Econ Questions

1. A) The three main characteristics of the market system exemplified are the interaction between people in the form of exchange of services and goods, making choices specifically the freedom to choose, and the expected future of cost vs. benefits.

B) The interaction between people is exemplified in many ways. The very beginning of the pencil making process demonstrates this interaction between people. The loggers have to harvest the wood, the miners in Ceylon have to mine for the "lead" and then ship it to Mississippi for the mixing stage. This process is what allows the pencil to even be manufactured in the first place because these materials are critical for the manufacturing process. If the loggers or the minors did not communicate well the process of manufacturing the pencil would be disrupted. The other interaction is the workers in the pencil manufacturing plant that assemble the pencil. The final interaction is the customers' choice whether to purchase the pencil, which warrants the level of demand and necessity of the pencil market itself.

The second characteristic is making choices specifically the freedom to choose. This is vital to the market system because people have to make a choice of participating in the pencil manufacturing market. The workers must decide if they wish to work in the factory, the loggers decide whether to work in the logging industry, the miners decide whether to mine as a career, the pencil factory owner decides whether to open a pencil manufacturing company, and the consumers decide the demand of the pencil but more importantly this decides if there is even a pencil markets.

The third characteristic is expected future of cost/benefit. The factory owner must decide if the cost of business is worth the return. In this case the factory owner must decide if the $4,000,000 is worth spending in order to produce pencils. This would be the opportunity cost. The loggers must decide if their time is worth the reward of logging, as must the miners, and also the factory workers them selves. They all must decide if the reward for the work is worth the time they will put in. The customer also must decide if the price of the pencil is worth spending their money. The customer also has the choice of buying a pencil or buying a pen. This then calls for the customer to make a decision of value on the pencil or the pen. In short the consumers opportunity cost would be in the form of capital and what they need the pencil for and if a pen would be an adequate substitute.

2. There are many reasons that having an understanding of economics would benefit a manager. The first reason is because it allows for the manager to understand the market system and how people behave and operate in the market system. The manager would also understand the laws of supply and demand, which are crucial in conducting business in a free market system. The manager would understand the relationship between price and demand or the effect that price can have on the demand and also how some products maybe elastic or inelastic. An elastic demand would be more price sensitive and an inelastic demand would be non-price sensitive. A manger must know which category their products or services fall into. The manager would also be aware of complementary and substitute products. If there was a substitute to the product or service offered the manager would need to price their product or service more competitively to the substitute products. If the product or service was complementary the manager may be able to offer the complementary product or service along with their initial product or service to increase the potential for profit to the company.

3. A). The first change would be in the increase quantity supply of handmade guitars to meet the rising demand (Shift to the Right). The effects of the banned use of Brazilian rosewood would raise the price of guitars, which would cause an increase shift in price and a decrease in demand (Shit to the Left). The reason for this is because the cost of materials to produce the guitar would rise which warrants a rise in price causing some consumers to not want to pay the higher price. The ban of rosewood guitars would also increase the price of the Brazilian rosewood guitars that were manufactured before the ban but also would most likely increase the demand of the rosewood guitars due to the fact they would no longer be produced this would also show a decrease shift in quantity supply of the rosewood (shit to the left). The reason for this is due to the scarcity of Brazilian rosewood guitars, which makes them more valuable to a consumer who only wants a Brazilian rosewood guitar.

B) The foreign producers entry into the market would result in a decrease shift in price, which would warrant an increase shift in demand (to the right) of foreign guitars. This would also cause an increase shift in quantity supply of guitars (to the right). The reason for this is because the market would be flooded with the cheaper foreign guitars. This would result in a decrease shift in demand (To the Left) for American made guitars because the foreign guitars are an adequate substitute product price cheaper than the American guitars. The American guitar makers may want to consider this new process of making guitars in order to be able to price their products competitively with the foreign guitars.

C) The change in preference of acoustic music over heavy metal music would cause the demand for acoustic guitars to experience an increase shift in demand (to the right). This would also cause the demand of electric guitars to experience a decrease shift in demand (to the left). The price of handmade guitars could experience a decrease shift in price or could experience no shift because they are handmade which tends to be more costly to produce. However the increase in demand would call for a greater supply of handmade guitars, which would result in an increase of manufactures