ECON90077 Economics of Markets and Organisations

ECON90077

Economics of Markets and Organisations

ASSIGNMENT 1 (10%)

Question 1

Please refer to Extract 1:

1. a)   Using the supply and demand model, and assuming a perfectly competitive market, how has the effect of falling commodity prices (e.g. gas, coal, corn) affected the market for newly produced heavy equipment? 1 mark

2. b)   How has the changes in the used and rental equipment markets, as described in the article, affected the market for newly produced heavy equipment? 1 mark

Question 2

Please refer to Extract 2:

1. a)   Using the supply and demand model, and assuming a perfectly competitive market, explain the degree of own-price elasticity of demand for cigarettes as suggested in the article. 1 mark.

2. b)   Given your answer to part a), use a diagram to illustrate how an increase in the tax on cigarettes affects the amount of government revenue. You need to contrast the effect of a lower tax versus a higher tax. Explain your answer fully. 2 marks.

Question 3

Please refer to Extract 3:

Uber is a service that matches private drivers to passengers that are seeking a ride from one place to another. Assume that the market for Uber rides is perfectly competitive.

1. a)   Suppose that the market for Uber rides is initially in equilibrium. According to the article, what happens to the demand and supply for Uber rides after severe storms? Suppose Uber always charges the same price per kilometre travelled independent of the circumstances (e.g., at the original market equilibrium price before the storm). Is the market still in equilibrium? Explain using the demand/supply model with diagrams. 2 mark

2. b)   Now consider the surge pricing that Uber uses during busy times. According to Uber’s chief executive, surge pricing is ‘necessary to give more drivers an incentive to get onto storm- ravaged roads and squeeze through traffic to pick up people for rides.’ Do you agree with this statement? How would the use of surge pricing affect the market outcome on a day when there is a snow storm? Explain using the demand/supply model with diagrams. 3 marks

EXTRACT 1
9/20/16 The Australian (Newspaper) 25

Mining slump hits machine makers BOB TITA

Used machinery is flooding the second-hand market, piling more pain on equipment makers battling slack demand from customers that mine, move or refine commodities amid a global slump in the value of everything from coal to corn.

Instead of buying a new $US500,000 bulldozer or $US300,000 excavator, many construction firms and other equipment users are renting or entering longer-term leases for machines to expand their fleets or replace worn out equipment, dealers and analysts say.

Dealers, in turn, are keeping smaller inventories of new wheel loaders, backhoes and other machinery. That is hurting sales for Caterpillar, Volvo, Deere and other manufacturers.

Machinery gluts can be lengthy because such high-price equipment can last a quarter-century or longer. The strong US dollar also is dampening demand from developing African and Asian markets that once snapped up used machines.

"There's a lot of machinery sitting around," said Bill Yurkovic, used equipment manager for Cleveland Brothers Equipment, a Caterpillar dealer in Pennsylvania and West Virginia. Demand there for dump trucks and other large earthmoving machinery crashed along with prices for the coal and natural gas the region produces. "It's as bad as it's been in my 30 years," Mr Yurkovic said. "A lot of renting. Not a lot of buying." With so much equipment up for grabs, used-machinery prices are down 10 per cent from a year ago, Caterpillar says. Its dealers also are under pressure to keep up with price discounts on competitors' new equipment.

EXTRACT 2
8/6/13 The Australian (Newspaper)

POOR SMOKERS ARE AN EASIER TARGET THAN MINING COMPANIES JUDITH SLOAN, CONTRIBUTING ECONOMICS EDITOR

Don't imagine that the government wants tobacco users to actually give up their habit THE government obviously thinks that it is much easier to raise money from smokers than mining companies

In the next four years, the government expects to raise nearly $39 billion from excise on tobacco products. By contrast, the minerals resource rent tax will bring in $5.5bn across the same period

For every dollar extracted from mining companies in the form of the MRRT, the Labor government expects to collect $7 from smokers. And don't be fooled that the government wants smokers to give up their habit. The estimates of future excise revenue are firmly predicated on the basis that most smokers will not quit

Technically speaking, the price elasticity of demand for cigarettes is low and the government knows this. As the Treasury paper on issues in tobacco taxation states, "applying higher taxes on goods which have relatively low price elasticities is optimal as these taxes are less distortionary, as their effects on consumer preferences are relatively minor". Tell that to the smoking tradie in western Sydney, I say. Even with the price of a packet of cigarettes expected to increase by more than $5, the Cancer Council estimates that only 200,000 smokers will quit, out of more than three million regular smokers

In other words, the number of smokers will fall by less than 7 per cent even as excise on tobacco products increases by more than 50 per cent in the next four years

EXTRACT 3

The New York Times
31 October 2012
“Uber struggles to get cars onto New York’s streets”

‘In New York post-Sandy, the lack of subways can be just as troubling as the lack of electricity.... Plenty of other people in New York are turning to car services this week. But Uber, a San Francisco-based start-up with operations in most major cities in the United States, said it was struggling to get enough cars on the road to meet demand. On Wednesday morning, it imposed a special “surge” fee — a rate of at least double the normal fare. Several New Yorkers didn’t take the price hike lightly. They complained on Twitter.... Travis Kalanick, Uber’s chief executive, said in an interview that the higher fee was necessary to give more drivers an incentive to get onto storm-ravaged roads and squeeze through traffic to pick up people for rides....’

Extra information on doing assignment 1 Some general hints

The objective in this assignment is to answer the questions, so the most important piece of advice is to do what the questions are asking. For example, several of the questions ask you to apply the demand/supply model to answer questions about changes in market outcomes. This means that to answer these questions you should explicitly use the concepts of demand and supply, and equilibrium price and quantity traded.

You don’t need to state definitions of any of the concepts such as demand and supply, or equilibrium. Assume that your tutor knows what these concepts mean. Instead, the assignment is trying to test your knowledge of the concepts by seeing how you apply them in answering the questions.

To complete the assignment the only reading you should need to do is subject videos and notes, the relevant sections of the textbook, and the excerpts from the articles included with the questions.

Marking criteria

Three main factors will be considered in marking your assignment:
a) Knowledge of economic concepts – For example: Has the answer used the appropriate economic concepts? Does the answer show a thorough understanding of those concepts?
b) Quality of analysis and application of economic concepts – For example: Is there a logical and thorough supporting argument or description of how conclusions have been drawn? Have economic concepts been applied in an effective manner in the particular application? Are assumptions clearly described? Is an understanding shown of any relevant qualifications to the conclusion?
c) Presentation – For example: Are the writing style and organisation of material such that the main ideas and arguments can be understood? Are diagrams presented clearly and effectively integrated with the text?