Circular Flow
A local bakery hires two new bakers to meet the increasing demand for its pastries.
What flow does this scenario represent?
From resource market to firms
Explain each of the following statements using supply and demand.
a. "When a cold snap hits Florida, the price of orange juice rises in supermarkets through the country."
b. "When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets."
c. "When a war breaks out in Saudi Arabia, the price of gasoline rises, and the price of a used Cadillac falls."
a. A cold snap in Florida reduces the supply of oranges, leading to higher orange juice prices due to unchanged demand.
b. Warm weather in New England decreases the demand for Caribbean hotel rooms, causing their prices to drop with a constant supply.
c. War in Saudi Arabia disrupts oil supply, raising gasoline prices, and the subsequent higher fuel costs reduce the demand for gas-guzzling used Cadillacs, lowering their prices.
Sole proprietors have _________________ for the debts of the of their companies.
Unlimited Liability
A city has only one company that provides water supply services to all its residents because it's inefficient for multiple firms to lay down water pipelines. This company's prices are regulated by the government. What type of market structure is this indicative of?
Natural Monopoly
One disadvantage of general partnerships is that the general partners have unlimited liability for the debts incurred by the business. True or False
The assets and liabilities of a corporation are separate from its owners. True or False
A sole proprietor has limited liability in meeting the debts of his or her business. True or False
One disadvantage of general partnerships is that the general partners have unlimited liability for the debts incurred by the business. True or False
The assets and liabilities of a corporation are separate from its owners. True or False
A sole proprietor has limited liability in meeting the debts of his or her business. True or False
Maria pays her monthly gym membership fee to stay fit.
What flow does this scenario represent?
From households to product market
The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.
Billy: Demand increased, but supply was totally inelastic.
Marian: Supply increased, but so did demand.
Valerie: Supply decreased, but demand was totally inelastic.
Billy could be right because if demand increases (shifts to the right) and supply is totally inelastic (vertical supply curve), the equilibrium price will rise, but the equilibrium quantity will remain unchanged.
Valerie could be right because if supply decreases (shifts to the left) and demand is totally inelastic (vertical demand curve), the equilibrium price will rise, but the equilibrium quantity will remain unchanged.
Mia wants to start an online retail business. She's looking for a simple structure with minimal formalities and wants all profits to be taxed as personal income. Which business structure suits her best?
Mia should consider starting a sole proprietorship. It's the simplest business structure, requires minimal formalities, and all profits are taxed as personal income.
This exists when a few producers dominate the production of an identical product.
Oligopoly
Over the past 20 years, technological advances have reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters?
Increased the supply and reduced the price of computers, making them more accessible and boosting their demand.
Increased the demand for computer software, as more computers in use means a greater need for software.
Decreased the demand for typewriters, as computers became more affordable and replaced typewriters in most applications.
A toy manufacturing company receives $100,000 in profit this month.
What flow does this scenario represent?
From product market to firms
Consider the markets for DVD Movies, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes: DVDs and TV screens; DVDs and movie tickets; TV screens and movie tickets;
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Explain what would happen in the market for TV screens.
c. How would the change in market for TV screens affect the markets for DVDs, and movie tickets?
a. DVDs and TV screens: Complements.
DVDs and movie tickets: Substitutes.
TV screens and movie tickets: Substitutes.
b. If there's a technological advance that reduces the cost of manufacturing TV screens, the supply of TV screens would increase. With demand remaining constant, the equilibrium price of TV screens would decrease, and the quantity sold would increase.
c. DVDs: As the price of TV screens drops and more people buy them, the demand for DVDs might increase because people would want content to watch on their new TVs. This could lead to an increase in the equilibrium price and quantity of DVDs.
Movie Tickets: With more affordable and potentially better-quality TV screens available, some people might prefer to watch movies at home. This could decrease the demand for movie tickets, leading to a decrease in the equilibrium price and quantity of movie tickets.
Carlos has invented a new gadget that he believes will be a hit. He needs significant investment to manufacture and market it on a large scale. Which business structure would be most appealing to potential investors?
Corporations are more attractive to investors because they can issue shares of stock, providing a clear return on investment and limiting liability.
In a small town, there are numerous farmers who sell an identical type of grain. No single farmer can influence the market price, and there is free entry and exit. Which market structure is this?
Pure Competition
MINI and Rolls-Royce
Differentiate between the factor market and the product market in the context of the circular flow model.
The Factor Market and the Product Market are two primary markets in the circular flow model.
In the Factor Market, factors of production such as labor, land, and capital are exchanged. Households supply these factors to firms and receive income (like wages, rent, and interest) in return.
In the Product Market, finished goods and services are exchanged. Firms supply goods and services, while households, government, and the foreign sector act as consumers, purchasing these products with the income they've earned from the factor market.
Explain how each of the following events would affect the market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented.
a. Reduced cotton supply raises sweatshirt production costs, shifting the supply curve left, leading to higher sweatshirt prices and lower quantity sold.
b. Leather jackets become more attractive, decreasing demand for sweatshirts (since leather jackets and sweatshirts are substitutes), therefore shifting the demand curve left, and lowering their price.
c. Demand for sweatshirts increases, shifting the demand curve right, raising their price and quantity sold.
d. Sweatshirt production becomes more efficient, shifting the supply curve right, increasing supply, reducing price, and raising quantity sold.
