Economics: Feasibility and Supply Shock
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Questions and Answers

What does it mean for production to be feasible?

  • Production uses some resources inefficiently.
  • Production is outside of the PPF.
  • Production is within or on the PPF. (correct)
  • Production is below the PPF.

    • Which statement accurately describes comparative advantage?

  • It produces goods at a higher cost than competitors.
  • It involves no opportunity cost.
  • It allows producing more at the same cost or at a lower cost. (correct)
  • It is irrelevant when trade is advantageous.

    • What effect does a supply shock, such as a drought, have on the supply curve?

  • It does not affect the supply curve.
  • It results in a parallel shift of the supply curve.
  • It shifts the supply curve left, increasing price. (correct)
  • It shifts the supply curve right, decreasing price.

    • What happens when a binding price ceiling is implemented?

    <p>It creates excess demand (shortage).</p> Signup and view all the answers

    How is consumer surplus defined?

    <p>The difference between the maximum price a buyer is willing to pay and the actual price paid.</p> Signup and view all the answers

    What is an effective price floor?

    <p>A minimum price set above the equilibrium price that creates excess supply.</p> Signup and view all the answers

    In the equations provided, what does the aggregate demand (AD) formula represent?

    <p>The combined demand from both consumers and sellers.</p> Signup and view all the answers

    What does a slope in a production possibilities graph generally represent?

    <p>Opportunity cost of one good for another.</p> Signup and view all the answers

    Study Notes

    Feasible?

    • Solving 5 math problems or watching 20 TV episodes is feasible.
    • Solving one math problem takes the same time as watching 2 TV episodes.
    • Number of TV episodes (E) and math problems (M) to be feasible must satisfy the equation: M = 5 - 0.5E.
    • Calculations for various combinations show some are feasible, others aren't
    • Comparative advantage (CA) exists when one party can produce something at a lower opportunity cost (or same cost) than another. No gain or trade if the slopes are the same
    • Example: Alice creates paintings, Donna creates teacups, if they trade they should specialize in what they are better at

    Supply Shock

    • A drought reduces production of goods like seeds, changing the supply curve.
    • A recession reduces consumers earnings, changing the demand curve
    • The effects combine to affect price and quantity

    Aggregate Demand (AD)

    • AD curve and demand curve 2 are represented on a graph
    • The intersection determines price and quantity

    Consumer Surplus

    • MD (demand): Qd = 280-2P
    • MS (supply): Qs = P-10
    • Binding condition is where the supply and demand curves cross for the points being discussed.
    • Consumer surplus (CS) = ½ base x height
    • Calculation shows a value for CS related to a particular set of data.

    Willingness and Producer Surplus

    • Willingness to pay is the maximum amount someone is willing to pay for something.
    • Producer surplus is the revenue minus the seller's cost.

    Effective Price Floor/Ceiling

    • Effective price floor is a minimum price, above equilibrium, creating excess supply
    • Effective price ceiling is maximum price below equilibrium, leading to excess demand
    • Price floors or ceilings cause deadweight loss (DWL)

    Elasticity

    • Elasticity measures the responsiveness of Qd to changes in price
    • If the price elasticity of supply is greater than 1, then the supply is elastic
    • If the price elasticity of suppy is smaller than 1, then the supply is inelastic
    • If |Es| = 1, the supply is unit elastic
    • Negative income elasticity of demand means that the good is inferior.
    • Positive income elasticity of demand means that the good is normal.

    Marginal Revenue (MR)

    • MR=dTR/dQ
    • Profit = TR - TC
    • TR = Total Revenue, P x Q
    • TC = Total Cost, FC + VC
    • VC = Variable Cost
    • MC = Marginal Cost, ΔTC/ΔQ

    Utility Maximization

    • Calculations to determine the point of greatest utility satisfying constraints are provided.

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    Description

    This quiz explores key concepts in economics, including feasibility of solving problems versus watching TV, the impact of supply shocks, and aggregate demand curves. Test your understanding of comparative advantage and how various factors influence market dynamics.

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