Macroeconomics Assignment 1

Course code: ECO-111-GS003

Course name: Macroeconomics

Assignment 1

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

Prices are the mechanism which the “invisible hand” pushes markets to equilibrium. Buyers look at the price when deciding how much to purchase, and sellers look at the price when deciding how much to stock. Thus, prices reflect both the value of the good and the cost of making the good. Prices adjust so buyers and sellers can reach compromises that maximize society’s well-being.

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

The first main cause of market failure is an externality, which is the impact of the actions of one person or group on the wellbeing of a bystander. An example would be pollution. The polluter, whether it’s a company dumping waste in a river or a person driving a car, does not pay the price for the pollution. The company won’t lose revenue and the driver won’t pay extra the next time he or she fills the tank. However, the pollution will harm others in society. The dumped waste could kill wildlife in the river and the car emissions increase the greenhouse gasses in the atmosphere.

The second cause of market failure is market power, or when one person (or a small group) has a considerable impact on market prices. Any company having a monopoly (like Ford being the only automobile maker in America) would be an example of market power, since there would be no competition between companies to keep the one company’s self-interest at bay.

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.)

An economy only has a limited amount of resources to use produce goods. An economy can never use more resources than it has...