Sue has a great idea for a business but has limited financial assets. She wants to retain control over the management of the company, but she needs someone to provide additional financing. Her friend Tom has some money to invest and likes Sue’s idea. He would like to share in any profits, but he doesn’t have the time or interest in managing the company and is nervous about the liability involved in running a business. A _______________ would probably match the needs of both Sue and Tom.
Limited Liability Partnership
In a city, there are numerous coffee shops. Each shop offers coffee but tries to differentiate itself through ambiance, special blends, and customer service. Customers have their preferences, and shops have some power over their pricing. Which market structure best describes this scenario?
Monopolistic Competition
Beachfront resorts have an inelastic supply, and automobiles have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
a. Beachfront Resorts (Inelastic Supply): When demand doubles and supply is inelastic (i.e., it doesn't adjust much in response to price changes), the equilibrium price will increase significantly, but the quantity might not change as much.
Automobiles (Elastic Supply): Since the supply is elastic, it can adjust more readily to changes in demand. Therefore, when demand doubles, the quantity supplied will also increase substantially, but the equilibrium price might not rise as much as it would for inelastic supply.
b. Beachfront Resorts will experience a larger change in price compared to automobiles. This is due to the inelastic nature of their supply, meaning that any increase in demand will primarily result in an increase in price rather than quantity.
c. Automobiles will experience a larger change in quantity since their supply is elastic and can more easily adjust to changes in demand.
A series of natural disasters severely damages infrastructure and disrupts production for months. How does this disruption alter the circular flow dynamics, especially in the short term?
Natural disasters causing severe damage to infrastructure and production disruptions would lead to an immediate slowdown in the product market. Businesses affected by the disaster would see a drop in production, leading to reduced incomes and possibly layoffs. This would, in turn, affect households, as their incomes would decrease, leading to reduced consumption. On the positive side, the rebuilding phase post-disasters often leads to a surge in demand for construction and related services, which can stimulate the factor market. However, the initial impact would be a contraction in the circular flow, with recovery dependent on the scale of the disaster and the effectiveness of the rebuilding efforts.
Price | Quantity Demanded | Quantity Supplied
------|-----------------------|-----------------------
$4 | 135 pizzas | 26 pizzas
$5 | 104 pizzas | 53 pizzas
$6 | 85 pizzas | 81 pizzas
$7 | 68 pizzas | 98 pizzas
$8 | 53 pizzas | 110 pizzas
$9 | 39 pizzas | 120 pizzas
a. Plot the demand and supply graphs based on the data. Can you determine the equilibrium price and quantity for pizzas?
b. If the market price for pizzas is higher than the equilibrium price, how would the market react?
c. Conversely, if the market price is lower than the equilibrium price, how would this influence the market?
a. Between $6 and $7
b. If the market price for pizzas is higher than the equilibrium price (let's say it's set at $8 or $9), the quantity supplied will exceed the quantity demanded (as suppliers are willing to produce more at a higher price, but consumers are less willing to purchase at that price). This will result in a surplus of pizzas in the market. To get rid of this surplus, sellers might reduce the price to attract more consumers, driving the market back towards the equilibrium.
c.If the market price is lower than the equilibrium price (let's say it's set at $4 or $5), the quantity demanded will exceed the quantity supplied (as consumers want more at the lower price, but suppliers aren't willing to produce as much at that price). This will lead to a shortage of pizzas in the market. Due to this shortage, consumers might be willing to pay more, and the price will rise, again pushing the market back towards the equilibrium.
Sarah wants to start a small bakery. She's concerned about personal liability but wants to maintain full control over decision-making. Which business structure would you recommend for her and why?
Sarah should consider forming a Limited Liability Company (LLC) or a single-member LLC. This structure provides the personal liability protection she's looking for, similar to a corporation, but allows her to maintain full control over the business, similar to a sole proprietorship.
A pharmaceutical company develops a unique drug for a rare disease. No other company has a substitute for this drug, and the company has a patent that prevents others from producing it for the next 20 years. However, the government regulates its pricing to ensure affordability. What market structure is this, and how does government intervention affect the typical outcomes of this structure?
The market structure is a Monopoly. The government intervention through price regulation ensures that the monopolist doesn't exploit consumers by setting excessively high prices, which is a typical outcome in an unregulated monopoly.
For each of the following pairs of goods, which good would you expect to have more elastic demand and why?
a. required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. subway rides during the next 6 months or subway rides during the next 5 years
d. root beer or water
a. Mystery Novels, because they are discretionary and readers can switch to other genres if prices rise.
b. Beethoven Recordings, as listeners can opt for other composers if Beethoven's prices increase.
c. Subway Rides During the Next 6 Months, because short-term price changes can lead to immediate alternative transport choices.
d. Root Beer, since consumers can easily choose other beverages if its price goes up.