Answer - What is a competitive market and explain the notion of the term “the “invisible hand “ as it relates to a competitive market

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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

Answer - What is a competitive market and explain