Notes: Economics

Therefore, the supply would be more elastic with respect to price. The long run effect of the price change should be larger because supply should be more sensitive o changes in wage as producers have more flexibility to substitute other inputs for labor, as a result the impact should be larger in the long run. 4. When the annual Valentine’s Day is coming, the demands for rose flower, chocolate, and love card suddenly increase. Please make comparisons in the change sizes of price and quantity between these products. Explain your reasoning graphically and descriptively.

Q Answer Chocolate and love card can be stored, so the manufactures can easily set up production and prepare larger stocks ahead of Valentine’s Day. This means that the apply of chocolate and love cards are relatively “elastic”, hence, an increase in demand has little effect on price. By contrast, rose are perishable. Only roses maturing around Valentine’s Day will be suitable for that day. It’s relatively costly to increase the quantity supplied on Valentine’s Day. This means that the supply is relatively “inelastic”, and consequently, the increase in demand causes the price to increase sharply. 5. Industry researchers R.

S. Plato predicted that, between 2003-04, oil prices

would fall by 5%, production of oil by OPEC and the former Soviet Union would increase, and liveries of new tankers would exceed scrapple of older vessels. (Source: Plato Report 2004, www. Plato. Com). (A)Using suitable diagrams, explain how each of the following would affect the market for tanker services: (I) a fall in oil prices; (it) an increase in production by OPEC and the former Soviet Union; (iii) new tanker deliveries; and (v) scrapple of older vessels. (B)Suppose that the net effect is to increase tanker rates. Illustrate the net effect on a single diagram.

Explain the impact on the quantity of tanker services used. (C)Len actuality, oil prices increased by 25% teens 2003 and 2004 and OPEC and the former Soviet Union production increased by about 10%. Modify your analyses in (A) for these changes. Q Answer (A) (I) A fall in oil price will reduce the operating costs of tankers, thus the supply increases; (it) An increase in production by OPEC and the former Soviet Union, the demand will increase; (iii) New tanker deliveries would increase the supply of tanker services; (iv) scrapple of older vessels would reduce the supply. Elasticity of both demand and supply.

The extend of the increase in demand is larger than the extent of the increase in supply, therefore the tanker rate / prices rises. See below diagram for details. (C) (I) A increase in oil price will increase the operating costs of tankers, thus the supply decreases; (it) An increase in production by OPEC and the former Soviet Union, the demand will increase; (iii) New tanker deliveries would increase the supply of tanker services; (v) scrapple of older vessels, the supply would decrease. 6. In 2002, Iraq’s Kirk region exported million barrels of crude oil per day (mad) by pipeline to the Turkish port of Achaean.

Following the U. S. -led coalition attack against Iraq, the pipeline was sabotaged and Kirk oil exports were disrupted. Refineries in western Europe switched to buying oil from the Rural in Russia, which produce oil that is chemically similar to Kirk. Rural oil is shipped to western Europe by tanker from the Black Sea through the Bosporus and Darkness. However, by early 2004, the surge in European demand and congestion in the Bosporus and Darkness had lifted spot tanker rates to ?¬39,000 per day (Source: “Bosporus Tanker Congestion Threatens Shortage of Oil,” Financial Times, January 12, 2004). A)Using suitable demand and supply curves, illustrate the short-run effects of pipeline disruption on the tanker services market. B)Using your diagram for (A), illustrate the long-run effects of the pipeline disruption. (C)When political conditions in Iraq are restored to normal, exports by pipeline will resume, and the demand for tanker services will fall. With lower charter rates, the owner of a tanker must decide whether to continue operating, temporarily lay up, or scrap the vessel. Explain how the owner should choose among these alternatives.

Q Answer (A) Pipeline disruption increased the demand for tanker services. (B) In the long run, the price would be higher than the original equilibrium, but lower than ?¬39,000 per day. The quantity of tanker services would be higher than in the short run equilibrium, and in turn, higher than in the original equilibrium. Run rate is below the average variable cost, the owner should lay up the tanker. The choice between operating and scrapping is a long run decision. If the long run rate is below the average cost, the owner should scrap the tanker. . Typical real-estate broker: “In California, the seller always pays the broker’s commission, so, buyers get brokerage services free. ” MBA: “If the custom were for the buyer to pay the commission, then would sellers get brokerage services free? Real-estate broker, clearly losing patience: “That is a purely hypothetical scenario, but if that situation were to arise, yes, I guess you’re right. ” (A)Assume that each seller pays a brokers’ commission of $18,000. Then, the supply of houses includes the cost of brokerage.

Illustrate the market equilibrium with a price of $310,000 per house and sale of 200,000 houses a year. (B)Now suppose that buyers rather than sellers pay the $18,000 commission. Using your figure, illustrate the following: (I) shift the supply curve down by $18,000 since 4 sellers do not pay the commission, and (it) shift he demand curve down by $18,000 since buyers now pay the commission. (C)Compare the market equilibrium of (A) and (B) in terms of (I) the net price received by sellers, and (it) the net price paid by buyers. (Net prices are net of brokerage commission, if any).

Q Answer (A) Market Equilibrium with a price of $310,000 per house and sale of 200,000 houses a year. (B) (I) t the supply curve down by $18,000 since sellers do not pay the commission. (ii) shift the demand curve down by $18,000 since buyers now pay the commission. (C) New equilibrium, the net price is the same. The net price would not be affected for either buyer or seller. The net price for both buyer and seller is 292,000. 8. E-commerce is predicted to reduce the cost of intermediary services such as those of travel agencies, real-estate brokers, and investment advisors. Consider the market for air travel.

Suppose that, with conventional travel agencies, the market equilibrium price is $300 per ticket, including a $1 5 intermediation cost. The quantity bought is 2 million tickets a year. With e-commerce, however, the intermediation cost falls to $2 per ticket. (A)Using suitable demand and supply curves, illustrate the original equilibrium with conventional travel agencies. Represent the intermediation cost by hafting the supply curve. (B)illustrate the new equilibrium with e-commerce. (C)What factors determine the extent to which consumers will benefit from e- commerce? Explain your answer with demand and supply curves. A) The intermediation cost $1 5 will increase the marginal cost for travel agencies, the intermediation cost will shift up the supply curve (from SSL to SO). Finally, the equilibrium price and quantities each will be $300 per ticket and 2 million tickets a year. P($ per ticket) SO 300 285 0 2 IQ Q (million tickets per year) (B) With e-commerce, the cost of intermediation cost falls to $2, and the new equilibrium price and quantity is at Pl and Q. P(per ticket)SO 287 0 2 Q Q (million) Since the original intermediation cost fell $13 to $2 per ticket, the marginal cost for traveler agency decreased, the supply curve shifted down from SSL to SO.

Moreover, due to the price decrease of ticket, the demand curve would shift up from Del to DO. Finally, the equilibrium price and quantity each would be Pl which was a little bit more that $287 per ticket and Q million tickets a year. (C) The price elasticity of buyer and supplier determines the extent to which consumers will benefit from e-commerce. In other words, the slope of the demand ND supply curve will determine the extent that consumers will benefit from e- commerce.

For picture A to D below, the red areas are the consumers’ benefits from e-commerce. We found that even the price all fell from $300 to $ 287 per ticket in four pictures, the consumers’ benefits would be different depended on the slope of demand and supply curve. Picture A : Consumer’s benefit from steeper supply curve. Picture B: Consumer’s benefit from gently supply curve. P(per ticket) 0 2 Q Q (t-million) Picture C: Consumer’s benefit from steeper demand curve. Picture D: Consumer’s benefit from gently demand curve