The law of supply and demand has anindirect relationship. They set the prices in the market. To explain how thiswhole thing works, lets take a certain good for a example. When this goodbecomes somehow affordable and popular, many consumers buy it and the demand for that product increases.However when the supply of the product can't catch up with the demand, shortage occurs and thisincreases the price of the product. On the other hand, when there is moresupply of that good, but the there isn't much demand for that good in the market, the price of the good decreases.This is the law of supply and demand. When there is supply but not much demandprices fall, but if there is more demand than supply prices increase. (4 points) 2. Define optimal efficiency. How isoptimal efficiency achieved in production? It is the state of minimizing waste and making the best of theresources you have. It is the ratio of benefit and cost. It is achieved byreaching the optimal ratio between the cost of allocating resources and the benefitgained at the end. (4 points) 3. Give one example of a fungible goodand one example of a non-fungible good. What is the difference between thesetwo types of goods, and why is it important? One fungible good is petroleum. A non-fungible good can be clothes or shoes.The main difference is that fungible goods don't make much a difference fromwhere you buy them and are the same for everyone. Non-fungible goods on theother hand are different for different consumers. For clothes and shoes forexample, people have different sizes so it isn't the same for everyone and acloth that fitted one customer might not fit another one. The different isimportant because for fungible products consumers can get them anywhere, theycan change shops or gas stations and still get the same product. This posesgreat challenge for producers that produce fungible products because there isgreat competition in that sector. They have to overcome the other competitorsand create a brand for their product in order to survive. (4 points) 4. Define bargaining power. Explain thedifferences in bargaining power that employers have with union workers versusnon-union workers. Bargaining power is different when asingle employee does it and when a union of employees do it. Unions have muchgreater power and high chances of succeeding. The reason is because when asingle employee bargains with his/ her employer, he/she doesn't create muchproblem for the employer because the employer can just replace that worker withanother one that could agree to his terms and conditions. But if the workersall group up, they become a problem for their employer as it is difficultfor the employer to just fire them all and bring in a new stuff and train themall over again. Therefore as a union the workers have equal power as theiremployer and can bargain suitable conditions more effectively. (5 points) 5. Explain why the housing market followsan up-and-down cycle. The house market follows the law ofsupply and demand therefore it has an up and down cycle. Since buying a houseis a long term investment , many people are reluctant to buy houses. Some mightbe better off with just renting the house while some like to own a house and this determines the demand in the market. The demand is alsodetermined by mortgage interest rates and the standard of living. If there aremore people with families that earn well they would prefer to own a houserather than rent. This, along with low interest rates, increases the demand ofhouses in a place. As demand increases, usually the supply decreases becausehouse take more time and resource to be produce than other goods in the market. Therefore pricesincrease and a seller market is created. when prices and the mortgage rates increase, houses become expensive for many and the demand decreases. Withdecreasing demand and more houses supplied, the housing market startssuffering. At this time investors and house owners are at loss because housesbegin to sell at lower than normal prices and a buyer's market is created. Whenprices decrease again demand grows and the process starts all over again. (4 points) 6. Why does relative scarcity determinethe level of prices in a free-market system? Because people tend to pay more forsomething that isn't easily found in the market. If there is relative scarcitythen that means there is high demand for that product, and high price as well. If we compare that to anothergood that isn't scarce at all the difference is big because the price of thesupplied product will be much less than the scarce one.