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

MAE101 Economic Principles
Question 1
“Economics is the study of how individuals, firms and society as a whole, manage its scarce resources.”
a) You are told that there are some 1,645 people who made the world billionaire list in 2014. Explain the concept of scarcity. Provide three examples that illustrate why even billionaires face the problem of scarcity.

b) Explain at least three of the core ideas or fundamental concepts that define the economic way of thinking. Include at least one specific example for each of the core ideas you have selected.
(5 + 5 = 10 Marks)
Question 2
This question is on fuel prices, droughts, and the prices of supermarket commodities.
You will need to read the following articles and do some research to answer the questions below.
John Quiggin, in his paper titled “Droughts, Climate Change and Food Prices in Australia,” 2010, concluded that “Droughts in Australia are generally associated with increases in the prices of some supermarket commodities, particularly fresh produce. In recent years, droughts in Australia have combined with global climatic and market trends to result in major increases in supermarket food prices across the board…”

Collect data on the world prices of oil, corn and wheat for the period 1990 to 2015. This data should be presented in a table and in a time-series line chart/graph using MS Excel. The graph must be titled and the sources cited.

a) Present a time-series line chart for each of the time-series mentioned above (1 table and graph for oil prices, and 1 table and graph for both corn and wheat prices).

b) Comment on the movements in the two graphs you have presented, giving reasons for the changes in prices for the commodities in the stated period.

c) What is ethanol? Use demand and supply graphs to explain why the demand for ethanol has influenced the price of corn (include two graphs).

d) Use Demand and Supply graphs to show how the increases in the price of corn have affected the price of milk and the price of cheese (two graphs).
(6+ 4 + 5 + 5 = 20 Marks)

Question 3
This question is on international trade.

a) Explain why more Australian food going to China would increase the price of food in Australia. Include a graph in your answer.

b) Construct a graph of the Australian market for beef. Label the domestic equilibrium price and quantity with no international trade and with international trade.

Call these PA and QA for price and quantity, without trade (for Australia), and PT and QT for price and quantity, with trade.

Evaluate the welfare effects from moving from “no trade” to “free trade”. You should include a clearly annotated graph as in chapter 9 in the text.
(4 + 6 = 10 Marks)

Recommended websites for this assignment:
– Adeyanju, Craig, The Top Factors that Move the Price of Corn http://www.futuresknowledge.com/news-and-analysis/grains/the-top-factors-that-move- the-price-of-corn/
– Biofuels Association of Australia, What are biofuels? http://biofuelsassociation.com.au/biofuels/
– http://www.futuresknowledge.com/news-and-analysis/grains/the-top-factors-that-move-the-price-of-corn/

– Quiggin, J, 2010, Droughts, Climate Change and Food Prices in Australia, https://www.acfonline.org.au/sites/default/files/resources/Climate_change_and_food_ in_Australia.pdf

– http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
– http://www.indexmundi.com/commodities/?commodity=crude-oil&months=360
– https://www.quandl.com/data/DOE/RWTC-WTI-Crude-Oil-Spot-Price-Cushing-OK-FOB?utm_medium=graph&utm_source=quandl
– https://research.stlouisfed.org/fred2/series/DCOILWTICO/downloaddata
– http:/www.opec.org