The price system

1. Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze). What does the increasing price of bronze signal? a. It tells people that bronze is getting harder to find and its higher price will signal consumers to conserve it more or seek substitutes. b. It tells people that there is a price bubble forming around bronze and that people are overvaluing the price of bronze. c. It tells people that the wars in the Middle East and Greece are coming close to being resolved because of bronze scarcity. d. It tells people to buy more bronze because it is going to be more valuable in the future.

a

1. Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now? 2. Will the price rise or fall as a result of this curve shift? a. The price will rise. b. The price will fall.

a

3. If you instead think of the "market for clothing" as the "market for clothing, whether it's new or used," does this shift the demand or supply of clothing, and in which direction? a. The supply of clothing shifts right: a rise in supply. b. The supply of clothing shifts left: a fall in supply. c. The demand for clothing shifts right: a rise in demand. d. The demand for clothing shifts left: a fall in demand.

a

3. Two major-party presidential candidates are running against each other in the 2016 election. The Democratic Party candidate promises more money for corn-based ethanol research and the Republican Party candidate promises more money for defense contractors. In the weeks before the election, defense stocks take a nosedive. Who is probably going to win the election: the pro-ethanol candidate or the pro-defense spending candidate? a. Pro-ethanol research, or the Democratic Party, candidate b. Pro-defense spending, or the Republican Party, candidate

a

4. How would the price of cookbooks specializing in recipes using wheat flour change? 5. Given your answer to the previous question, what would happen to the price of paper? a. Increase, because demand would shift to the right. b. Increase, because supply would shift to the left. c. Fall, because demand would shift to the right. d. Fall, because demand would shift to the left.

a

4. How would the price of cookbooks specializing in recipes using wheat flour change? a. Increase, because demand would shift to the right. b. Increase, because supply would shift to the left. c. Fall, because demand would shift to the right. d. Fall, because demand would shift to the left.

a

4. Once it became easier to build good laptops, did "invisible hand" forces push more of society's resources into making laptop and push resources away from making desktops? a. Yes. b. No.

a

4.Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze). After the development of iron, did the supply or demand for bronze shift? Which way did it shift? Why? a. The demand for bronze shifted to the left (down) because there was now a good substitute for bronze. b. The demand for bronze shifted to the right (up) because there was now a good substitute for bronze. c. The supply for bronze shifted to the right (down) because there was now a good substitute for bronze. d. The supply for bronze shifted to the left (up) because the quantity demanded of bronze decreased.

a

1. If a nation's government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy? (Hint: Steven Davis and John Haltiwanger. 1999. "Gross Job Flows." In Handbook of Labor Economics (Amsterdam: North-Holland) found than in the United States, 60% of the increase in U.S. manufacturing efficiency was caused by people moving from weak firms to strong firms.) a. Richer. b. Poorer.

b

1. Let's see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops? a. The price of laptops increases. b. The price of laptops decreases. c. An increase in laptop supply will not change its price.

b

1. Sometimes speculators get it wrong. In the months before the Persian Gulf War, speculators drove up the price of oil: The average price in October 1990 was $36 per barrel, more than double its price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might even be higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, then President George H. W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait's oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. How much money did speculators lose or make on each barrel? a. Speculators made a profit of $16 per barrel. b. Speculators lost $16 per barrel. c. Most oil speculators broke even.

b

1. You manage a department store in Florida, and one winter you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts? a. Sweaters b. Bermuda shorts

b

2. When speculators sold their stored oil in the months after the war, did this massive resale tend to increase the price of oil or decrease it? a. The resale increased the price of oil. b. The resale decreased the price of oil.

b

3. Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze).Why do you think iron and steel became more common around the same time as the increase in price of bronze? a. An increase in the demand for bronze signals that people are wealthy enough to afford iron and steel. b. An increase in the price of bronze encourages innovation to produce substitutes. c. An increase in the price of a resources signals that it is too competitive to make a profit, so entrepreneurs seek other alternatives. d. The introduction of iron and steel differentiates bronze for specific uses and therefore causes its price to increase.

b

3. In 1980, University of Maryland, Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as the population grew, while Simon believed that people would find good substitutes, just as earlier people developed iron as a substitute for scarce bronze. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon. What does the falling price tell us about the relative scarcity of these metals? a. The falling price indicates that the metals are scarcer than what they were before. b. The falling price indicates that the metals are less scarce than what they were before. c. The falling price tells us nothing about scarcity.

b

4. What happens to the price of new, unrecycled clothing? a. The price of new clothing increases. b. The price of new clothing decreases. c. The change in price direction depends on the size of the supply curve's shift. d. The price of new clothing will not change.

b

5. After this invention, will society's scarce productive resources (machines, workers, retail space) flow toward the "new clothing" sector or away from it? (Note: You may think this theoretical question is fanciful but three-dimensional printers, which can create plastic or plaster prototypes of small items such as toys, cups, etc., have fallen dramatically in price. Every day, you're getting just a bit closer to having your own personal Star Trek replicator.) a. Resources will flow toward the new clothing sector. b. Resources will flow away from the new clothing sector. c. Resource flows will remain unchanged.

