Describe how the law of supply and demand works. Use at least one example in your answer.

1. ; Describe how the law of supply and demand works. Use at least one example in your answer. ;

The law of supply and demand has an indirect relationship. They set the prices in the market. To explain how this whole thing works, lets take a certain good for a example. When this good becomes somehow affordable and popular, many consumers buy it ; and the demand for that product increases. However when the supply of the product can’t catch up ; with the demand, shortage occurs and this increases the price of the product. On the other hand, when there is more supply of that good, but the there isn’t much ; demand for that good in the market, the price of the good decreases. This is the law of supply and demand. When there is supply but not much demand prices fall, but if there is more demand than supply prices increase.

(4 points)

2. ; Define optimal efficiency. How is optimal efficiency achieved in production? ;

It is the state of ; minimizing waste and making the best of the resources you have. It is the ratio of benefit and cost. It is achieved by reaching the optimal ratio between the cost of allocating resources and the benefit gained at the end.

(4 points)

3. ; Give one example of a fungible good and one example of a non-fungible good. What is the difference between these two types of goods, and why is it important?

One fungible good is petroleum. ; A non-fungible good can be clothes or shoes. The main difference is that fungible goods don’t make much a difference from where you buy them and are the same for everyone. Non-fungible goods on the other hand are different for different consumers. For clothes and shoes for example, people have different sizes so it isn’t the same for everyone and a cloth that fitted one customer might not fit another one. The different is important because for fungible products consumers can get them anywhere, they can change shops or gas stations and still get the same product. This poses great challenge for producers that produce fungible products because there is great competition in that sector. They have to overcome the other competitors and create a brand for their product in order to survive.

(4 points)

4. ; Define bargaining power. Explain the differences in bargaining power that employers have with union workers versus non-union workers.

Bargaining power is different when a single employee does it and when a union of employees do it. Unions have much greater power and high chances of succeeding. The reason is because when a single employee bargains with his/ her employer, he/she doesn’t create much problem for the employer because the employer can just replace that worker with another one that could agree to his terms and conditions. But if the workers all group up, they become a problem for ; their employer as ; it is difficult for the employer to just fire them all and bring in a new stuff and train them all over again. Therefore as a union the workers have equal power as their employer and can bargain suitable conditions more effectively.

(5 points)

5. ; Explain why the housing market follows an up-and-down cycle.

The house market follows the law of supply and demand therefore it has an up and down cycle. Since buying a house is a long term investment , many people are reluctant to buy houses. Some might be better off with just renting the house ; while some like to own a house ; and this determines the demand in the market. The demand is also determined by mortgage interest rates and the standard of living. If there are more people with families that earn well they would prefer to own a house rather than rent. This, along with low interest rates, increases the demand of houses in a place. As demand increases, usually the supply decreases because house take more time and resource to be produce than other ; goods in the market. Therefore prices increase and a seller market is created. when ; prices and the mortgage rates increase, houses become expensive ; for many and the demand decreases. With decreasing demand and more houses supplied, the housing market starts suffering. At this time investors and house owners are at loss because houses begin to sell at lower than normal prices and a buyer’s market is created. When prices decrease again demand grows and the process starts all over again.

(4 points)

6. ; Why does relative scarcity determine the level of prices in a free-market system?

Because people tend to pay more for something that isn’t easily found in the market. If there is relative scarcity then that means there is high demand for that product, and high ; price as well. If we compare that to another good that isn’t scarce at all the difference is big because the price of the supplied product will be much less than the scarce one.