Economics Questions Thread

[dantan]

If it makes it any easier, I usually try to think of interest rates as the commercially charged price and the cash rate as the whole sale rate, which is what it essentially is.

In terms of interest rates diverging so heavily from the set cash rate, you can look at it in the context of overseas borrowing the banks undertake to make up the savings investment gap. Due to economic instability in Europe (mainly), more money is being locked up in the sense that it's harder to borrow money from such places and it's charged at a much higher interest rate, which is a higher business cost for banks. This is the reason they cite anyway, though many are skeptical about the accuracy of this reasoning though.

[abcdqdxD]

Which of the following industries is likely to have the highest degree of competition:

A) motor mechanics
B) chocolate
C) recorded music
D) petrol

I don't think its B or D, so I'm tossing up between A and C. I'm slightly learning towards A because they have no brand differentiation, while music kind of does. What do you guys think?

[dim_sim]

Examine figure 1.31 ( http://content.jacplus.com.au/secure/ebooks/07303/0730338886/images/lightwindow/01.31_fmt.jpg ..I don't know if the link will work for other people :S) showing changes in the market price of crude oil (used to make petrol, synthetic fabrics and plastics) since 1970.

Assuming that the production costs faced by oil producers were moderately steady since 2002, explain the effects on the allocation of resources of generally higher crude oil prices. In your answer explain (giving reasons) which particular industries or types of production would attract extra resources and which areas would repel resources as a result of this price signal. (4 marks)

Thinking about the effects on resource allocation, give one reason why it would be dangerous for the government to remove its excise tax on petrol, or to pay petrol users a subsidy of 50 cents per litre to help make petrol cheaper. (3 marks)

[dantan]

Which of the following industries is likely to have the highest degree of competition:

A) motor mechanics
B) chocolate
C) recorded music
D) petrol

I don't think its B or D, so I'm tossing up between A and C. I'm slightly learning towards A because they have no brand differentiation, while music kind of does. What do you guys think?

I'm just thinking aloud here, I'm really not entirely sure either but this is what I think:

A - I think you're pretty close to the mark here, after all it is a homogeneous product of sorts (though there are brands in a sense), but it's not like people can simply go down the road to a new mechanic.

B - Chocolate, hmmmm. I think this is quite similar to recorded music in a way but considering brand loyalty and that there aren't that many when you think about it, I again think you're probably right.

C - I think it's most likely recorded music. There are so many artists, recording companies, genres, stores, methods of buying it to cater for many tastes.

D - Given that the amount of petroleum is controlled at a supply level, I think it's unlikely and there isn't that much competition anyway.

Where did you get the question from? Hope this helps!

Examine figure 1.31 ( http://content.jacplus.com.au/secure/ebooks/07303/0730338886/images/lightwindow/01.31_fmt.jpg ..I don't know if the link will work for other people :S) showing changes in the market price of crude oil (used to make petrol, synthetic fabrics and plastics) since 1970.

Assuming that the production costs faced by oil producers were moderately steady since 2002, explain the effects on the allocation of resources of generally higher crude oil prices. In your answer explain (giving reasons) which particular industries or types of production would attract extra resources and which areas would repel resources as a result of this price signal. (4 marks)

Thinking about the effects on resource allocation, give one reason why it would be dangerous for the government to remove its excise tax on petrol, or to pay petrol users a subsidy of 50 cents per litre to help make petrol cheaper. (3 marks)

I remember doing these questions last year, and my teacher and I both came to the conclusion that they were incredibly ambiguous.

Anyway, for the four marker, I simply talked about how the higher price indicates a shortage of oil in this market and how it would increase the cost of transport. I think you could give an example of how more resources might be put into the production of greener transport (i.e. hybrid cars, smaller cars) and taken away from more polluting older cars etc.

For the three marker, I just talked about how getting rid of of excise taxes or bringing in subsidies simply encourage use of unclean methods of transport leading to CO2 emissions and all the consequences that follow. Hence it's not a good idea to do those things because it'll encourage an even greater allocation of resources to an unclean energy source. It's exactly the opposite of why the carbon tax was introduced.

Hope that helps you out a bit!

[abcdqdxD]

Hi,

I'm not 100% sure about this one:

Which of the following items is likely to have the highest price elasticity of supply?

A) Oil
B) Milk
C) Strawberries
D) Electrical Appliances

I think it's D

[dantan]

Hi,

I'm not 100% sure about this one:

Which of the following items is likely to have the highest price elasticity of supply?

A) Oil
B) Milk
C) Strawberries
D) Electrical Appliances

I think it's D

Yeah I think it's D as well. You can instantly eliminate B and C because they are perishable items of food, so they can't really be stored (you could also argue that increasing strawberry production quickly is not easy).

Oil is a hard one because arguably supply is controlled by OPEC but it is easy to store. But it might be hard to increase production/might not be excess?

So I would go with D because electronic appliances are easily stored and generally for manufactured goods it's easy to increase production quickly.

[abcdqdxD]

Why and how is a positive externality a market failure?

[morantz]

Why and how is a positive externality a market failure?

Positive externalities are usually things that the government invests in in order to gain positive living standards for its civilians. For example the insulation scheme; Rudd brought out an incentive whereby the federal government would subsidise the cost of installing a house with insulation packs to all households. This proved to gain a better environment for everyone else considering less pollution would be produced due to less fan or heater use. However, this exploits the competitiveness within the market of those insulation packs as the market is now run by one supplier and one buyer which are the producer of the product and the government respectively, thus being market failure.

