Macroeconomics

Written Assignment 1

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

Market forces of supply and demand.

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

Market failure can be caused by Externality and Market Power. Externality is when one person’s actions can affect the whole economy. Market Power is when a small group of people has a strong impact on the economy.

3 Use a production possibilities frontier (PPF) 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.)

A market that is running on a PPF is said to be efficient, that is, that the production of all products is at 100% without affecting other products. Typically in a PPF there will be some points that show at which production rate these goods can be produced more efficiently. There might be a point that is outside of the PPF curve, in which case it will be indicative of production that is not realistic in light of the current resources. Or a point below the curve which will show that production is below what is expected considering the resources available.

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

Positive statements do not have to be correct, but they need to be based on something tangible, and thus tested and be able to be proved or disproved. Normative statements are based on speculation or opinion and thus cannot be proven.

An example of a positive statement would be for example that fact that if oil prices go up, the amount of driving done by people will decrease. An example of a normative statement would be for example to say that the retirement age should increase because people are living longer.

5 Explain how absolute advantage differs from comparative advantage.

Absolute advantage...