9
Market Forces
1
MARKET FORCES (3.3)
14
1
MARKET FORCES (3.3)
Tom loves tomatoes.
Read the information below and answer the questions.
1. 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.
Price
($/kg)
TOM’S UTILITY SCHEDULE FOR
TOMATOES
Tomatoes Total Utility
Marginal
(kg/month)
Utility
1
1.60
2
2.80
3
3.60
4
4.20
5
4.50
6
4.75
7
4.90
8
4.90
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.
____________________________________________________________________________________________
____________________________________________________________________________________________
Marginal Utility
4. Is it possible for Tom’s total utility to go down as he consumes more of a good or service? Explain your
answer.
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
5. With reference to the Law of Diminishing Marginal Utility, explain why Tom’s demand curve is downward
sloping.
____________________________________________________________________________________________
____________________________________________________________________________________________
Exercise 1.1
____________________________________________________________________________________________
____________________________________________________________________________________________
6. If the price of tomatoes is $0.60 per kg, what is Tom’s optimal purchase? Why?
optimal purchase: __________________ kg
Reason: ____________________________________________________________________________________
____________________________________________________________________________________
MARKET FORCES (3.3)
15
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.
1. 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.
Day 1: _____________________________
Day 2: _____________________________
Day 3: _____________________________
Day 4: _____________________________
Day 5: _____________________________
Day 6: _____________________________
Day 7: _____________________________
Day 8: _____________________________
Day 9: _____________________________
Day 10: _____________________________
1
TOM’S MARGINAL UTILITY SCHEDULE
(MU is measures in $)
(price = $10)
Movies
(price = $12)
Golf
Windsurfing
30
22
15
9
4
2
0
24
21
18
15
12
9
6
30
26
22
18
14
10
6
(price = $20)
2. The movies are the cheapest holiday activity. Why does Tom not always go to the movies?
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
3. Tom’s sister, Maia, loves eating fresh strawberries over summer. Use Maia’s demand schedule below to draw
her demand curve for strawberries on the axis to the right. Label this curve D1.
($/punnet)
1
2
3
4
5
6
Marginal Utility
Price
Price
($/punnet)
Quantity
Demanded
(punnets / month)
5
4½
4
3
2
1
Quantity
(punnets/month)
4. The current market price for strawberries is $3. Show the market price as P1 and Maia’s resulting quantity
demanded as Q1.
5. This year, Maia’s marginal utility from eating bananas and oranges has increased. Show the impact of this on
the graph above. Label your changes appropriately.
Exercise 1.2
MAIA’S MONTHLY
DEMAND FOR
STRAWBERRIES
16
1
MARKET FORCES (3.3)
Define 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.
Exercise 1.3
Marginal Utility
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.
4. The price of Commodity A is $4 and that of Commodity B is $10. If a consumer evaluates the marginal utility
of A to be 10 units then she is in equilibrium when the marginal utility of B is . . .
a. 4 units.
b. 10 units.
c. 25 units.
d. 40 units.
5.
A fall in the price of DVD’s leads to increased sales of DVD’s. As a result the . . .
a. marginal utility of DVD’s falls.
b. total utility obtained from DVD’s falls.
c. total and marginal utility obtained from DVD’s rise.
d. marginal utility of DVD’s rises.
6.
Diminishing 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.
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
MARKET FORCES (3.3)
17
State the consumer equilibrium rule
(or formula) Noi should use to
ensure she maximises the total utility she receives from purchasing shoes and dresses.
1
____________________________________________________________________________________________
2. Use Table 1 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 $100.
a. Number of dresses Noi should purchase:
____________________________
b. Number of pairs of shoes Noi should purchase: ____________________________
Table 1: MARGINAL UTILITY NOI RECEIVES FROM
SHOE AND DRESS PURCHASES
Quantity of Dresses
Marginal Utility
Quantity of Shoes
Marginal Utility
1
2
3
4
800
400
200
100
1
2
3
4
300
200
150
75
($)
(pairs)
($)
3. Look at the changing values of marginal utility in Table 1 and state the law of economics they show.
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
Optmal Purchase Rule
4. Use the optimum purchase rule (P = MU) to explain why Noi would buy fewer dresses if their price increased.
Exercise 1.4
____________________________________________________________________________________________
22
1
MARKET FORCES (3.3)
Patchy Helicopters provides high quality attack helicopters
for New Zealand secondary schools. Below is a summary of their marginal costs of production
1. Assuming Patchy Helicopters lowest average cost of production (i.e. its shut-down point) is $40 000, use the information below
to complete Patchy Helicopters Supply Schedule.
