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S6 Economics Assignment (3)
Price / Demand / Use Value
1
‘The more useful something is, the higher price it will be transacted in the market.’ Do you agree ?
Illustrate your answer with reference to the concepts of price, total use value, marginal use value and
consumer surplus.
2
Decide whether the following phenomena refute the law of demand :
3
A
Between 1990 and 1997, we observed that the price of residential flats increased crazily and
at the same time more people bought flats.
B
When Peter went buying a watch with his girl friend, he chose the most expensive brand
although he is sure that the qualities of all brands are more or less the same.
In the year 302 A.D., the Roman emperor Diocletian commanded that there should be cheapness.
His edict declared:
The prices of things bought in the markets or brought daily into the cities are
so ridiculously high that they can no longer be measured. Unprincipled greed
of the merchants appears whenever our armies, following the commands of
the public weal, march not only in villages and cities but also upon all
highways, with the result that prices of foodstuffs mount not only fourfold and
eightfold, but transcend all measure. Our law shall fix measure and a limit to
this greed.
A
Use a diagram to illustrate the increase in price of foodstuffs as the armies marched.
B
Use a diagram to show the price of foodstuffs could be even higher (in the back market) after
a price ceiling was set.
C
‘Disequilibrium occurs if there is a price control.’ Explain in what sense this statement is
wrong, with reference to your analysis in (B).
S6 Economics Assignment (3)
Price / Demand / Use Value
1
‘The more useful something is, the higher price it will be transacted in the market.’ Do you agree ?
Illustrate your answer with reference to the concepts of price, total use value, marginal use value and
consumer surplus.
2
Decide whether the following phenomena refute the law of demand :
3
A
Between 1990 and 1997, we observed that the price of residential flats increased crazily and
at the same time more people bought flats.
B
When Peter went buying a watch with his girl friend, he chose the most expensive brand
although he is sure that the qualities of all brands are more or less the same.
In the year 302 A.D., the Roman emperor Diocletian commanded that there should be cheapness.
His edict declared:
The prices of things bought in the markets or brought daily into the cities are
so ridiculously high that they can no longer be measured. Unprincipled greed
of the merchants appears whenever our armies, following the commands of
the public weal, march not only in villages and cities but also upon all
highways, with the result that prices of foodstuffs mount not only fourfold and
eightfold, but transcend all measure. Our law shall fix measure and a limit to
this greed.
A
Use a diagram to illustrate the increase in price of foodstuffs as the armies marched.
B
Use a diagram to show the price of foodstuffs could be even higher (in the back market) after
a price ceiling was set.
C
‘Disequilibrium occurs if there is a price control.’ Explain in what sense this statement is
wrong, with reference to your analysis in (B).
Suggested answer to S6 Economics Assignment (3)
1
The statement is wrong. If something is useful, people are willing to pay more for it. So it has high
total use value (TUV). But the amount people are willing to pay may not be actually paid.
The more of something people own, the higher is the TUV, but the lower is the marginal use value
(MUV). If P > MUV, people will buy less. If P < MUV, people will buy more. In equilibrium, price
equals MUV. So the price of something is low because it is so abundant that people can consume up
to a high quantity at which MUV is low. Something with high TUV but low price is common. In this
case, the high TUV consists of high consumer surplus but low total exchange value.
2
3
A
The law of demand is not refuted. The law of demand is refuted only if an increase in price
(a cause) leads to an increase quantity demanded (a consequence). Between 1990 and 1997,
the fact that people bought more flats is a cause. People expected a capital gain from the
estate market and therefore the demand for flats increased. The high demand bid up the
price. So the increase in price is a consequence. In reality, after the increase in demand, the
new demand curve for flats was still downward sloping (but had shifted to the right). It was
impossible for people who didn’t own unlimited wealth to buy more flats at a higher price.
B
The law of demand is not refuted. Peter chose the most expensive brand not because he
loved paying high price, but because he intended to show off before his girl friend. If the
price of the watch increased, he might not have been willing to buy it, or just afforded it.
A
B
P
P
S2
S1
S
P2
Pf
P1
D2
Pc
D1
D
Q
War damaged the farms and the supply of food
decreased. As the armies marched, the demand
for food increased. The increase in demand
together with the decrease in supply caused a
great increase in price.
C
When the ceiling price PC is set, less (Q) would be
supplied at lower price. At (Q), the MUV was
very high. Sellers in the black market could ask
for a price Pf equal to the MUV.
According to (B), a price control causes a decrease in quantity (to Q). At such low quantity,
the MUV of foodstuff is as high as Pf. People is willing to make up the difference between
the monetary price (Pc) and the full price (Pf) by paying a non-monetary price like waiting in
line. So the full price (Pf) equals the MUV. It is still in equilibrium in this sense.