Worksheet 1: An Introduction to Economics and the Role of Supply and Demand (Markets) Learning Objectives: (1) Outline the basic economic problem and construct a simple model (the production possibility frontier) to illustrate the trade-offs societies face. (2) Identify what markets are and discuss the importance of prices. (3) Construct the supply and demand model and analyse how prices in a competitive market are determined. (4) Use the supply and demand model to analyse real time series data. An Introduction to Economics Part 1 - (20 minutes) Answer the following questions 1. What is the basic economic problem that societies face? 2. Derive the production possibility frontier (PPF) for guns and butter that shows the basic trade-off. 3. On the PPF, identify where there is an optimal allocation, a sub-optimal allocation and an infeasible allocation. 4. The PPF is a simple model why is it useful? Why do you think simple models about economic phenomenon might be useful? The Role of Supply and Demand (Markets) Part 2 (10 minutes) Identify a market of your choice. Who are the participants in the market? What goods and services are being transacted? How are prices determined? Does the government impact upon this market in any way?
Part 3 (20 minutes) Answer the following questions using the market you identified in Part 2: 1. Derive the market demand curve. 2. What factor moves you along the demand curve? What factors shift the demand curve? 3. Derive the market supply curve. 4. What factor moves you along the supply curve? What factors shift the supply curve? 5. Show the market equilibrium. 6. Analyse situations where there is disequilibrium (i.e. excess demand and excess supply)? 7. Can you think of any other real-life examples of excess demand or excess supply? Part 4 - Price Ceiling or Price Floor (10 minutes) For the following, please identify whether the statement is referring to a price ceiling, or a price floor.
1. The price control is applied below the market price. 2. If the price control is applied above the market price, this policy will be ineffective. 3. This price control causes excess demand. 4. This price control causes excess supply. 5. Which price control would be implemented to reduce the amount people are smoking? 6. The current wage is too low and thus workers are being exploited, which price control may the government consider implementing? Part 5 - Exam Practice (20 minutes) On the following page there is a time series graph of crude oil prices from 1861 onwards. Usefully the figure also identifies some of the main historical events during this long time period. I often ask a question in the exam that uses a figure like this but set in a different context. For example, I could give you a time-series of house prices, agricultural goods, and commodities such as iron, steel, silver or even gold. The question would look something like this and would require you to apply the supply and demand model to analyse