ECON 325

In Class Exercise Two - Subjective Value and Supply

1.       1.  Assume a new use for cotton is discovered.  This new “use” is part of a production process for a new good.  The new good is highly valued by consumers.  Explain how this would relate to the supply of cotton shirts.  In your answer discuss consumer ends and increasing marginal opportunity cost.

2.     2.    Explain the role of prices in determining where and how resources should be used in order to meet consumer ends.  That is, how do prices generate knowledge that producers utilize in making decisions.  What role do shortages and surpluses play in your answer?

3.       3.  What does it mean for a market price to be “distorted” in some way?  Example?

4.       4.  What are a couple of potential outcomes from distorted prices?  Are they good or bad outcomes?  Does it depend?  Explain.