Question

1. (a) What determines the price in a market?

      (b) Why is this price considered efficient?

      (c) Why do prices in markets rise and fall?

      (d) Why is it actually wrong to say that “If the price in a market increases, then that’s a bad thing?

2. (a) In economics, what are inferior goods?

      (b) Are inferior goods always of inferior quality?

      (c) In the market for adult entertainment, identify two goods that are substitutes.

      (d) In the market for plastic surgery, identify two goods that are complements.

      (e) In our example from class, why did one pizzeria supply pies at a lower price, but Hiram’s pizza          

            only supplied pizza pies when then price was higher?  (Show this on a graph)

(3) For each part of this question, draw a supply and demand graph and show the effect of a change either in supply or demand for the market’s equilibrium price and quantity: (Label the axes of each graph and the different demand and supply curves that you are drawing.  Also label the old equilibrium price and quantity and the new equilibrium price and quantity.)

1. the market for oranges, when the price of apples falls

2. the market for cellphones when new technology is developed to make the manufacturing of cell phones much cheaper

c) The market for luxury restaurant meals when a booming economy leads to the average family making a lot more income

Answer 1

I will answer first 4 subparts according to Chegg policy. Please post the question again asking for the rest, Thanks.

a) The supply and demand of the goods determine the market price of the good. The supply side forces are production costs and demand side forces are the goods' expected utility and the opportunity cost(In terms of what other goods can be bought). A supply curve is typically upward sloping signifying that sellers are willing to sell higher quantities at higher prices and demand curves are typically downward sloping indicating that consumers demand less as the price increases. The market price is decided by the equilibrium point at which they intersect.

b) This price is considered efficient as at this price, the quantity the suppliers are willing to supply is equal to the quantity the consumers are demanding. Thus the market is efficient and there is no excess demand or supply which is going unused.

c) The prices in market rise and fall due to changes in price of inputs like labor and capital affecting the supply side and other forces like prices of substitute or complement goods or other information that may impact the demand curve. All of these can cause variations in the equilibrium and may affect the market price and may cause it to rise and fall.

d) It is wrong to say that the increase in market prices of a good is always a bad thing as it is not necessary to be a bad thing. .It is possible increase in prices leads to increase in supply and more of good is being produced whereas it may not be produced at its optimal quantity before. It may also lead to increase in social welfare(Determined by sum of consumer and producer surplus) if it moves towards a more optimal level of production.

Hope it helps. Do ask for any clarifications required.