Term Paper: Consumer Product and Describe Both a Movement

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¶ … consumer product and describe both a movement along the demand curve for the product and a shift in the demand curve for the product under consideration. Be sure to briefly explain what would cause a shift in the demand curve for the product you are discussing.

The pharmeutical drug like Viagara has several different opportunities to move and shift along the demand curve. As medicine this drug can be experience a shift within the demand curve when it reaches FDA approval. The reason that this shift within the demand occurs is because there is an external factor that moves the product higher among all levels of price. This occurs in this case because Viagara is now viewed by the Food and Drug Administration as safe for consumer use. Therefore many more people will want to use it than when it was not approved. A movement in the demand curve for this product occurs when the Viagara increases the price of the drug considerably from before. A movement along the curve occurs when the price is the only factor that is changed. As a result, only a certain level of demand now exist because the price is higher than it was previously. This causes a movement rather than a shift in the demand curve.

Explain the profit maximization rule for firms operating in a competitive market and why the demand curve facing a single firm is horizontal. (250 words)

In a competitive market the profit of a company is maximized when marginal revenue equals marginal cost. At this point, the production of one unit of a good will change the revenue exactly as much as the cost of producing that same unit. At this point it is no longer advantageous to produce more or less. When the marginal revenue is still greater than the marginal cost then it is still worth it for the company to produce more product and therefore they will want to produce more. When the marginal cost is greater than the marginal revenue, then the company is actually losing money for every unit that they sell. Therefore at the point where both marginal revenue and cost are equal there is no longer any impetus to produce more or less. However, this only occurs in a competitive landscape, when there is only one company, the demand curve becomes horizontal. This is because at every single price level, consumers do not have a choice of whether or not they want to buy this product, therefore their demand is completely inelastic and they will buy the product no matter at what price. This is what occurs when there is an essential good that is owned by a monopoly. This is a very rare case and a good example would be a cancer drug which is very rare and owned by a patent protected drug company.

According to economic theory of the supply and demand for labor, what is the impact of a minimum wage established by the government? Assume that the minimum wage was set above the market clearing equilibrium wage in a given labor market. (250 words)

According to economic theory there is only a perfect balance between the supply and demand of labor when there is equilibrium at MR = MC. When the labor market is perfectly competitive, workers are paid their marginal value. When there is a minimum wage in place, it prevents employers from hiring workers at the established minimum price which means that at the minimum wage level employers are not as willing to hire as many people as they would be at the equilibrium point. This will mean that fewer employers in general will wish to hire labor resulting in a surplus of labor at the minimum wage level. Economists argue that at this point, there would be massive unemployment because workers will not be hired completely at the level specified. However, the reality is that there are much different means by which individuals can measure minimum wage, when factoring in self-employment the reality is that the economic model of supply and demand does not fully capture all of the different possibilities for unemployment. A closer analysis shows that although economic theory predicts there is massive unemployment this is usually not the case.

Explain why market failure occurs when an externality has resulted from an exchange between two parties. In your response, define the term externality and discuss at least one mechanism to correct the market failure. (250 words)

Externalities can be defined as third party effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. Market failure can result from an externality that occurs from an exchange by having a byproduct which is not accounted within the price of the good exchange.d When there is no price mechanism to compensate and fully account for the social cost and social benefits of production and consumption. When a company wants to maximize their profit they are only worrie d about their private costs and private benefits and do not worry about the general costs associated with their product. Therefore they ignore the costs of for instance a chemical spill that might hurt the environment as well as destroy the ability of other industries to function. This is when market failure occurs because there are no mechanisms to balance private optimum output with social optimum output. One of the principle mechanisms for correcting externatliies and their impact on the market is through government regulation. Government regulation ensures that industries consider public and social costs along witht their private costs by placing fines in place for reaching over their level of mandated production. This results in limiting the capacity for private concerns to outweigh public ones. It is one of the principle aims of the government to harbor corrective measures against the threat of internal damage.

Discuss the difference between classical economists and Keynesian economists with regard to their views on how the macro economy functions. (250 words)

Assume that the aggregate demand curve and the aggregate supply curve intersect (macro equilibrium) at a point that results in unemployment being above the government's target rate. Provide one example of a fiscal policy remedy and one monetary policy solution to correct this undesirable outcome. (250 words)

If the level at which the macro equilibrium level of unemployment is higher than the government's target level there are two different types of policies that the government can pursue to remedy this situation. First, they can pursue a fiscal policy to change this. A fiscal policy would be what occurred when FDR created public works projects that hired a massive amount of unemployed workers. A fiscal policy can be defined as the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. In a publics works project, the government hires a lot of unemployed people and allocates significant funds to the building of public works such as highways and dams, as a result, these individuals are now employed and the government is actively supplying the funds to pursue this project. Another policy that the government can implement is a monetary policy. A monetary policy is the process by which the government manages the money supply to achieve specific goals. This occurs when the government either increases the supply of money or decreases the supply of money. During a period of unemployment, the government might which to stimulate spending and also give more money to workers by increasing the supply of money substantially and thus giving more money to individuals, this increases inflation because money is worth less but it stimulates a greater flow of money and thus spending which helps the ecnomy to grow. Governments typically attempt to use both strategies in conjunction in order to lower the unemployment rate and stimulate the economy.

Why are the concepts of the multiplier and the marginal propensity to consume important to understand in the context of fiscal policy? In your response, define each of these terms. (250 words)

The goal of fiscal policy is to stimulate the economy and increase general economic welfare by using the minimum of resources, thus the multiplier affect is a very important concept within the use of fiscal policy. The multiplier effect can be understood as when a change in aggregate demand causes a further change in aggregate output for the economy. When the government for instance increases its spending it will be putting more money into the individuals who receive that money. These individuals will then consume more because they have more recreational money, this further stimulates the economy to hire more people and build more products which further stimulates growth within the economy. At each stage of this process, there is a multiplier effect where the results of the initial spending of the government is multiplied many different times during different stages of the actual process. Thus the net impact of their initial investment is… [END OF PREVIEW]

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