Supply and Demand and Price Essay

Words: 1541
Pages: 7

1. Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
Market Power- In some markets, a single buyer or seller may be able to control the market prices. Market Power can cause inefficiency because it keeps the price and quantity away from the equilibrium of supply and demand.
Externalities- The impact of one person’s actions on the well-being of a bystander. Since buyers and sellers do not consider these side effects when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole.

2. What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus
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Many smaller, developing nations are afraid of trade agreements involving developed nations because the imbalance of power could result in a unilateral benefit to the developed nation. A multilateral approach is when a country reduces its restrictions while other countries do the same. In other words, it can bargain with its trading partners in an attempt to reduce trade restrictions around the world. An example of a multilateral approach is NAFTA. This famous agreement minimized barriers among the United States, Mexico, and Canada. An advantage of a multilateral approach is that it has the potential to result in freer trade than a unilateral approach because it can reduce restrictions both abroad and at home. However, if international negotiations fail, the results can be more restricted than a unilateral trade.

6. Why do economists use real GDP rather than nominal GDP to gauge economic well-being? Define the GDP deflator.
Nominal GDP- The production of goods and services valued at current prices
Real GDP- The production of goods and services valued at constant prices.
The goal in obtaining GDP is to gauge how well the overall economy is performing. Because real GDP measures the economies production of goods and services, it reflects the economy’s ability to satisfy the needs and desires of its citizens. Therefore, real GDP is a better gauge of economic well-being than is nominal