Unit_4_Mid-Term

1 Geraldine Spinner BU204-1 Unit 4- Midterm January 9, 2011 2 Atlantis is a small, isolated island in the South Atlantic. They grow potatoes and catches fish, given their limited resources and available technology, they use more of resources for potato production; there are fewer resources available for catching fish. Below is a graph describing their production possibilities! Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes' Atlantis cannot produce 500 pounds of fish and 800 pounds of potatoes, because if they produce 500 pounds of fish, then the most potatoes they would be able to produce is 600 pounds. Therefore, this point would lie outside the production possibility frontier at point G. The opportunity cost of increasing the annual output of potatoes from 600 to 800 would be 200 pounds of fish. So therefore, if Atlantis increases their output from 600 to 800 pounds of potatoes, it will have to cut the fish production from 500 to 300 pounds and that’s a difference of 200 pounds. If Atlantis would increase the output from 200 to 400 pounds of potatoes, they could only get 50 pounds of fish. The fish production is now 650 pounds, they would have to cut that to 600 pounds. We can see that the more potatoes Atlantis produce, the more the opportunity 3 cost is, as you grow more potatoes, you have to use less land that would be suitable to do it. Because you have to divert more resources away from the fishing as more potatoes is grown, as a result you produce less fish. This implies that the production possibility frontier will become higher the more you move to the right. Peter Pundit, an economics reporter, states that the European Union (ER) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that the output from EU in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU. This statement from Peter Pundit is not correct. Even if the EU had an absolute advantage over the United States in all products it produces, the United States would still have a comparative advantage in some of the products. Trade will make the EU and the United States better. Therefore, the United States should keep producing the products. Peter Pundit is confused about the difference between absolute and comparative advantage. If the EU and the United States continue to trade, it should result in the EU export their goods would have the comparative advantage and the United States export their goods would have the comparative advantage also. The market price of goods is determined by both the supply and demand for it. In 1860, English economist Alfred Marshall published his work, Principles of economics, which was one of the earlier writing on how both supply and demand interacted to determine price. Today, the supply- demand model is one of the fundamental concepts of economics. The price level of a good essentially is determined by the point at which quality supplied equals quality demanded. (NetMBA, 2010). Thinking, of Maine and the United States and the sell of lobsters. 4 Below you will find the demand curve and the supply curve for Maine lobsters; also you will find the equilibrium price and quantity of lobsters. The equilibrium price of the lobster is $15 per pound and the equilibrium quantity is 600 pounds. Now, what if the Maine lobsters could be sold in France' What is the demand schedule for Maine lobster now that the French consumers can also purchase them, and what will happen to the price at which fishermen can sell lobster' Also about the US consumers, what will happen to the price and quantity' The graph below will explain……. 5 As you can see, you can get the demand schedule by adding together at any price given, the quantity demanded by American consumers and the quantity demanded by the French consumers. Therefore the new equilibrium price of the lobster is $20 per pound and the new equilibrium quantity is 700 pounds. The Maine fishermen would come out better if they sell to the French consumers, they would sell more lobsters at a higher price than they did before. When it comes to the U.S. consumers, they would be worst, because they will have to pay more for the lobster, when before they only paid $15 per pound and this time they have to pay $20 per pound and resulting in just consuming 400 pounds verses 600 pounds. The supply and demand model is based on the principle that the price in a market moves to its equilibrium price, or market clearing level, the price at which the quantity demanded is equal to the quantity supplied. This quantity is the equilibrium quantity. 6 When the price is above its market clearing level, there is surplus that pushes the price down. When the price is below its market clearing level, there is a shortage that pushes the price up( Unit 3 seminar, 2011). The European governments tend to make greater use of price controls than does the American government. The French government sets minimum starting yearly wages for new hires that have completed le BAC, certification roughly equivalent to a high school diploma. I will demonstrate in the absence of government interference, the equilibrium wage and the number of graduates that will be hired per year, also if there will be anyone seeking a job at the equilibrium wage. As you can see the equilibrium wage is shown being $30,000 and there are 290,000 workers being hired. With a minimum wage of $35,000, there are 60,000 of surplus workers, the quality 7 Supplied is 310,000 and the quality demanded is 250,000, the number of workers who is involuntarily unemployed. The minimum wage is 40,000, the surplus is 100,000, and this is how many involuntarily unemployed workers there are. The higher the minimum wage the larger amount of involuntary unemployment. The ones who would benefit from this are those workers who succeed in getting hired. But, there are workers who did not get hired, if the market was allowed to reach equilibrium, and then more workers could be employed. The workers lose, but the employer loses also because now fewer of them can afford to hire workers and they will have to pay higher wages. The missed opportunity in all this is that there are workers who want to work even if the wages is lower than minimum wage and companies that were willing to hire them at a lower wage, but the law states that a company is not allowed to hire anyone below minimum wage. Therefore the worker that was willing to work was not hired. A price floor, a minimum market price above the equilibrium price, benefits successful sellers but creates persistent surplus. Price floors lead to inefficiencies in the form of deadweight loss from inefficiently low quantity, inefficient allocation of sales among sellers, wasted resources, and inefficiently high quality (Unit 3 seminar, 2011). ------------------------------------------------- The government set a price floor for $5 per bushel, the quantity of corn supply is 1,200 bushels. The quantity demand is 800 bushels and there is a surplus of 400 bushels. The government would have to buy 400 bushels at the price of $5 each and the program cost would cost the government 400 x $5 = $2,000. The revenue the corn farmers would receive $6,000 in revenue which is the corn farmers sell 1,200 bushels, that is about 800 to the consumers and 400 to the government so you would multiply 1,200 by $5. If the government would set a target price of $5, the market reaches equilibrium at the price of # and a quantity of 1,000 bushels. There would be no surplus or shortage. The government does not purchase any corn. Reference Macroeconomics (2011). Unit 3 Seminar. Kaplan University Net MBA, 2010. The Supply and Demand Business Knowledge Center. Retrieved June 12, 2011 from http://www.netmba.com/eco/micro/supply-demand