[dantan]

Positive externalities are usually things that the government invests in in order to gain positive living standards for its civilians. For example the insulation scheme; Rudd brought out an incentive whereby the federal government would subsidise the cost of installing a house with insulation packs to all households. This proved to gain a better environment for everyone else considering less pollution would be produced due to less fan or heater use. However, this exploits the competitiveness within the market of those insulation packs as the market is now run by one supplier and one buyer which are the producer of the product and the government respectively, thus being market failure.

While this isn't wrong per se, I don't think it addresses the general question of how a positive externality is actual a failing of the market. Externalities refer to a level of production that is less than optimal in some way or another. In the case of negative externalities, something is overproduced, e.g. CO2 emissions were a negative externality, because prior to taxing it, there was no internalized cost to firms for producing lots of CO2. Therefore they had no incentive to reduce this type of production even if it was harmful to 3rd parties (future generations) so therefore CO2 emission intensive goods were over-produced.

So in the case of positive externalities, there is an underproduction of these goods which advantage 3rd parties in some cases. Take 'university education' as an example. By going to get educated at university, this will positively influence 3rd parties such as employers and colleagues who will benefit from my extra knowledge/expertise. However, when I apply for uni and pay for uni, this isn't foremost of my concern, as there is no internal benefit. However, if everyone considered the benefits for third parties (or there was a way to internalize the benefit), economic rationalism dictates that more people would take up uni education. (I know this isn't the best example). Therefore, the market has failed, because there is an underproduction of uni education which is a good service that we need more of. This hence results in less third party benefit because people getting uni education don't have an internal benefit (other than their own personal).

I hope this helps in some way. I'll try find a better example!

[abcdqdxD]

Sorry I'm still struggling to understand why a positive externality is a market failure. Could you give another example? Thanks

[dantan]

Ok, try think of it this way.

A positive externality is a benefit to a third party which is not necessarily felt by either of the immediate parties involved. So they are good, we want them. However, as the benefits of consumption are not felt by us (the direct party), we don't take that into account when we decide whether or not to purchase something, so they are not produced as much and as a result, on the whole, we miss out on having this 'good thing.'

Consider: Solar Panels. They are a good thing, they have a positive impact on the environment and hence the people around us and the people of the future (3rd parties). However, as someone looking to buy solar panels, I don't think about other people, I think about me, and for me, installing solar panels is an expensive undertaking. As a result, I probably won't buy solar panels (as it's expensive and there is not apparent reward for helping benefit others). As a result, solar panels, something that is good for society is underproduced heavily and thus the market has failed to produce an optimum level of solar panels (less than is good).

Is that a little clearer?

[chasej]

What is the market mechanism and how does it lead to an efficient allocation of resources?

Can someone also explain how relative prices effect allocation of resources?

(Want to check my notes are correct, SAC on wednesday) Thanks

[Sebby]

The market mechanism is how the forces of supply and demand determine relative prices, which then ultimately determine the allocation of resources. Essentially, it is just how the market 'works'. Theoretically, the market mechanism achieves an efficient allocation of resources, as the buyers demand on what price they are willing to pay for the product, ensuring that suppliers have to be more cost efficient in producing that good in order to meet the expectations of buyers. Thus, suppliers will be competitive and efficient in trying to produce goods in order to sell them. This leads to an efficient allocation of resources.

Relative prices change constantly in the market. If relative prices for a good increase, due to the rising demand for it, then this sends a signal to suppliers that it is more profitable to produce this good. This leads to suppliers re-allocating their resources to the highly demanded good due to their profit motives, and thus effects the allocation of resources.

[abcdqdxD]

The market mechanism is how the forces of supply and demand determine relative prices, which then ultimately determine the allocation of resources. Essentially, it is just how the market 'works'. Theoretically, the market mechanism achieves an efficient allocation of resources, as the buyers demand on what price they are willing to pay for the product, ensuring that suppliers have to be more cost efficient in producing that good in order to meet the expectations of buyers. Thus, suppliers will be competitive and efficient in trying to produce goods in order to sell them. This leads to an efficient allocation of resources.

Relative prices change constantly in the market. If relative prices for a good increase, due to the rising demand for it, then this sends a signal to suppliers that it is more profitable to produce this good. This leads to suppliers re-allocating their resources to the highly demanded good due to their profit motives, and thus affects the allocation of resources.

^ 50SS

[sam.utute]

The market mechanism is how the forces of supply and demand determine relative prices, which then ultimately determine the allocation of resources. Essentially, it is just how the market 'works'. Theoretically, the market mechanism achieves an efficient allocation of resources, as the buyers demand on what price they are willing to pay for the product, ensuring that suppliers have to be more cost efficient in producing that good in order to meet the expectations of buyers. Thus, suppliers will be competitive and efficient in trying to produce goods in order to sell them. This leads to an efficient allocation of resources.

Relative prices change constantly in the market. If relative prices for a good increase, due to the rising demand for it, then this sends a signal to suppliers that it is more profitable to produce this good. This leads to suppliers re-allocating their resources to the highly demanded good due to their profit motives, and thus effects the allocation of resources.

Note this down guys!