Eco-101 Written Assignment

ECO-111

Written Assignment #1

1. What is the mechanism by which the "invisible hand" pushes markets to equilibrium?

Prices is what drives economic activity in the market. Prices will be determined by what the good or service is worth to the buyer and how much the seller believes the consumer is willing to pay. “Invisible hand” is a description used because the free market is at work with no government intervention.

2. Explain the two main causes of market failure and give an example of each.

Externality and market power are the two main causes of market failure. Pollution is an example given in the text. Pollution itself may not cause a corporation any money but it will negatively effect the population in the surrounding area. Or Star Trek terms, the Vulcans find humans illogical because we believe “the needs of the one outweigh the needs of the many.” A good example of market power is monopolies. If there isn’t enough competition, a single entity is able to dictate the price (unlike the invisible hand). A monopoly will create a decrease in demand and thus negatively effect the market. It’s why we have legislation to help prevent monopolies or company mergers that could lead to the path of a monopoly.

3. Use a production possibilities frontier to describe efficiency. (This question can be answered either with or without the use of a graph, depending on whether you have a graphing program on your computer. It is possible to describe the various points on the PPF without a graph.)

Resources, money, and labor are a few factors for the production possibilities frontier. Trade is a way for two entities to maximize their production (comparative and absolute advantage). If the United States is better at producing barrels of oil, and China is better at making car stereos, the two countries can trade and thus maximize their output.

4. What is the difference between a positive and a normative statement? Give an example of each.

Positive...