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Relationship Between Scarcity of Goods and the Law of Demand (Multiple Choice Questions Sample)
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PACC6007 ECONOMICS
Question One. Answers
1.1 Part a
Relationship between Scarcity of Goods and the Law of Demand
When an individual’s motive is expressed as an intention to buy, it becomes a want. Therefore, the law of demand is a theoretical concept that relates the amount of products and services that a customer desires and is able to purchase in a given time at a fixed price (O'Connor 52). On the other hand, scarcity is taken to mean the deficiency in the supply of products and services in the market. The law of demand is still valid even when there is an excess of supply in the market. This is due to the fact that it lowers the willingness of the customer to buy.
Relationship between the Demand Law, Equilibrium in the Market and Price Rationing
The law of demand depends on the availability of products and services in the market. When there is a surplus in the market, there will be a decline in demand from the buyers (Hirshleifer, Glazer and Hirshleifer 97). In a situation such as this, the suppliers will tend to ration the prices so that people can make more purchases. According to the law of demand, people are likely to purchase more products when their price is reduced and vice verse.
The Law of Demand, Supply in the Market and the Efficient Use of Resources’ Concept
The sense of efficient use of resources is likely to diminish when there is no supply shortage in the market (O'Connor 134). First, the manufacturers may end up lowering the price of their products to encourage purchases yet they may have bought the raw materials at a slightly higher cost. Also, people are likely to fall into the temptations of huge purchases due to low cost of products. In the last impact, the products under stock may get spoiled due to low demand. Therefore, all these scenarios indicate that money being a resource is likely to be used inefficiently.
1.2 Part b
The price mechanism is an economic term used to describe the way by which numerous decisions taken by consumers and the producers are used to determine the allocation of scarce resources to demanding situations (Khanna 67). In any society, there are three fundamental problems which face them; scarcity, unemployment and poverty. The price mechanism uses several concepts to control these three societal problems. In rationing mechanism, the price of products is normally increased. In other words, the objective of the rationing is to ensure that there is no scarcity in factors of productions as well as products. This reduces the demand of the affected product consequently bringing scarcity under control because there will be less demands.
Under the transmission of preferences function, the consumers inform the producers about their preferred nature of the products (Khanna 61). In response to this, the producers improve on their productions and increase output due to anticipated high demand. An increase in output translates to more people being employed or few people working more hours and earning extra pay. The effect of this is that the level of income in the society is increased thus reducing poverty and unemployment.
The Limitations of the Market System
One of the drawbacks of the market mechanism is its dependency and generation of inequality in the distribution of incomes (Gemper 91). Another way of explaining this is that the salary of the employees engaged in the production line will depend on how much the society will value the produced goods. If the sales are high, then the staffs are also likely to earn good income and vice verse. The market system is also criticized due to its inability to cope with supply of products or services that are indiscriminate. This is to say that, for instance, if there is a rationing for buying defence goods, the security agency will be incapacitated in their bid to protect the citizens yet the later may lack the ability to make individual purchases.
Question Two. Answers
2.1 Part a
Normally, people will look for luxurious places where they can spend their leisure time. Considering that people are likely to visit a common place, there is a likelihood of shortage or increase in price of facilities (Hirshleifer, Glazer and Hirshleifer 21). The decision by the elderly couple to own a holiday home is justified because they are essentially trying to make their average expenditure constant. If they had not considered this aspect, then they would be forced to bear with future private accommodation crises whenever they need to travel for holiday. The holiday home is also a passive investment that they can sell in future or lease out if they no longer feel like travelling there.
2.1 Part b
Opportunity Cost and Comparative Advantage
Opportunity cost means foregoing some present comforts as a sacrifice for the future. This concept works closely with the comparative advantage economic theory which was first developed by David Ricardo, an English Economist (Mankiw 30). The comparative advantage is mostly used to relate the trade between two countries A and B although a variation can be done to fit the concept in other smaller but controlled environments such as companies.
