?  How is the Production Possibilities Curve/Frontier related to trades-offs?

Trade offs are when you choose to decide on one thing (opportunity benefits) and give up the other (opportunity costs). When economists are discussing the topic of “guns and butter” it means that they are referring to military supplies and consumer supplies. 

16. What effect do the following have on Supply:

    1. Marginal Product of Labor

• As the marginal product of labor increases, firms are more willing to produce and supply more goods because the additional labor leads to higher output and profitability. (SHIFT RIGHT, INCREASE SUPPLY)

2. Diminishing Marginal Returns of labor

• Each additional worker contributes less to total output, which means the firm becomes less efficient. This can lead to higher production costs. (SHIFT LEFT, DECREASE SUPPLY)

3. Negative Marginal Returns

• The firm’s production becomes less efficient to the point where it is producing less output with more labor. 

(SHIFT LEFT, DECREASE SUPPLY) 

17. What is an inferior good and when would there be demand for it?

• An inferior good is a type of good whose demand decreases as consumer income increases, and increases as consumer income decreases.

18. How does a public good differ from a private good?

Public goods - Cannot be easily excluded from consumption (where everyone can benefit without restrictions) - one person’s consumption does not reduce availability for others

Private goods - Can be excluded from consumption by others (where only some can benefit) - one person’s consumption reduces the amount available for others

19. What are the principles of free enterprise (free markets/capitalism)?

The principles of free enterprise (free market/capitalism) 

• Private property rights = Individuals and businesses have the right to own and control property and resources

• Freely Exchange = Buyers and sellers freely engage in transactions based on mutual agreement without conflict.

• Competition = Multiple businesses compete in the market, driving innovation, lowering prices, and improving quality.

• Profit motive = Businesses operate to earn profits, which incentivizes them to improve products and services.

• Limited Government = The government’s role is minimal, mostly enforcing laws and ensuring fair competition, but not directly controlling the economy.

20. What is a mixed economy? How does it differ from a command economy?

A mixed economy blends market forces with government regulation. A command economy is fully controlled by the government, which makes all economic decisions.

21. What is exchanged in the factors market and the product market (circular flow)?

• Factors Market: Factors of production (land, labor, capital, and entrepreneurship) are exchanged. Households provide these factors to businesses in exchange for income (wages, rent, interest, profit)

• Product Market: Goods and services are exchanged. Businesses sell products to households, and households spend money to purchase them.

22. What is physical capital and human capital?

A physical capital would be machines and objects that humans would use in order to produce goods and services, While human capitals differ as it relies on a person's knowledge and skills within a specific field, meaning they are able to increase their human capital by increasing their knowledge through education and training.  In summary, both physical and human capital are essential for enhancing productivity and economic growth, as they contribute to the efficiency and effectiveness of production processes.