There are two major kinds of government interventions in markets: price controls and quantity controls. The government intervenes to regulate prices by imposing price controls, which are legal restrictions on how high or low a market price may go. Price ceiling is the maximum price sellers are allowed to charge for a good or service whereas price floor is the minimum price buyers are required to pay for a good or service.
Price and quantity controls may have adverse impacts on productive and allocative (marketing) efficiency. However, price and quantity controls are used despite their well-known problems.
Based on the reading in Chapter 3 on price ceiling and price floor, explain the impacts of the following price control measures.
What would happen to the supply and demand of Super Bowl tickets if the government mandated that no more than $20 a ticket could be charged?
What would happen if a law passed dictating that kindergarten teachers could make no less than $100,000 per year?
A fundamental assumption for economic analysis is that economic agents, be it an individual, a household or a firm/business, tend to make choices and select alternatives rationally. The rational economic choice (decision) implies that people are driven by the rational pursuit of self-interest, and engaged in economic decisions to maximize this self-interest.
By rational economic choice, economists mean that people try to make the best choice they can, given the available resources at their disposals (money, time, etc.) and information.
Self-interest is when individuals make economic decisions that are in their own best interest. On the other hand, social interest is when choices are made that benefit society as a whole. Economists argue that social interest can be attained by individual decision makers acting in their own self-interest. This process is what Adam Smith called the invisible hand, which has been the foundation of the market economy.
Create an example to demonstrate how an individual or firm acting out of self-interest to maximize profits by offering goods or services in economic markets benefit consumers – even if they do not care about them. In other words, how does self-interest help achieve society’s economic goals?
What is the relationship between self-interest and social interest in the economic decision (economic choice) process? Is there a conflict between the two in the economic world?
Assignment and Case Study
GB540: Economics for Global Decision Makers
Prof: Tilahun Ayanou
All problems below are to be completed and submitted to the Unit 1 Dropbox by the end of Unit 1.
Problem #1: Using either a graph or table (Refer to pages 11-15 for help with graphs and tables) use two goods to construct a production possibilities curve. Clearly explain what a variety of different points on the curve mean. What would make the curve expand or contract? Why is efficiency lost at the extremes, as when substantially more of one good and very little of another is produced?
Problem #2 Part A: Go to the internet auction site eBay® at www.ebay.comand select the category Jewelry and Watches, followed by Loose Diamonds and Gemstones, and then Diamonds, Natural. How many natural diamonds are for sale at the moment? Note the wide array of sizes and prices of the diamonds. In what sense is there competition among the sellers in this market? How does that competition influence prices? In what sense is there competition among buyers? How does that competition influence prices?
Problem #2: Part B) Describe what would happen if an outside agency determined the prices eBay could charge.
Problem #3: Read the “LAST word” feature on markets for human organs on Pages 62–63 of your text. Next, select a social problem where free markets are not allowed to function and describe how free market features could be introduced to help alleviate the problem. As part of your answer also include a discussion of the risks of introducing market mechanisms in situations where ethical issues are present. Your answer should be approximately two pages long and in APA format.
(Note: You can write about social problems where the free markets are not allowed to function, which includes the market for a particular illegal good or service, a regulated market, etc.).
GB540 Unit 1 Assignment Rubric
Content and Analysis
Problem # 1 · Graph or table to illustrate a production possibilities curve · Meaningful description of a variety of different points on the curve. · Explanation of what would make the curve expand or contract. · Explanation of why efficiency is lost at the extremes, (i.e., substantially more of one good and very little of another is produced).
Problem # 2 · Comprehensive discussion of the availability of natural diamonds as a component of supply in a competitive market and how it influences price. · Comprehensive discussion the demand for natural diamonds in a competitive market and how it influences the price. · Description of what would happen if an outside agency determined the prices eBay could charge.
Problem # 3 · Introduction and Conclusion
· Social problem identified where free markets are not allowed to function.
· Description of how free market features could be introduced to help alleviate the problem.
· Two pages in length
Writing Style, Grammar, APA Format
Economist Joseph Schumpeter, who taught at Harvard from 1932 until his death in 1950, popularized the term “creative destruction” to describe the capitalist process in which entrepreneurs introduce new goods and services to economic markets that displace existing goods and services. Though this innovative process results in increased wealth and better standards of living overall, not everybody benefits equally. The opportunity cost of buying a newly available product is the use of the old one that has been given up, so those in the camp of the new, different, and desirable do very well, while those camped out with the old and no longer desirable products see their prospects decline.
Provide an example of creative destruction you have witnessed during your lifetime and describe what the benefits and costs to the economy have been. Who was enriched and whose fortunes declined? Construct thoughtful, detailed responses to the cases contributed by at least three of your classmates.