b

5. One question that economics students often ask is "In a market with a lot of buyers and sellers, who sets the price of the good?" There are two possible correct answers to this question: "Everyone" and "No one." What is meant by "Everyone?" a. In a market operating in a western democracy, everyone gets to vote on price controls and restrictions to ensure the market operates fairly. b. In a market with many participants, each person's actions push the supply or the demand just a little bit, so everyone has some small influence. c. In a market with many suppliers and demanders, each person's actions have a negligible effect on supply or the demand, so everyone has to work together to influence the market. d. Everyone has to consume something.

b

5. The process of market creation is most similar to the creation of a country's a. Constitution b. Language c. Defense strategy

b

In 1980, University of Maryland, Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as the population grew, while Simon believed that people would find good substitutes, just as earlier people developed iron as a substitute for scarce bronze. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon.5. Choose the pair that best expresses a relationship similar to that in the original pair. Arbitrager: Region :: a. Speculator: Market b. Speculator: Time c. Speculator: Forecast d. Speculator: Bet

b

In 1980, University of Maryland, Julian Simon bet Stanford entomologist Paul Ehrlich that the price of any five metals of Ehrlich's choosing would fall over 10 years. Ehrlich believed that resources would become scarcer over time as the population grew, while Simon believed that people would find good substitutes, just as earlier people developed iron as a substitute for scarce bronze. The price of all five metals that Ehrlich chose (nickel, tin, tungsten, chromium, and copper) fell over the next 10 years and Simon won the bet. Ehrlich, an honorable man, sent a check in the appropriate amount to Simon.Which of the following could not have caused the shift? a. Scientists developed substitutes for the minerals. b. The demand for the minerals increased. c. The supply of the minerals increased.

b

Let's see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. 2. Laptop and desktop computers are substitutes. Now that the price of laptops has changed, what does this do to the demand for desktop computers? a. The demand for desktops increases b. The demand for desktops decreases. c. A change in the price of laptops will not affect the price of desktops.

b

Let's see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it's become much easier to build better laptop computers in recent years, laptop supply has increased. 3. How does the change in desktop demand affect the quantity supplied of desktop computers? a. The supply of desktops increases. b. The supply of desktops decreases. c. The supply of desktops is unaffected.

b

One question that economics students often ask is "In a market with a lot of buyers and sellers, who sets the price of the good?" There are two possible correct answers to this question: "Everyone" and "No one." 6. What is meant by "No one?" a. No one person's behavior can affect prices. b. No one wants the equilibrium price. Everyone wants the lowest price possible. c. There is too much information for suppliers to know how to set prices. d. Nobody actually plans for a given price to be the equilibrium price.

d

2. Andy enters in a futures contract allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much did Andy make or lose? a. Andy made $50. b. Andy lost $50. c. Andy made $250,000. d. Andy lost $250,000.

c

3. The video explores how prices tie all goods together. To illustrate this idea, suppose new farming techniques drastically increased the productivity of growing wheat. Given this change, how would the price of wheat change? a. Increase, because demand would shift to the right. b. Increase, because supply would shift to the left. c. Fall, because supply would shift to the right. d. Fall, because demand would shift to the left.

c

1. Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now? a. Demand curve will increase, that is, a shift to the right (up). b. Demand curve will decrease, that is, a shift to the left (down). c. Supply curve will increase, that is, a shift to the right (down). d. Supply curve will decrease, that is, a shift to the left (up).

d

2. Suppose a new invention comes along that makes it easier and much less expensive to recycle clothing: perhaps a new device about the size of a washing machine can bleach, re-weave, and re-dye cotton fabric to closely imitate any cotton item you see in a fashion magazine. Head into the laundry room, drop in a batch of old clothes, scan in a couple of pages from Vogue, and come back in an hour. If you think of the "market for clothing" as the "market for new clothing," does this shift the demand or the supply of clothing, and in which direction? a. The supply of clothing shifts right: a rise in supply. b. The supply of clothing shifts left: a fall in supply. c. The demand for clothing shifts right: a rise in demand. d. The demand for clothing shifts left: a fall in demand.

d

4. How would the price of cookbooks specializing in recipes using wheat flour change? 5. Given your answer to the previous question, what would happen to the price of paper?6. Given your prediction about the change in the price of paper, how would the price of pencils change? (Hint: are paper and pencils complements or substitutes?) a. Rise, because demand would shift to the right. b. Rise, because supply would shift to the left. c. Fall, because demand would shift to the right. d. Fall, because demand would shift to the left.

d

2. Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze).How is the increasing price of bronze an incentive? a. Consumers will save more money by conserving bronze. b. Consumers who switch to substitutes can save money. c. Entrepreneurs can profit by developing new alternatives to bronze. d. Entrepreneurs can profit by developing ways to recycle bronze. e. All of the above.

e