Exam 4: Demand and Supply Applications

Explain how the price system eliminates a shortage.

When is the price of a product demand determined?

Many people are offended when they learn that the CEO of a charitable organization makes a salary commensurate with a CEO of a private company that is run for profit. Explain why it would be a mistake for charitable organizations to pay their CEOs less than companies that are driven by profit?

List some types of non-price rationing systems.

Suppose the demand for bananas increases. Explain how the price of bananas adjusts after the increase in demand.

Explain what the phrase "price rationing" means.

Most modern countries have prohibitions on the trading of human organs in the marketplace. What impact do you believe such laws have had on the availability of organs for patients that need them? Furthermore, which people are most likely to be able to obtain the organs that they require and why? Explain the ethical dilemma that is at work that makes the strict application of basic economic principles difficult to put into practice in cases like this.

What two important functions are performed by the price system?

The rash of hurricanes that pelted the Gulf Coast in 2005 resulted in a large decline in gasoline production as many offshore rigs were shut down and many refineries were taken off line while waiting out the hurricane. The decrease in supplies of gasoline led to a run up in prices. Many voters clamored for relief by calling on their congressman and senators to enact temporary price controls. Analyze the impact on the gasoline market that would have transpired had politicians actually headed the calls by voters to impose price controls on gasoline.

How does price serve as a signal to resource owners?

Assume the government is concerned about the high price of Atlantic Red Crab and announces that it is going to shorten the fishing season to one week. What impact will this have on the quantity of crab caught and the price of crab? Will this actually result in greater protection of the Atlantic Red Crab?

Colleges and universities often do not pay salaries that are market-driven. For example, it is typical for a history professor to make the same as an economics professor. What kinds of problems are likely to result from this kind of a pay scale?

Explain how the price system eliminates a surplus.

Explain what will happen when the government imposes a minimum price that is below the market equilibrium price. Why is this true?

Explain how low-skilled workers might actually be made worse off from a minimum wage law in terms of working conditions and job training. In addition, what might be the long-run impact on wages and earnings?

Critically evaluate the following statement. "It's better to make people wait in line than it is to make them have to pay more for the product."

Explain what a black market is and how it functions. What is a black market generally a response to?