ECON 262
What Do Markets Do/Economic Calculation and Demand/Supply and Shortages/Surpluses
1. What do markets do (generally speaking)?
2. How do producers in markets determine where resources should be allocated (this relates to "economic calculation")?
3. What knowledge is generated and utilized in markets when resources are allocated? Think about both sides of the market.
4. What is a market clearing price? What is happening regarding inventories at that price?
5. What are inventory costs and where do they come from?
6. What is a shortage? What does it signal suppliers to do and why?
7. What is a surplus? What does it signal suppliers to do and why?
8. Assume the market clearing price is $5.00 for deli sandwiches and the amount of exchange that would take place at that price is 200 deli sandwiches per day. You, however, don't have this information and have just opened your deli. You decide to price your sandwiches at $9.00 and are willing and able to sell 285 sandwiches per day at that price. When you do this, you notice you sell 100 sandwiches per day. Draw this situation on a graph and then explain what will happen in this market -- i.e., if there is a shortage or surplus, show this on the graph and then explain what the shortage or surplus will cause to happen in the market. Make sure you talk about inventories in your answer.
9. Draw a situation where there is a shortage in the market for eggs. Then explain what will happen in this market (if there are no price controls).
10. If the government puts a price floor on the market for corn below the market clearing price, what will happen in the market? Explain using words and a graph.
11. If the government puts a price ceiling on the market for race cars below the market clearing price, what will happen in the market? Explain using words and a graph.
12. What questions do you still have about this material?