According to the economists, if the two countries are individually involved in the production of product X and Y, the one that has the greatest ability of producing X should act as the supplier to the weaker one. In turn, the weaker country, but equally stronger in the production of product Y is expected to act as the supplier to the one that produces only X in large quantity (Mankiw 23). Through this strategy, each of the country is able to concentrate more on where its strength lies. At the small scale level, a contracting company may opt to contract another company to complete a given task yet it is also capable of accomplishing the same. There are two possible explanations for these situations. Considering the opportunity cost, the contracting company will take this as an opportunity cost to invest their present resources in other avenues. Still, the company could be avoiding overhead costs of maintaining facilities such as machines and wages or their resale thus preferring to transfer the risk.
The other possible approach for explaining this situation is using the comparative advantage theory. It is possible that the contracted company greater experience in handling the assigned task although, its factors of production may be highly compelling it to charge more. Therefore, the contracting company may weigh the option between the cost of handling the current project with and without contractors and then settle for the former.
Question Three. Answers
The Price Floor and Price Ceiling
The price floor and price ceiling are both government attempts to influence the forces of demand that the market has failed to achieve (Krugman, Wells and Graddy 83). Price floor represents the lowest price that a given product will fetch in the market while price ceiling stands for the highest price that a given product will cost in the market.
Usually, the price ceiling is set below the equilibrium price as a mechanism of lowering the cost of certain goods so that they are eventually affordable to people. Similarly, the price floor is normally set above the minimum/equilibrium price of certain products as a protective measure to some unproductive sectors of the economy.
Basically, when the government sets a price ceiling, commodities become expensive to buy. Consequently, there will be less people demanding the same commodity which will force the producers to ration its supply in the market. Likewise, if the government sets the floor price, commodities become more affordable in the market. In the long run, there will be a rise in demand which is likely to lead to rationing in the market. Figure 1 below summarises this concept using graphs.
Figure 1 depicting price ceiling in part A and price floor in part B
Price ceilings and price floors have their weaknesses in the market. For instance, consider a scenario whereby the government has passed a regulation that farmers should receive a price that is higher than the market price for their crop. Such an action will lead to a decline in demand due to excess supply in the market. Since this will mean that the farmers will be unable to reap maximum returns, few of them will venture in farming in the next season leading to a shortage.
Question Four. Answers
4.1 Part a
The linear demand curve relates the price of commodities to the quantity that the consumers are likely to demand at a given instance. According to the linear demand function, the demand of certain products (g...
Instructor
Course
Date
PACC6007 ECONOMICS
Question One. Answers
1.1 Part a
Relationship between Scarcity of Goods and the Law of Demand
When an individual’s motive is expressed as an intention to buy, it becomes a want. Therefore, the law of demand is a theoretical concept that relates the amount of products and services that a customer desires and is able to purchase in a given time at a fixed price (O'Connor 52). On the other hand, scarcity is taken to mean the deficiency in the supply of products and services in the market. The law of demand is still valid even when there is an excess of supply in the market. This is due to the fact that it lowers the willingness of the customer to buy.
Relationship between the Demand Law, Equilibrium in the Market and Price Rationing
The law of demand depends on the availability of products and services in the market. When there is a surplus in the market, there will be a decline in demand from the buyers (Hirshleifer, Glazer and Hirshleifer 97). In a situation such as this, the suppliers will tend to ration the prices so that people can make more purchases. According to the law of demand, people are likely to purchase more products when their price is reduced and vice verse.
The Law of Demand, Supply in the Market and the Efficient Use of Resources’ Concept
The sense of efficient use of resources is likely to diminish when there is no supply shortage in the market (O'Connor 134). First, the manufacturers may end up lowering the price of their products to encourage purchases yet they may have bought the raw materials at a slightly higher cost. Also, people are likely to fall into the temptations of huge purchases due to low cost of products. In the last impact, the products under stock may get spoiled due to low demand. Therefore, all these scenarios indicate that money being a resource is likely to be used inefficiently.
1.2 Part b
The price mechanism is an economic term used to describe the way by which numerous decisions taken by consumers and the producers are used to determine the allocation of scarce resources to demanding situations (Khanna 67). In any society, there are three fundamental problems which face them; scarcity, unemployment and poverty. The price mechanism uses several concepts to control these three societal problems. In rationing mechanism, the price of products is normally increased. In other words, the objective of the rationing is to ensure that there is no scarcity in factors of productions as well as products. This reduces the demand of the affected product consequently bringing scarcity under control because there will be less demands.
