Question

1. What are the three economic questions that every society must answer? How are they typically answered in a mixed economy like the United States? Provide examples and explain your answer.
2. Economics assumes that people act rationally. What does this mean? Why is this assumption made? Provide examples and explain your answer.
3. What is the Law of Demand? Explain the difference between a change in demand and a change in the quantity demanded. Provide an example from the gasoline market.
4. Other than price, what are the determinants of supply? Provide three examples from the consumer market for gasoline.
5. What does market equilibrium mean? Provide two examples of how market equilibrium in the consumer market for gasoline market could change.

Answer 1

Answer to Question 1)

In economics, there are three basic questions which are needed to be answered these are what to produce, for whom to produce and in what quantity to produce. As economies have grown, they have taken the help of socialism or protectionism or capitalism which is a supply and demand model or mixed approach towards answering this question.

A socialist society allocates its resources through the government. The government decides what it is to produce and who it is to supply to and in what quantity. Example of such societies historically were China and India, and in the present is North Korea.

The United States has a mixed approach here, while producers and consumers are the true kings on one hand in which the concept of demand and supply decide the three questions as stated above. While the government has control over some aspects such as defence, health care, public education etc. Here the government takes control of critical aspects of an economy and all other functions of business is decided independently by consumers and producers demanding for goods and services in the market.

The consumers try to maximize their returns or satisfaction while the suppliers try to maximize their revenue. Wherever they meet, a market is said to be in equilibrium. All remaining markets are handled by the government.

Please feel free to ask your doubts in the comments section.