MAE101 Economic Principles

Order Description

Answers are to be submitted into your lecturer’s locker by the end of week 9 – Friday 5:00 pm.
You will need to include an Assignment Cover Sheet, available from the portal under Forms.
Graphs should be clearly presented with relevant axis labelled and a title given to each graph.
The graphs for Question 2 can be hand-drawn if you are having problems with using the computer to do so.
P/s. The word count doesn’t include words used in graphs and diagrams, etc.
Include at least three references for your assignment.
Up to three marks will be deducted for insufficient referencing and wrong approach in in-text citation and poor presentation.

Please note: Answers to Questions 2 and 3 are to be submitted into your lecturer’s locker on level 4.
Question 2
[This part requires you to find some background information and knowledge on crude oil].
?    Crude oil is a world commodity and the primary input into the production of many products. Name some goods produced from crude oil or produced using crude oil as a main input.
?    Who are some of the largest producers of crude oil? List the largest 5 companies that produce oil. Name the 10 largest owners of oil resource?

Consider the market for crude oil. Assume that the crude oil market is a competitive market, where there are many buyers and sellers.
?    Answer the following questions using concepts from the Demand and Supply model and concepts on elasticity of demand and supply. Start your answers for each part below with a Demand and Supply graph showing the crude oil market initially in equilibrium. Explain what happens to the market demand, supply and equilibrium price and quantity when the following happen:
i)    The global financial crisis (GFC) starts in the United States of America in 2007/2008
ii)    War breaks out in the Middle East, and the countries that supply oil are directly involved in the war
iii)    War breaks out in the Middle East, and the countries that supply oil are not directly involved in the war.
Your answers should include some comment on how the elasticity of demand and/or supply impacts on the magnitude of change in market price and quantity where relevant, in terms of global or international oil prices and in terms of the national (local) market for oil in those countries mentioned in the questions.
(1 + 1 + 8 Marks)
Question 3
This question is about oil prices for the period 1970 to 2014. Use the data provided in the MS Excel file “Data for crude oil prices” attached.
Present this data in a time-series line chart/graph using MS Excel. The graph must be titled and the source cited.
Comment on the movement of oil prices through the four decades and give possible reasons for the changes in oil prices especially for the periods that had significant change in prices.
Other websites that may be useful: www.opec.org;  http://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/
In chapters 14, 15, 16 & 18 of Gans et al. (2015) we studied the behaviour of firms/producers that operated in a range of distinct market environments. Which of these market environments do you feel best resembles the market for crude oil? Give specific reasons for your conclusion. Would this have impacted on the price changes seen in the data shown in your graph?
(6 marks)

MAE101 Economic Principles

Question 1
Adam Smith, in his book, The Wealth of Nations, 1776, explained that every individual participating in the market is “led by an invisible hand to promote an end [the efficient use of resources] which was no part of his intention …” Adam Smith was the first to suggest that competitive markets send resources to the uses in which they have the highest value.
a) i. What is a competitive market and explain the notion of the term “the
“invisible hand “ as it relates to a competitive market.

ii. Using a demand and supply graph, explain and illustrate how a competitive market achieves an allocatively efficient distribution of resources.

iii. Describe how eBay works to allocate goods and explain how the prices of those goods are determined on eBay. How does eBay, an e-commerce innovation, help increase consumer and producer surplus achieve greater allocative efficiency?
(3 + 3 + 4 marks) Total 10 marks
b) i. Use the following website, https://research.stlouisfed.org/fred2/, to obtain data for the price of gold from 1970 to 2016. Import the data into MSExcel to create a time-series line graph. Ensure your graph has a title, axis labels and is correctly sourced at the bottom of the graph.
You may find the following article helpful for parts (ii) and (iii) below, http://www.telegraph.co.uk/finance/personalfinance/investing/gold/11014933/The-seven-drivers-of-the-gold-price.html
ii. Comment on the movement of the gold price as depicted in your graph. Briefly discuss at least two reasons for the major changes observed in the price of gold over the period.
iii. In the aftermath of the Global Financial Crisis (GFC) in 2008/09, the price of gold rose strongly. As the price of gold rose in the ensuing years, more of it was bought, not less. Is this an exception to the Law of Demand? Use a demand and supply diagram to illustrate your answer.
(2 + 4 + 4 marks) Total 10 marks

Question 2
The city of Lanzhou in China is famous for its beef noodles. Read the following article http://www.nytimes.com/2006/03/04/international/asia/04china.html? before answering the questions below.
a) Summarise the article (in 150 to 200 words) and explain what is happening in Lanzhou.
b) Using your knowledge of Topic 3 (Supply and Demand), provide two factors (determinants) that are influencing the price of a bowl of noodles in Lanzhou, China. Illustrate each factor with a separate demand and supply diagram.
c) Summarise and briefly compare the characteristics of the four different market structures covered in this course. Which market structure are Lanzhou beef noodles likely to fit into. Briefly explain why.

d) The article said that The Western Economic Daily had broken a major scandal with a headline: “The Beef Noodles Price Hike, a Price-Fixing Scheme.” Another headline read, “Price collusion is illegal”.
Visit the Australian Competition and Consumer Commission (ACCC) website, www.accc.gov.au, to help you answer the following questions.
i. What is the role of the ACCC?
ii. What is price collusion and why is it illegal?
iii. How does price fixing influence the efficiency of a market?
(2+ 8 + 4 + 6 marks) Total 20 marks