Econ chapter 7
Andy enters into 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 does Andy make or lose?
Andy made $250,000—he buys gold for $950 and sells it for $1,000, repeating the process 5,000 times.
Why do prediction markets tend to work so well?
Because prediction markets give participants an incentive to bring their most useful knowledge to the market
Why is it so hard for central planners to solve the great economic problem?
Because they lack the information needed to solve it and because they have little incentive
Given your answer in question d, how would the quantity of graphite (used in pencils) consumed change?
Fall, because demand would shift to the left
Given your answer in question c, how would the price of pencils change? (Hint: Are paper and pencils substitutes or complements?)
Fall, since paper and pencils are complements and so demand would shift to the left
If a nation's government instead made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, why is that nation likely to be poor?
If the most inefficient firms are kept from failing, then many people are spending their days producing less than they would at a more efficient firm.
Given your answer in question a, how would the price of cookbooks specializing in recipes using wheat flour change?
Increase because demand would shift to the right
Given your answer in question b, how would the price of paper change?
Increase because demand would shift to the right
During the COVID-19 pandemic, as toilet paper supplies ran low, many people tried to stockpile toilet paper to resell at higher prices. Is this good or bad?
It's good because the higher price prevents toilet paper from being wasted.
Suppose that speculators believe oil prices will rise in the future, so rather than sell oil today, they store it for the future. If they are right, what will happen?
Low-value uses of oil will be given up today in exchange for higher-value uses in the future.
A change in the demand for steel can cause a price change that affects the prices of the goods for which steel is a substitute or an input, causing more price changes that affect still other goods. This demonstrates that:
Markets link to one another
Will the price rise or fall as a result of this curve shift?
Price will rise
To illustrate this idea, suppose new farming techniques drastically increased the productivity of growing wheat. How would the price of wheat change
fall, because supply would shift to the left
Laptop and desktop computers are substitutes. Now that the price of laptops has changed, what does this do to the demand for desktop computers?
reduces the demand for desktops
If an economy has correctly solved the great economic problem, then it has
satisfied as many wants as possible given the resources available
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?
supply will decrease, and shift up to the left
Markets link the world as a result of immense cooperation that is:
voluntary and undirected