Question

Essay Topics 2: Write a short essay on each of the topics, answering all questions in each topic in a clear, coherent, and concise essays.

A. Prices What is the most important role of prices in an economy? Do prices need to be flexible to fulfill that role or could they be fixed (controlled)? What are consequences when prices cannot fulfill that role?

B. Government What is the proper role of government in an economic system? When formulating an answer, think about the main institutions that define an economic system.

Answer 1

A. price determines the quantity of supply and quantity of demand. When supply and demand equal market is in equilibrium. When the market is not in equilibrium, invisible hand works and by giving upward or downward pressure on the price it establishes market equilibrium. When the price is more than market equilibrium then supply is more than demand. A surplus creates at a higher price. There is always a downward pressure on price until it comes to market equilibrium. When the price is less than market equilibrium demand is more than supply. A shortage creates at the lower price. There is always a upward pressure on price until it comes to market equilibrium. That is if prices are flexible invisible hand can fix the prices by changing supply and demand. When invisible hand cannot fix the price government intervention is needed to clear the market

B) The government generally fix the price according to the economic situation. When it needs to supply more government suggest a price floor which is above the market equilibrium. When it needs more demand government suggest a price ceiling which s below the market equilibrium.

So generally government intervention increases the total welfare of the economy.