# Economics Study Set 18

## Quiz 3 :Demand, Supply, and the Market Process

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Do business firms operating in competitive markets have a strong incentive to serve the interest of consumers? Are they motivated by a strong desire to help consumers? Are "good intentions" necessary if individuals are going to engage in actions that are helpful to others? Discuss.
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Present day market is consumer dominated. This means that a consumer either makes or destroys a business. If a business has to flourish it has to provide the consumers what is demanded by them with good quality and competitive price. This provides the business firms a strong incentive to serve the interests of consumers by adopting efficient production techniques and cost saving technology.
The business firms trade in goods and services in order to maximize their profits. There is less inclination towards provision of goods and services that are needed by the consumers. However, the business firms must be motivated to help the consumers in order to help themselves i.e. achieving the goal of profit maximization.
No, good intentions are not the single factor that is present behind helping others.

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What factors determine the cost of producing a good or service? Will producers continue to supply a good or service if consumers are unwilling to pay a price sufficient to cover the cost?
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The cost of producing a good or service depends upon certain factors. Theses are:
1. The cost of labor and inputs used in the production process: if the cost of labor and inputs goes high, the cost of production will increase and the supply of the product shall reduce.
2. The government's taxation or subsidy policy: if the government increases the taxes on the production of a commodity, it shall increase the cost of production and decrease the supply of the product.
The producers shall continue to supply the product at a price that is able to recover the variable cost of production even if the consumers are unwilling to a price sufficient to cover the cost.

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Are prices an accurate measure of a good's total value? Are prices an accurate measure of a good's marginal value? What's the difference? Can you think of a good that has high total value but low marginal value? Use this concept to explain why professional wrestlers earn more than nurses, despite the fact that it is virtually certain that nurses create more total value for society than do wrestlers.
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The price of a commodity helps in the calculation of the total value of a product. However, it is not its accurate measure. The prices are an accurate measure of a good's marginal value only. This is so because while doing a marginal analysis of a product, it is the marginal utility of the product that decides the price that a consumer would be willing to pay for it. As soon as the consumer stops deriving additional satisfaction from the use of a commodity, he or she will stop paying the price of the commodity.
The example of a good that has high total value but low marginal value is water.
The professional wrestlers earn additionally on the basis of their performance. The more addition they make to the entertainment of the people who come for watch the wrestling, they are highly paid. On the other hand, nurses are paid on the basis of their total service for the organization. There is no such additional contribution valuation of their services.

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What is being held constant when the supply curve is constructed for a specific good like pizza or automobiles? Explain why the supply curve for a good slopes upward to the right.
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What is the law of supply? How many of the following "goods" do you think conform to the general law of supply? Explain your answer in each case. a. gasoline b. cheating on exams c. political favors from legislators d. the services of heart specialists e. children f. legal divorces
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Define consumer surplus and producer surplus. What is meant by economic efficiency, and how does it relate to the gains of consumers and producers?
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How is the market price of a good determined? When the market for a product is in equilibrium, how will consumers value an additional unit compared to the opportunity cost of producing that unit? Why is this important?
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"Production should be for people and not for profit." Answer the following questions concerning this statement: a. If production is profitable, are people helped or harmed? Explain. b. Are people helped more if production results in a loss than if it leads to profit? Is there a conflict between production for people and production for profit?
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What is the invisible hand principle? Does it indicate that self-interested behavior within markets will result in actions that are beneficial to others? What conditions are necessary for the invisible hand to work well? Why are these conditions important?
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Do business firms operating in competitive markets have a strong incentive to serve the interest of consumers? Are they motivated by a strong desire to help consumers? Are "good intentions" necessary if individuals are going to engage in actions that are helpful to others? Discuss.
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What's wrong with this way of thinking? "Economists argue that lower prices will result in fewer units being supplied. However, there are exceptions to this rule. For example, in 1972, a very simple 10-digit electronic calculator sold for $120. By 2000, the price of the same type of calculator had declined to less than$5. Yet business firms produced and sold many more calculators in 2000 than they did in 1972. Lower prices did not result in less production or in a decline in the number of calculators supplied."
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What must an entrepreneur do to earn a profit? How do the actions of firms earning profits influence the value of resources? What happens to the value of resources when losses are present? If a firm making losses goes out of business, is this bad? Why or why not?
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Which of the following do you think would lead to an increase in the current demand for beef? a. higher pork prices B) higher consumer income C) higher prices of feed grains used to feed cattle D) widespread outbreak of mad cow or hoof-and-mouth disease E) an increase in the price of beef
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What is the difference between substitutes and complements? Indicate two goods that are substitutes for each other. Indicate two goods that are complements.
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What is being held constant when a demand curve for a specific product (shoes or apples, for example) is constructed? Explain why the demand curve for a product slopes downward to the right.
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If General Motors (GM) is earning losses, should the government step in to keep them in business with a taxpayer subsidy? What does the presence of losses say about how consumers value the company's output relative to its cost of production? Be sure to address the effects of the policy on GM's competitors, both domestic and foreign.
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