10 Short Answer Questions I have attached a powerpoint that has the answers within the material
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Week 1 ECON150 summer on-line course:
1) Explain the role of full utilization and optimal efficiency of society’s productive resources in
producing the production possibilities curve.
2) What is being experienced if a society is producing a combination of goods represented by a
point that lies below the Production Possibilities curve?
3) What will increasing the productivity of the productive resources of society do to the position of
that society’s Production possibilities curve? Explain why the curve will respond as you suggest.
4) What is the relationship between price and Quantity demanded for any “normal” good?
5) Explain how graphically a change in Demand is different from a change in Quantity demanded.
6) If supply remained unchanged, and an increase in Demand for a good was experienced, what
impact would be realized in the price and quantity for that product in the marketplace?
7) Why does Quantity Supplied increase as the market price for a good increases?
8) Explain how graphically a change in Supply differs from a change in Quantity Supplied.
9) What is the relationship between Quantity demanded and Quantity Supplied at Market
10) Describe the market reactions that would occur if the market price that is set is found to be
below the equilibrium price for that product.
*Scarce resources vs insatiable wants
* Productive resources of society
*Socialism vs Capitalism in allocating resources
*Production possibilities analysis – Long-term growth
•* Circular Flow Model
•* Demand and Supply
•* Change in quantity demanded vs change in demand
•* Change in quatity supplied vs change in supply
•* Equilibrium and efficient workings of the market
• The productive resources each society has to work with is their land, labor,
capital and Entrepreneurial ability.
• These resources are also called factor inputs
• While land and labor are rather self explanatory capital and
entrepreneurial ability may require some further definition.
• Capital is the produced assets of the economy which can be used to
further enhance the productive capacity of that society. It is not therefore
money which many interpret the word to mean. It is rather the
machinery, equipment and technology developed by the society.
• Entrepreneurial ability relates to the capability of that society to develop
and expand the output of the society through effective innovation and
vision. It relates to the talents of the people of the society but also to the
opportunities the society provides to effectively use the talents of the
members of the society. This opportunity can be either supported or
thwarted by government intervention as well as the rules of law that
dictate the actions of the individuals of the society.
• Scarce resources = there is a finite quantity of the
productive resources of any society. Although the
resources are abundant in quantity, they are still scarce in
that there is a limit to the amount we have. For example,
we have an abundance of productive land within our
society, but the amount of that land is not limitless, thus it
• Insatiable wants = we will always desire more of something
than less if the cost of that something is free. For example,
if you did not have to pay for it, and someone came to your
door to offer you either a bottle of water or a six pack of
water a rational consumer would always opt to take the six
pack. Getting the greater quantity without having to pay a
higher price would always be the more desired option.
• Each society is vested with the responsibility of allocating
their scarce productive resources in a way that best
services their desire to satisfy their insatiable wants and
• In a socialistic society the allocation of that societies
resources is directed by the government as it is deemed the
resources of the society are owned by the government.
• In a purely Capitalistic society it is the system of markets
and prices that directs the allocation of the society
resources as it is deemed the resources are privately
owned and can be used in the fashion that is optimally
profitable for the owner of the asset.
• A graphical depiction of the output performance of a
society is demonstrated by a production possibilities
graph (see figure 1.2 pg 13 of your textbook).
• In the referenced graph the author looks at the
production of industrial robots as shown on the vertical
axis vs pizzas as shown on the horizontal axis of the
• You may want to rename the axis to Capital Goods on
the vertical axis and consumer goods on the horizontal
axis to help make the conclusions reached by the
analysis to be more realistic.
• Again referring to Figure 1.2 Points A, B, C, D, and E are all
points on the curve. Each point on a production
possibilities curve represents a maximum attainable level of
output the society can produce when operating at
maximum efficiency and optimal utilization of productive
• Maximum efficiency means each resource that is working is
producing at their respective highest capable output e.g. if
the productive capacity of a machine is 500 units of output
per hour then that machine is generating 500 units every
• Optimal Utilization means each resource is working e.g. if a
company has 4 machines in their factory, each of those
machines is actively working.
• While it may seem obvious that if a company invested in a resource
they would naturally put that asset to work. However, the use of
resources by a company may be effected by the level of demand for
the product that company is offering to the marketplace. For
example, if a company who had invested in numerous machines
found that the quantity they were producing when each of the
machines was producing was greater than the current demand for
their product, that company would elect to lay off some workers
and allow the machine to sit idle until the demand for the good
increased and justified returning the machine to productive use.
• When we say optimal utilization is achieved we mean all of the
resources of that society are being actively put to use and no
resources are sitting idle.
• Going back to figure 1.2, each point on the production possibilities curve
reflect a societies possible output combinations when producing at
optimal utilization and maximum efficiency of all productive resources.
