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Problem set ii
1. ECON 312: Principlesof Economics
Problem Set Two:
Professor: Sharleen H. Rajput
E-mail: srajput@devry.edu
Please e-mail your assignment back to me by May 20th no later than 10pm. Any late
submissions will not be accepted. If you are unable to submit yourassignment please email
me ASAP with your explanation.
Provide Short Answers for the following:
Question One:
Contrast how a market systemand a command economy try to cope with economic scarcity?
Please explain this in your own words and provide an economic based example?
A free market allocates resources through the price mechanism. A market Economy relies on
factors such as private ownership to determine market prices. Individuals act within their own
self-interest to make the most money as possible through the decisions they make for
consumption or production. This creates a competitive market and scattered economic power.
A command economy copes with scarcity through central planning. Production is determined
by a government appointed committee.
An example would be that an increase indemandforNike sneakersraisesthe price andprompts
organizationsto utilize additional resourcesintothe productionof those sneakers.
Question Two:
Distinguish between the resource market and the product market in the circular flow diagram?
In what way are business and households buyers and sellers in this model?
Resource Market is when the household sell their resources to a business. In product markets
businesses sell products to the household. Businesses and households are buyers and sellers in
this model because households own all economic resources and will sell these resources to the
business for profit. Business buys these resources to produce a service or good.
Question Three:
Why does the demand curve slope downwards? Always helpful to use an economic example to
explain this
There are three prominent reasons for the demand curve to slope downwards.
The income effect - the income effectsaysthat,whenthe price of goods decrease whatconsumers
can buy withtheirmoney income- risesandconsumersincrease theirdemand.
Substitution effect- If the price of one comparable good falls, becoming less expensive
consumers will switch from one good to the less expensive comparable brand. For example
Tide and Xtra detergent are the same price, so I choose to buy Tide, however Xtra lowers its
price. Now instead of buying tide I buy Xtra because it is cheaper.
2. Diminishing Marginal Utility which states that the more a product is consumed the additional
benefit of the product falls. For example if I am extremely thirsty I will pay a high price for the
first bottle of water. However, the more water I drink the less I am willing to pay for it.
Question Four:
Why does the supply curve slope upwards? Always helpful to use an economic example to
explain this
A slope curve will increase because of an increase in input prices as well as the amounts of goods and
services increasing over time. When this happens an incentive is created for producer to create a greater
quantity of that good, when a large amount of goods are supplied the cost of production falls.
Question Five:
Explain how market failures present governments with the opportunity to improve the
allocation of society's resources? Failure makes way for innovation and rebirth.