2.4.

3 Test (TST): Microeconomics Test

Economics Name: Emma Wright

Points Possible:40
Date:

Part I: Short-Answer Questions (20 points)

1. Briefly explain what a product market is. Then, describe the role that product markets play in

the flow of goods and services in an economy. In forming your response, be sure to describe the

relationship between product markets, households, and businesses. Provide a brief example to

illustrate this relationship. (4 points) A product market is where goods and services are bought

and sold between businesses and households. A resource market supplies businesses the

resources they need in order to produce goods and services. Common resources include labor,

capital, land, natural resources, and entrepreneurship. Business supplies goods and services

in order to meet the needs of the household. On the other hand, households provide revenue

through their purchases to the business. This creates a circular flow of income and resources.

For example, at a grocery store they sell produce to households and then the households will

purchase the goods giving revenue back to the business(grocery store).

2. Briefly explain the law of supply. Then, describe how production cost and the presence of

other sellers in the market influence the law of supply. Give a brief example of how each factor
can influence supply. (4 points) It states that an increase in the price of goods or services

results in an increase in their supply. Supply is the quantity of goods or services that suppliers

are willing and able to provide to customers. Production costs directly impact supply:if

production costs decrease, producers can afford to supply more at each price level, leading to

an increase in supply. For example, if the cost of raw materials for manufacturing clothing

decreases, clothing manufacturers can afford to produce more clothing items, increasing the

overall supply in the market.

3. What is the difference between elastic and inelastic demand? Use your own perspective and

experience as a consumer to give an example of each, being sure to clearly explain why you

consider your demand for these goods to be elastic or inelastic. (4 points) An elastic demand is

one in which the change in quantity demanded due to a change in price is large. An inelastic

demand is one in which the change in quantity demanded due to a change in price is small.

From my perspective as a consumer, my demand for luxury vacations would be elastic. If the

price of luxury vacations were to increase significantly, I would likely reduce the quantity

demanded or the option for more budget-friendly alternatives, such as staying at a less

expensive resort or choosing a different destination altogether. Luxury vacations are not a

necessity therefore I can adjust my own spending if needed. As a consumer with inelastic

demand, I would choose groceries because they are a necessity and I need them for daily

living.

4. The monopoly is one of the basic types of market structures. What are its defining

characteristics? Why would a seller want to create a monopoly, and why are monopolies

generally considered harmful to an economy? (4 points) A monopoly is characterized by a

single seller that dominates the entire market for a particular good or service. This seller has

significant control over pricing and output levels, often resulting in higher prices and lower

quantities produced compared to competitive markets. Sellers may want to create a monopoly

to maximize profits by exploiting their market power, as they can set prices above marginal

cost without fear of competition. But, monopolies can be harmful to the economy because

they can give the government more power over the people and give less of a choice to

consumers.

5. Two of the four basic types of market structures are competitive: pure competition markets

and monopolistic competition markets. Compare these two structures on the four criteria below,

then give an example of each of the two structures:

● Number of buyers and sellers

● Similarity of products

● Sellers' control over price

● Ease of entering market

Comparison of Pure Competition and Monopolistic Competition:

Numbers of buyers and sellers: there are numerous buyers and sellers, with no single buyer or seller
having significant influence over the market price. While in a monopolistic competition markets,
there are also many buyers and sellers, but each seller offers a slightly differed product, giving
them some degree of market power.
Similarity of Products: products are identical, meaning consumers see no differences
between products offered by different sellers. In monopolistic competition markets, products
are similar but not exactly the same, allowing sellers to differentiate their products through
branding, packaging, or other features.
Sellers control over price: In competition markets sellers have no control over the price, they
have to accept that the market price results in the supply and demand. But in monopolistic
competition markets sellers have some control over price, making them charge higher prices.
Ease of entering the market: Pure competition markets typically have low barriers to entry,
making it relatively easy for new sellers to enter the market and compete. Monopolistic
competition markets also have relatively low barriers to entry, but different strategies may
create some barriers based on branding, product differentiation, or advertising costs.

Part II: Application and Critical Thinking (20 points)

6. Fill in the chart to compare and contrast the main features of four different kinds of business

organizations: sole proprietorships, general partnerships, corporations, and LLCs.

Sole General Corporations LLCs

proprietorships partnerships

How easy it is easy Pretty easy complex moderate

to start
Who owns it Single person Multiple people Shareholders Members

Who keeps Owner Partners Shareholders Members

the profits
Who makes Owner Partners Shareholders, members/mana
the decisions board of gers
and provides direction
resources

Who takes Owners Partners Shareholders Members

the risks
 How long it Indefinite Indefinite Indefinite Indefinite
lasts

Then, write an analysis paragraph addressing the following prompt:

Imagine you want to start a business that designs and sells the finest submarines on the planet.

Your dream is to ramp things up quickly, so before too long, you can sell your submarines to

governments and private explorers all over the globe. And, of course, you can make a lot of

money in the process. At this point, you've got the ideas and expertise but no money or

resources. Which of the four business organizations will be best for your venture? Provide at

least three reasons to support your choice.

For the idea of designing and selling submarines on a global scale,

forming a corporation would be the smartest business organization to choose because
corporations offer limited liability protection, which would shield the owner's personal assets
from potential lawsuits or debts incurred during the business operations, especially important
in a high-risk industry like submarine manufacturing. Secondly, corporations have the ability to
raise capital by selling shares to investors, allowing for the funds necessary to finance the
expense of submarine design and production. Finally, corporations have unlimited existence,
meaning the business can continue to operate and expand even if the original owner or
founders are no longer involved, ensuring long-term sustainability and growth potential for the
submarine corporation.