Download Economics X Creativity

Economics X Creativity
Multimedia Case 1: One Day of An Otaku
Case Study prepared by:
Prof. Michael FUNG
Dr. Fred KU
Dr. David CHOW
Mr. Sam KONG
Miss Lorraine ZHAO
Miss Cindy LAU
Mr. Patrick CHEUNG
Video produced by: CUHK Business School (2012)
* Should you have any comment, please email Prof. Fung ([email protected])
P. 1
Introduction
“Super delicious breakfast”, NaNa the belle and video
games are Otaku’s meanings of life. However, one day,
he received blows after another: because he was late, he
could not buy his favourite “super delicious breakfast”,
which was sold 100 sets a day. He was very frustrated.
Then, in order to buy NaNa’s poster, he was willing to
queue up instead of studying. Unfortunately, after
queuing for half an hour, he realized that the posters
were all sold out. He could only get one in the black
market. At home, he returned to the computer’s virtual
battlefield. But he could not imagine the bad lucks had
not left him. His computer mouse could not function at
this critical moment! When he tried to buy a new one, he found out that its price skyrocketed due
to the earthquake in Japan…When he was plodding back to the hostel, he met his dream girl…To
win her heart, he decided to study hard. With the financial
support of his mother, he spent extravagantly on private
tuitions…Could Otaku finally win the heart of his dream
girl?
From the experience of Otaku, the video explains the
concepts including demand, supply and prices in a funny
way. Students can better understand the market mechanism.
Key Question
What factors would affect the demand and
supply of a market? How do they work?
Key Concepts
1. Market demand, market supply
equilibrium price
2. Substitutes and complements
3. Normal goods and inferior goods
and
Learning Outcomes
1. Understand the basic concepts of demand and supply.
2. Understand what determines the demand and supply of a good in a competitive market.
P. 2
1.
True / False Questions
An increase in demand is represented by a rightward shift of a demand curve.
2.
An individual demand curve reflects one’s willingness and ability to pay.
3.
At a given price, there is a surplus when the quantity demanded is greater than the
quantity supplied.
4.
If there is an advancement of the technology used to produce a good, the supply curve
for that good will shift leftward.
5.
A price cut on a good will lead to an increase in demand represented by a rightward
shift of the demand curve.
6.
Film cameras and films are complements. If the price of film cameras increases, the
demand for films will go up.
7.
If the housing price is expected to increase, the current demand for houses will remain
the same.
8.
For a normal good, quantity demanded will increase if there is a decrease in income.
9.
In a perfectly competitive market, if a firm raises the price for a good, its revenue will
always increase.
10.
Market equilibrium is attained when there is no tendency for price and quantity to
change.
MC Questions
1. Which of the following events will definitely cause the equilibrium quantity to fall?
A) demand and supply both increase
B) demand decreases and supply increases
C) demand and supply both decrease
D) demand increases and supply decreases
2. According to the video, computer mice made in Japan and that made in other countries
are _______. The earthquake in Japan destroyed some factories producing computer
mice, so that the _______ of mice made in Japan _______. The price of the mice made
in Japan _______ and this will lead to a _______ of demand curve for the mice made in
other countries.
A) substitutes; demand; increases; rises; rightward shift
B) substitutes; supply; decreases; rises; rightward shift
C) substitutes; supply; increases; drops; leftward shift
D) complements; demand; decreases; drops; leftward shift
3. When the income of an individual doubles, his demand for good X increases by more
than double, while his demand for good Y increases by less than double. We can conclude
that good X is a/an ______ and good Y is a /an ______ to the individual.
P. 3
A)
B)
C)
D)
normal good; normal good
normal good; inferior good
inferior good; normal good
inferior good; inferior good
4. Suppose computers and printers are complements. Then an increase in the price of
computers will cause
A) a decrease in the supply of printers and a decrease in the quantity demanded of
printers.
B) a decrease in the demand for printers and a decrease in the quantity supplied of
printers.
C) an increase in the equilibrium price of printers and a decrease in the equilibrium
quantity of printers.
D) a decrease in the equilibrium price of printers and an increase in the equilibrium
quantity of printers.
5. Suppose the main character in the video loses his part-time job and therefore he
consumes less “super delicious breakfast”. To him, “super delicious breakfast” is a/ an
A) normal good.
B) complementary good.
C) luxury good.
D) inferior good.
6. The essential feature of an inferior good is that its
A) price elasticity of demand is positive.
B) income elasticity of demand is positive.
C) price elasticity of demand is negative.
D) income elasticity of demand is negative.
7. Which of the following is not a determinant of the demand for a good?
A) the price of a complementary good
B) the price of the good next month
C) the price of a resource used to produce the good
D) the price of a substitute good
8. If the price of a good is very low,
A) firms can and should raise the price of the product.