PATCHY HELICOPTERS
Supply Schedule
PATCHY HELICOPTERS
Marginal Cost Schedule
Helicopters
Supplied
Marginal
Cost
Price
($)
0
----------
20 000
1
36 000
35 000
2
33 000
40 000
3
40 000
50 000
4
50 000
70 000
5
70 000
110 000
6
110 000
180 000
7
180 000
Quantity
Supplied
Supply Schedules and Curves
2. At what level of output does Patchy Helicopters start to face diminishing returns? __________________
3. Use the information in the table draw a supply curve for Patchy Helicopters on the graph alongside.
Patchy Helicopters
Supply of Attack Helicopters
Price
($000)
180
160
140
120
100
80
60
40
Exercise 1.5
20
1
2
3
4
5
6
7
Q
4. Imagine New Zealand schools are prepared to pay up to $70,000 for their own helicopter, how many helicopters would Patchy Helicopters produce? _______________
5. Show your answer to question 4 on the graph above, indicating the price (P1) and quantity supplied (Q1).
MARKET FORCES (3.3)
23
Norm’s Gnomes designs and creates designer garden
1
gnomes for Auckland homes.
1. Use the supply schedule below to draw Norm’s Gnomes supply curve.
NORM’S GNOMES
Supply Schedule
Price
($)
Quantity
Supplied
10
1
Price
15
2
90
25
3
80
40
4
70
60
5
85
6
______________
3. Show your answer to question 2 on the graph as P1 and Q1.
60
50
40
30
20
10
1
2
3
4
5
6
Q
4. On the graph, show the consequence (P2, Q2)
of the market price rising to $85.
5. 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 $15 per gnome produced. Show the impact of this on the graph above.
7. With the price of garden gnomes still at P2 , describe how Norm will respond to the increase in his costs of
production ... and explain why he does this.
Marginal Cost and Supply
2. If the market price for garden gnomes
in Auckland is $40, how many gnomes
will Norm supply?
NORM’S GNOMES
Supply of Garden Gnomes
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
Exercise 1.6
____________________________________________________________________________________________
28
1
MARKET FORCES (3.3)
Over half of the phones
sold around the world today are now smart phones. And this
percentage is growing as consumers’ preferences for smart phones grow.
1. The graphs below show the markets for smartphones and dumbphones. Show the impact of consumers’
growing preference for smart phones on the market for smart phones. Clearly label your changes.
Price
($)
Smart Phones
900
Dumb Phones
Price
($)
400
S
800
350
700
300
600
S
250
P1 500
200
400
P1 150
300
100
D
200
50
D
100
1
2
3
4
Q1
5
6
7
Q (million)
1
2
3
Q1
4
5
6
Q
(million)
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)
____________________________________________________________________________________________
Smart vs Dumb Phones
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
3. Show 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.
____________________________________________________________________________________________
____________________________________________________________________________________________
Exercise 1.7
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
MARKET FORCES (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.
1. The graphs below the markets for milk and timber. Show the current equilibrium price (P1)and quantity(Q1)
in both markets.
Price
($/M3)
Price
($/kg)
Timber
450
9.00
400
8.00
S
350
7.00
300
6.00
250
5.00
200
4.00
150
3.00
D
100
Milk
S
2.00
D
1.00
50
10
20
30
40
50
60
70
Q (m M3)
1
20
40
60
80
100
120 140
Q (m kg milksolids)
2. Show 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.
____________________________________________________________________________________________
Timber and Dairy Products
____________________________________________________________________________________________
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 1.8
____________________________________________________________________________________________
30
1
MARKET FORCES (3.3)
Another shift in technology
prefer smaller, more mobile technology.
Price
($)
Tablet Computers
is from laptop computers to tablet computers as consumers
1. Why does the supply curve for tablet computers
slope upwards to the right?
S
_______________________________________________
_______________________________________________
_______________________________________________
P1
_______________________________________________
_______________________________________________
D
Q1
_______________________________________________
Q
_______________________________________________
2. Why does the supply curve for tablet computers slope upwards to the right?
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
3. Show the impact of growing demand for tablet computers on the graph above.
Exercise 1.7
Smart vs Dumb Phones
4. Show the impact of growing demand for tablet computers (ceteris paribus) on the market for laptop computers
shown below.
5. Explain, step by step, how the market for laptops shifts
from the old to new equilibrium price and quantity.
Laptop Computers
Price
($)
S
_______________________________________________
_______________________________________________
_______________________________________________
P1
_______________________________________________
_______________________________________________
D
_______________________________________________
_______________________________________________
Q1
Q
6. Adam Smith, 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
1.5 to 1.7, explain how the ‘invisible hand’ or price mechanism benefits consumers AND producers.
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________