1MARKET FORCES (3.3) Market Forces

Transcription

1 MARKET FORCE (3.3) 9 Market Forces

2 4 MARKET FORCE (3.3) Tom loves tomatoes. Read the information below and answer the questions.. Complete the table below to show the utility Tom gets from consuming tomatoes. 2. Use the information from the table to draw Tom s monthly demand for tomatoes on the axes. TOM UTILITY CHEULE FOR TOMATOE Tomatoes (kg/month) Total Utility Marginal Utility ($/kg) Quantity (kg/month) 3. Tom s total utility is the same whether he consumes 7 or 8 kilograms of tomatoes. Is this possible? Explain your answer. 4. Is it possible for Tom s total utility to go down as he consumes more of a good or service? Explain your answer. Exercise. Marginal Utility 5. With reference to the Law of iminishing Marginal Utility, explain why Tom s demand curve is downward sloping. 6. If the price of tomatoes is $0.60 per kg, what is Tom s optimal purchase? Why? optimal purchase: kg Reason:

3 MARKET FORCE (3.3) 5 Over the holidays, Tom likes to do three activities going to the movies, playing golf and wind-surfing. Based on his marginal utility for each product, Tom does one activity per day.. The table below shows the price of each activity and the marginal utility Tom derives from each activity. Use this table and your understanding of consumer equilibrium to work out what Tom will do each day, for the first ten days of his holiday. ay : ay 2: ay 3: ay 4: ay 5: ay 6: ay 7: ay 8: ay 9: TOM MARGINAL UTILITY CHEULE (MU is measures in $) Movies (price = $0) Golf (price = $2) Windsurfing (price = $20) ay 0: 2. The movies are the cheapest holiday activity. Why does Tom not always go to the movies? 3. Tom s sister, Maia, loves eating fresh strawberries over summer. Use Maia s demand schedule below to draw her demand curve for strawberries on the axis to the right. Label this curve. MAIA MONTHLY EMAN FOR TRAWBERRIE Quantity emanded ($/punnet) (punnets / month) 5 2 4½ ($/punnet) Quantity (punnets/month) 4. The current market price for strawberries is $3. how the market price as P and Maia s resulting quantity demanded as Q. 5. This year, Maia s marginal utility from eating bananas and oranges has increased. how the impact of this on the graph above. Label your changes appropriately. Exercise.2 Marginal Utility

4 6 MARKET FORCE (3.3) efine the following terms. Check that you can define each term and use it in an appropriate context. ceteris paribus consumer equilibrium law of diminishing marginal utility marginal utility optimal purchase rule 2. At a price of $3 for jellybeans and $4 for chocolates, William cannot decide which packet he should buy next. Which of the following statements is most likely to be correct? a. William receives the same total utility from jellybeans as he does from chocolate. b. William receives the same marginal utility from jellybeans as he does from chocolate. c. William considers that the marginal utility for jellybeans is greater than that for chocolate. d. William considers that the marginal utility for jellybeans is less than that for chocolates. 3. When making purchases the consumers will always try to... a. always buy the cheapest good. b. spend the same amount on everything they buy. c. maximise their total satisfaction. d. buy until marginal utility is maximised. Exercise.3 Marginal Utility 4. The price of Commodity A is $4 and that of Commodity B is $0. If a consumer evaluates the marginal utility of A to be 0 units then she is in equilibrium when the marginal utility of B is... a. 4 units. b. 0 units. c. 25 units. d. 40 units. 5. A fall in the price of V s leads to increased sales of V s. As a result the... a. marginal utility of V s falls. b. total utility obtained from V s falls. c. total and marginal utility obtained from V s rise. d. marginal utility of V s rises. 6. iminishing marginal utility means... a. as consumption of one product increases, holding all else constant, total utility begins to decrease. b. as consumption of one product decreases, holding all else constant, total utility begins to increase. c. there will be no demand for the product. d. as consumption of one product increases, holding all else constant, total utility increases but at a decreasing rate. 7. Explain why marginal utility falls as people consume more goods or services.