The specific combination of goods produced by the society (either point A,
B, C, D or E) is dependent on HOW the society allocated their productive
resources. For example, if the society directed every one of their
productive resources to the production of Industrial Robots (Capital
Goods) and therefore had no resources available to produce Pizzas
(Consumer goods) this society would find their output to be at point A on
this curve. In contrast, if all resources are to produce pizzas, and no
resources were to produce industrial robots that society would find their
output to be at point E on the graph. Points B, C and d reflect some
allocation of resources between the two alternative goods the society
could produce. For example, point B would be realized if the society
dedicated a small portion of their productive resources to pizza output
and a majority of their productive resources were dedicated to producing
• Any point beneath a production possibilities curve is
attainable but reflects a society that is not operating at
maximum efficiency and/or is not making optimal
utilization of all of it’s productive resources (see figure 1.4
• An example of this is a society that has a higher than
acceptable (we will explain what is acceptable later in this
course) level of unemployment. For instance, if we said an
acceptable rate of unemployment was 5% and we were
actually experiencing an unemployment rate of 8% then we
would find our output as a society would be reflected by a
point beneath the production possibilities curve (similar to
point U in figure 1.4 pg 16)
• If you go back to figure 1.2 pg 13 point W on this
graph represents a combination of goods the
society would favor, but currently the productive
capacity of the society will not allow that
combination of goods to be produced. If you are
following this, you can explain why point W is
currently unattainable. If you recognized the
curve represents the MAXIMUM attainable level
of output and point W is beyond this curve
therefore it is currently unattainable, then you
are understanding this concept of production
So, what is the value of this production possibilities analysis? If we look at a societies future
productive capabilities being influenced by the current allocation of productive resources of that
society then we see how the analysis has merit.
For instance, if we took two different nations who today have the same exact quantity and quality
of productive resources and one of those societies today elects to allocate their resources more to
the production of capital goods and less to consumer goods (similar to point B in figure 1.2 pg 13),
but the second nation elects to currently produce more consumer goods and therefore elects to
limit their current production of capital goods (similar to point D in figure 1.2 pg 13), the second
nation may feel more successful today as their citizens have many consumer goods available for
purchase today, but their level of output in the future will not grow as rapidly as nation one
because they have neglected the production of output enhancing capital goods today.
Figure 1.6 pg 17 reflects the outcomes each nation may find in their respective future production
possibilities curves. In graph A although there has been some growth in the output potential of the
society in the future, that increase is small compared to that realized in graph B. Graph A would be
associated with the nation that neglected adequate investment in their capital asset base, while
graph B would relate to the nation that sacrificed current consumer good output in order to allow
the output potential of the nation to expand in the future.
• The discussion of production possibilities leads to a
realization that each nation has an obligation to ensure the
productive capacity of their productive resources is
• Government actions that lead to developments in growing
the productive capacity of each resource is therefore in the
best long-term interest of the productive capabilities of
that society e.g. actions that support improvements in
healthcare and education, actions that lead to
development of new technologies and production of more
efficient machinery, actions that stimulate the
development of the Entrepreneurial talents of the people,
all will enhance the productive capacity of the nation and
lead to a higher standard of living for the citizens.
In a purely Capitalistic system there is no government intervention that influences
the way productive resources are allocated in the society. It is by the workings of
the free market that the allocation of resources takes place.
Adam Smith coined the phrase “the Invisible Hand” to describe this allocation of
The Invisible hand says “resources will flow to be used in a way that best satisfies
the members of the society as if they were directed by an “Invisible hand”.
However it is the selfish pursuit of profitability that causes resources to be
allocated within that society. Goods that are highly demanded will command a
price in the marketplace that allows the producers of those goods to reap a profit.
Others seeking to gain a similar profit will then enter this industry causing more
productive resources to thereby be allocated to the production of those goods.
Producers producing goods that are not in high demand will find the market price
they need charge for the product to induce sales may not be adequate to generate
a profit and the losses sustained by these producers will cause them to leave that
industry and thus fewer resources will be dedicated to the production of those
The Circular Flow model is presented on page 43 in figure 2.2 of your textbook.
This model recognizes that markets exist for the PRODUCTS of society (the goods
and services that are offered for sale in the marketplace) and also for the
RESOURCES of society (the land, labor, capital and entrepreneurial ability that goes
into the production of the goods and services that will be offered for sale). The
participants interacting within each of these markets are the households and the
businesses (assuming no government involvement). The households SUPPLY
resources to the resource market (e.g. we supply our labor to work to create the
things that will be produced), and CONSUME the products offered for sale in the
product market. Businesses SUPPLY the goods that have been produced to the
product market to offer them for sale, and CONSUME the land, labor, capital, and
entrepreneurial ability offered for sale in the resource market.
Thus as figure 2.2 shows, households supply the resource market, businesses
consume what was offered in that resource market then supply the product
market where households consume what has been offered in the product market.
There is a continuous circular flow of activity.
• The mechanics as to how the system of markets and
prices functions is explained by the workings of supply
• Demand is the quantity that is willingly demanded at
each potential market price while all other variables
capable of influencing the demand for the good or
resource are held constant.
