Unit 1
Identify the five-sector model illustrating leakages and injections in an economy.
Circular flow of income
Describe excess supply.
At a price point, excess supply refers to a situation where the production (supply) of a good is more than the ability and willingness to purchase it, known as demand. Also called a surplus, excess supply would illustrate market disequilibrium.
True or false- The price mechanism refers to how the free market reallocates resources.
True
State the formula for price elasticity of supply.
PES= % change in quantity supplied / % change in price
Adam Smith
List five non-price determinants of supply.
Changes in costs of factors of production (FOPs) Prices of related goods (in the cases of joint and competitive supply) Indirect taxes and subsidies
Future price expectations
Changes in technology
Number of firms
Define the term 'market equilibrium'.
Market equilibrium is when a market of a good or service results in a direct intersection of the quantity supplied and quantity demanded at a price known as the equilibrium price.
Identify the elasticity for a necessity good with zero substitutes.
The good has price inelastic demand.
Fill in the blank:
The ___________ ____________ ___________ (60 total) illustrates the output of two goods given the use of the same ___________ ______________.
production possibility curve/frontier
finite/scarce
resource
Discuss how the price of related goods would cause a shift in supply or demand for a particular good.
For supply, the discussion of the non-price determinant of price of related goods should explicitly include joint and competitive supply.
For demand, the discussion of the non-price determinant of price of related goods should explicitly include substitutes and compliments.
For the command term 'discuss', students should not focus on one single determinant.
Explain how three functions of the price mechanism attempt to correct market disequilibrium.
Signalling- Higher or lower prices give information to producers or consumers about the state of the market. This may result in a new equilibrium point as a new curve is established in the market, due to firms or consumers leaving or entering the market.
Incentive- Higher or lower prices incentivize (motivate) producers to supply more or less (quantity), or consumers to demand more or less (quantity). This is based on the inventive or rationale for profit and utility, respectively, due to the laws of supply and demand. Due to this function, markets will move back to equilibrium.
Rationing- Due to scarce resources during a shortage (excess demand), higher prices will ration off demand for limited goods (or ration off excess supply).
Explain how the 'mobility of factors of production' is a PES determinant.
If the factors of production are more mobile, for example, it is easier to hire more workers given an increase in price, then the supply would be price elastic. However, if the factors of production are less mobile, such as finite or fixed land or space, then the supply would tend to be price inelastic and less responsive or sensitive to a price change.
Identify the economic thinker who reasoned that to have the means to buy, a buyer must first have produced something to sell.
Jean-Baptiste Say
Draw an appropriate diagram to explain how a decrease in the price of airbag bicycle helmets in Sweden would affect the quantity supplied. Be sure to label the diagram completely. State the determinant.
An appropriately labeled diagram should be drawn. The determinant is price.
Distinguish between 'allocative efficiency' and 'productive efficiency'.
Allocative efficiency refers to the equilibrium point in which social surplus is maximized and resources are used in the most optimal way for society, that is, marginal cost = marginal utility. No one can be better off without someone else being worse off.
Productive efficiency refers to a firm's lowest possible average cost to make a good or service, meaning there is minimal waste. Efficiency is at its best.
The price of hand soap increases from 80,000 KIP to 90,000 KIP. The quantity demanded decreases by 4%. Calculate the PED and state the type of elasticity.
.32, the good has price inelastic demand.
According to the syllabus, identify five roles of positive economics.
the use of logic
the use of hypotheses, models, theories
the ceteris paribus assumption
empirical evidence
refutation
State an example of five different non-price determinants of demand.
changes in income- Mr. Maguire's salary decreases, so he demands less gym memberships.
changes in the price of related goods- Vasy becomes cheaper than Sengdara, so people switch
tastes and preferences- People get tired of eating laab, so they switch to Khao Soi
future expectations- People expect clothes to go on sale, so they stop buying now
number of consumers- new teachers move to VIS, so the demand for gym memberships increases
State the quantifiable concept of the ratio of useful output to total input.
Efficiency
Explain the Engel curve on the whiteboard.
Both slopes should be explained. The bottom curve relates to normal goods (positive relationship) and the top relates to inferior goods (inverse).