5 MARKET FORCE (3.3) 7 tate the consumer equilibrium rule (or formula) Noi should use to ensure she maximises the total utility she receives from purchasing shoes and dresses. 2. Use Table below to determine the quantity of shoes and dresses Noi should purchase to maximise her total utility. Assume each dress cost $200 and a pair of shoes costs $00. a. Number of dresses Noi should purchase: b. Number of pairs of shoes Noi should purchase: Quantity of resses Table : MARGINAL UTILITY NOI RECEIVE FROM HOE AN RE PURCHAE Marginal Utility Quantity of hoes (pairs) Marginal Utility Look at the changing values of marginal utility in Table and state the law of economics they show. 4. Use the optimum purchase rule (P = MU) to explain why Noi would buy fewer dresses if their price increased. Exercise.4 Optmal Purchase Rule

6 22 MARKET FORCE (3.3) Patchy Helicopters provides high quality attack helicopters for New Zealand secondary schools. Below is a summary of their marginal costs of production. Assuming Patchy Helicopters lowest average cost of production (i.e. its shut-down point) is $40 000, use the information below to complete Patchy Helicopters upply chedule. PATCHY HELICOPTER Marginal Cost chedule PATCHY HELICOPTER upply chedule Helicopters upplied Marginal Cost Quantity upplied At what level of output does Patchy Helicopters start to face diminishing returns? Exercise.5 upply chedules and Curves 3. Use the information in the table draw a supply curve for Patchy Helicopters on the graph alongside. ($000) 4. Imagine New Zealand schools are prepared to pay up to $70,000 for their own helicopter, how many helicopters would Patchy Helicopters produce? how your answer to question 4 on the graph above, indicating the price (P ) and quantity supplied (Q ) Patchy Helicopters upply of Attack Helicopters Q

7 MARKET FORCE (3.3) 23 Norm s Gnomes designs and creates designer garden gnomes for Auckland homes.. Use the supply schedule below to draw Norm s Gnomes supply curve. NORM GNOME upply chedule Quantity upplied NORM GNOME upply of Garden Gnomes 2. If the market price for garden gnomes in Auckland is $40, how many gnomes will Norm supply? how your answer to question 2 on the graph as P and Q Q 4. On the graph, show the consequence (P 2, Q 2 ) of the market price rising to $ With reference to Norm s Gnomes as an example, explain they law of supply... i.e. why do firms supply more if the price of a good or service rises? 6. Norm s costs of production rose by $5 per gnome produced. how the impact of this on the graph above. 7. With the price of garden gnomes still at P 2, describe how Norm will respond to the increase in his costs of production... and explain why he does this. Exercise.6 Marginal Cost and upply

8 28 MARKET FORCE (3.3) Over half of the phones sold around the world today are now smart phones. And this percentage is growing as consumers preferences for smart phones grow.. The graphs below show the markets for smartphones and dumbphones. how the impact of consumers growing preference for smart phones on the market for smart phones. Clearly label your changes. P mart Phones Q (million) P umb Phones Q (million) Q Q 2. Explain how the changes you made to the market for smart phones, will affect the supply of dumb phones. Your answer should clearly refer to the concept of opporutnity cost (note: assume ceteris paribus, i.e. no change to the demand for dumb phones) Exercise.7 mart vs umb Phones 3. how the changes you have described in question 2 on the market for dumb phones. 4. Using smart phones and dumb phones as an example, explain how the price mechanism helps to achieve allocative efficiency across markets.

9 MARKET FORCE (3.3) 29 In the 2000 s growth in the international demand for milk products alongside regulatory changes relating to forestry, meant that the profitability of growing trees dropped significantly in comparison to farmers producing milk.. The graphs below the markets for milk and timber. how the current equilibrium price (P )and quantity(q ) in both markets. ($/M 3 ) Timber ($/kg) Milk Q (m M 3 ) Q (m kg milksolids) 2. how the impact of growing demand for milk on BOTH markets - ceteris paribus. 3. Clearly explain how an increase in demand in one market (milk) can affect the equilbrium price and quantity in another market (timber). 3. The allocation of resources from producing timber to producing milk took 2-3 years. With reference to the concepts of short-term and long-term, explain why this change took so long. 4. If the price of milk dropped dramatically tomorrow, explain why farmers would not immediately switch back to growing timber. 5. Using timber and dairy products as an example, explain why the full mobility of resources, a characteristic of a perfectly competitive market, is so important for an economy to achieve allocative efficiency. Exercise.8 Timber and airy Products

10 30 MARKET FORCE (3.3) Another shift in technology is from laptop computers to tablet computers as consumers prefer smaller, more mobile technology. Tablet Computers. Why does the supply curve for tablet computers slope upwards to the right? P Q Q 2. Why does the supply curve for tablet computers slope upwards to the right? 3. how the impact of growing demand for tablet computers on the graph above. 4. how the impact of growing demand for tablet computers (ceteris paribus) on the market for laptop computers shown below. Exercise.7 mart vs umb Phones 5. Explain, step by step, how the market for laptops shifts from the old to new equilibrium price and quantity. 6. Adam mith, a famous economist, coined the phrase the invisible hand to refer to the price mechanism or market forces. Using one of the examples from exercises.5 to.7, explain how the invisible hand or price mechanism benefits consumers AN producers. P Laptop Computers Q Q