• Supply is the quantity that is willingly supplied at each
potential market price while all other variables capable
of influencing the supply for the good or resource are
• It is very important for the students to recognize
a significant difference between a change in
demand vs a change in quantity demanded and
also the difference between a change in supply vs
a change in quantity supplied.
• While the titles of the concepts just mentioned
SOUND very similar, they have dramatic
differences in analyzing the impact on pricing and
distribution within any market.
• To explain the difference between a Change in Demand vs a Change
in Quantity Demanded let’s use an example: Look at the demand
for a specific item such as a sweater and define the things that will
impact your demand to purchase that product, you may recognize
things like; the price of that sweater, the amount of money you
have to spend, the price of some substitute product like maybe a
sweatshirt, the amount of advertising for that sweater. Now given
this list of variables we distinguish the relationship between the
quantity of the sweaters demanded at each possible price for that
sweater while all of the other variables mentioned STAY THE SAME.
In doing so we can say any change in the quantity of the sweater
demanded is exclusively related to the price of that sweater since
nothing else that can influence the demand for the good changed.
• Now what happens to the quantity of those sweaters being
demanded as the market price of the product changes?
• As the market price of the good reduces, there
will become greater quantities demanded of that
good i.e. there is an inverse relationship between
the price of the good and the quantity demanded
as the price goes down the quantity demanded
goes up and vice-versa.
• There are two different explanations as to why
this inverse relationship exists, they are called the
income effect and the substitution effect.
• The income effect says as the price of any good reduces the
buyers of that good will be capable of affording a greater
quantity of the good even with a fixed income, it will be “as
if” they have more income while in reality it is that they
have more purchasing power with the same income e.g. if
you have $19 to spend and wish to purchase our sweaters if
the price of the sweater is $10 you can afford only 1
sweater, if the price were to reduce to $8 if you had the
desire to do so you could now increase your quantity
demanded to 2 sweaters as you can now afford 2.
Although your income did not change, the purchasing
power of the income you had to work with has become
• Thus as price goes down, quantity demanded goes up.
• The substitution effect also justifies this inverse relationship
between price and quantity demanded of a good. The
substitution effect states that as the price of a good
declines buyers who may have been predisposed to
purchasing some alternative good may now shift their
buying preference in favor of the good with the falling
price, e.g. say you were thinking of purchasing a sweatshirt
and went to the store to make this purchase, if the price of
the sweaters has been reduced, you may decide that
instead of purchasing the sweatshirt you will now buy the
sweater instead, you will have “substituted” the sweater in
favor of the good you originally desired. Thus as the price
of the sweater reduces the quantity demanded of the
• The graphical depiction of the demand for any normal good
is shown in the graph on page 54 in figure 3.1. As you can
see from this graph it is a downsloping curve/line. This will
ALWAYS be the case for any normal good. It is called the
Law of Downward sloping demand and is caused by the
inverse relationship between the price of the good and the
quantity of the product being demanded i.e. once again,
they move in opposite directions, when one goes up the
other variable goes down.
• See the table associated with this figure 3.1. In this case
the product used for example is Corn, as the price per
bushel of corn reduces (5,4,3,2,1) the quantity demanded
of the corn increases (10, 20, 35, 55, 80).
• As you can see from this figure 3.1 as the price of the product under
consideration changes (while all other variables that can influence
the demand for the product stays the same) we are graphically seen
as moving from one point on a curve to another point on that same
curve i.e. the curve did not shift, we simply go along the curve from
one point to another.
• This is called a CHANGE IN QUANTITY DEMANDED. When price of
the product under consideration is the only changing variable and it
causes us to move from one point on a curve to another point on
the same curve we have experienced a CHANGE IN QUANTITY
• More specifically, when we move DOWN a curve (for instance if the
price goes from $5 to $4 in figure 3.1) we have an INCREASE in
quantity demanded (we go from 10 to 20). If we move UP along
the curve (for instance if the price went from $2 to $3) there is a
DECREASE in quantity demanded (we go from 55 to 35).
• The preceding page recognizes a very
important point: when the only changing
variable is the price of the good under
consideration we have a CHANGE IN
QUANTITY DEMANDED which is seen
graphically as a MOVEMENT from one point
on a demand curve to another point on that
same curve, there is no shift of the curve
caused by a change in market price of the
good being analyzed.
• As was stated previously, there are other variables
other than the price of the good that can also have an
influence on the demand for the product. We noted
things such as income, price of substitute goods,
advertising as examples. When one of these other
variables changes the impact on the demand curve
graph is VERY different than what we saw when price
• When one of these other variables changes the ENTIRE
CURVE SHIFTS, this is called a CHANGE IN DEMAND.
• As an example say you originally had $19 to spend and you wanted to
purchase a number of sweaters. At each potential price your
price/quantity relationship may look like: $10 = 1, $8 = 2, $6 = 3, $4 = 4.
This is all consistent with what had been previously stated, as price comes
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