Under the transmission of preferences function, the consumers inform the producers about their preferred nature of the products (Khanna 61). In response to this, the producers improve on their productions and increase output due to anticipated high demand. An increase in output translates to more people being employed or few people working more hours and earning extra pay. The effect of this is that the level of income in the society is increased thus reducing poverty and unemployment.
The Limitations of the Market System
One of the drawbacks of the market mechanism is its dependency and generation of inequality in the distribution of incomes (Gemper 91). Another way of explaining this is that the salary of the employees engaged in the production line will depend on how much the society will value the produced goods. If the sales are high, then the staffs are also likely to earn good income and vice verse. The market system is also criticized due to its inability to cope with supply of products or services that are indiscriminate. This is to say that, for instance, if there is a rationing for buying defence goods, the security agency will be incapacitated in their bid to protect the citizens yet the later may lack the ability to make individual purchases.
Question Two. Answers
2.1 Part a
Normally, people will look for luxurious places where they can spend their leisure time. Considering that people are likely to visit a common place, there is a likelihood of shortage or increase in price of facilities (Hirshleifer, Glazer and Hirshleifer 21). The decision by the elderly couple to own a holiday home is justified because they are essentially trying to make their average expenditure constant. If they had not considered this aspect, then they would be forced to bear with future private accommodation crises whenever they need to travel for holiday. The holiday home is also a passive investment that they can sell in future or lease out if they no longer feel like travelling there.
2.1 Part b
Opportunity Cost and Comparative Advantage
Opportunity cost means foregoing some present comforts as a sacrifice for the future. This concept works closely with the comparative advantage economic theory which was first developed by David Ricardo, an English Economist (Mankiw 30). The comparative advantage is mostly used to relate the trade between two countries A and B although a variation can be done to fit the concept in other smaller but controlled environments such as companies.
According to the economists, if the two countries are individually involved in the production of product X and Y, the one that has the greatest ability of producing X should act as the supplier to the weaker one. In turn, the weaker country, but equally stronger in the production of product Y is expected to act as the supplier to the one that produces only X in large quantity (Mankiw 23). Through this strategy, each of the country is able to concentrate more on where its strength lies. At the small scale level, a contracting company may opt to contract another company to complete a given task yet it is also capable of accomplishing the same. There are two possible explanations for these situations. Considering the opportunity cost, the contracting company will take this as an opportunity cost to invest their present resources in other avenues. Still, the company could be avoiding overhead costs of maintaining facilities such as machines and wages or their resale thus preferring to transfer the risk.
The other possible approach for explaining this situation is using the comparative advantage theory. It is possible that the contracted company greater experience in handling the assigned task although, its factors of production may be highly compelling it to charge more. Therefore, the contracting company may weigh the option between the cost of handling the current project with and without contractors and then settle for the former.
Question Three. Answers
The Price Floor and Price Ceiling
The price floor and price ceiling are both government attempts to influence the forces of demand that the market has failed to achieve (Krugman, Wells and Graddy 83). Price floor represents the lowest price that a given product will fetch in the market while price ceiling stands for the highest price that a given product will cost in the market.
Usually, the price ceiling is set below the equilibrium price as a mechanism of lowering the cost of certain goods so that they are eventually affordable to people. Similarly, the price floor is normally set above the minimum/equilibrium price of certain products as a protective measure to some unproductive sectors of the economy.
Basically, when the government sets a price ceiling, commodities become expensive to buy. Consequently, there will be less people demanding the same commodity which will force the producers to ration its supply in the market. Likewise, if the government sets the floor price, commodities become more affordable in the market. In the long run, there will be a rise in demand which is likely to lead to rationing in the market. Figure 1 below summarises this concept using graphs.
Figure 1 depicting price ceiling in part A and price floor in part B
Price ceilings and price floors have their weaknesses in the market. For instance, consider a scenario whereby the government has passed a regulation that farmers should receive a price that is higher than the market price for their crop. Such an action will lead to a decline in demand due to excess supply in the market. Since this will mean that the farmers will be unable to reap maximum returns, few of them will venture in farming in the next season leading to a shortage.
Question Four. Answers
4.1 Part a
The linear demand curve relates the price of commodities to the quantity that the consumers are likely to demand at a given instance. According to the linear demand function, the demand of certain products (g...
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