B) the supply curve for the good will shift to the left.
C) the quantity supplied of the good could be zero.
D) firms would increase profit by increasing output
9. Which of following about an equilibrium price is NOT true?
A) It is always fair and just.
B) It measures the value of the last unit sold to consumers.
C) Consumers who are willing to pay the equilibrium price can acquire the good.
D) Firms who are willing to accept the equilibrium price can sell what they produce.
P. 4
10. In the video, NaNa’s posters are popular. Suppose there is a model called “GaGa” and
her poster is a substitute for NaNa’s poster. Which of the following would be a possible
cause of the change in the demand illustrated in the diagram below?
Ga Ga’s poster
P
S
D2
0
A)
B)
C)
D)
D1
Q
A rise in the price of GaGa’s posters
An increase in the production cost of GaGa’s posters
An increase in the supply of NaNa’s posters
An increase in the production cost of NaNa’s posters
Discussion Questions
1. Consumers’ expectation could affect the market demand. In the video, the price of the
computer mice made in Japan increased due to the earthquake. Suppose that the
earthquake has a lasting impact on the mouse market, and the supply of computer mice
made in Japan is fixed in the short run.
(a) Suppose people expect the price of the computer mice made in Japan will rise
sharply in the near future. With the aid of a diagram, explain how people’s
expectation will affect its market equilibrium price today.
(b) Suppose another brand (not made in Japan) of mice of the same quality arises in
the market. With the aid of a diagram, explain how this would affect the market
equilibrium price and quantity of the computer mice made in Japan today.
2. Second-hand market emerges when excess demand exists.
(a) If the market price of NaNa’s signed posters increases significantly, would more
people choose to purchase the unsigned posters?
(b) How does the change in (a) affect the equilibrium price and quantity of unsigned
posters, assuming other factors remain constant?
Suppose many teenagers become addicted to NaNa’s posters and spend less time doing
meaningful things. The government would like to prevent teenagers from being addicted
to NaNa’s posters so as to reduce the social burdens caused by these teenagers.
(c) One measure to achieve the government’s objective is to charge a per-unit tax (t)
on the sale of NaNa’s posters. The tax will be collected from the poster sellers.
P. 5
With the aid of a diagram, explain the change in equilibrium price and quantity of
NaNa’s posters. Indicate the amount of government tax revenue received on the
diagram. (Hint: Assume most consumers of NaNa’s posters become addicted to it.
How will it affect the shape of the demand curve?)
(d) Another measure is to discourage teenagers from obsessed with teen idols through
education. With the aid of a diagram, show the change in equilibrium price and
quantity of NaNa’s posters if the policy is effective.
(e) Indicate the change in total expenditure of consumers on NaNa’s posters on the
diagrams in (c) and (d). If the government’s objective is to reduce the quantity
purchased as well as the total expenditure on NaNa’s posters, which measure
should be adopted? Explain. (Assume that the administration and implementation
costs of the education policy are negligible.)
3. Inferior good refers to a good for which the demand decreases as income rises. The video
uses tutorial classes of different prices to illustrate the concept of inferior good.
(a) The tutorial class with a lower price is regarded as an inferior good in the video.
In reality, is it necessary for lower-priced goods or services to be inferior goods?
Why or why not?
(b) Give an example of a normal good as well as an inferior good in daily life and
illustrate your answer.
4. There are two major tunnels leading to Shatin in Hong Kong, and each tunnel’s capacity
for vehicle flows is limited. There is always a congestion problem in Lion Rock Tunnel
during rush hours, while the Tate's Cairn Tunnel usually has excess capacity. The table
below illustrates the toll for the two tunnels respectively.
Tunnel
Toll
Lion Rock
$8 (Flat toll)
Tate’s Cairn
$15 (Private cars)
Source: Transport Department, HKSAR Government1
(a) With the aid of supply-demand diagrams, illustrate the situation of each tunnel
respectively in two separate diagrams.
(b) When there is traffic congestion, would the opportunity cost of getting to Shatin
be the same to every user of the Lion Rock Tunnel? Which consumer, the more
affluent or the less affluent one, is more likely to choose the congested Lion Rock
Tunnel?
(c) Suppose Lion Rock Tunnel and Tate’s Cairn Tunnel are substitutes. Suggest a way
that can reduce the traffic congestion in the Lion Rock Tunnel as well as the
excess capacity in the Tate’s Cairn Tunnel. Indicate the changes on the diagrams
drawn in (a).
1
http://www.td.gov.hk/en/transport_in_hong_kong/tunnels_and_bridges/tunnels_and_bridges/index.html
P. 6
Challenging Question
5. Equilibrium price is attained when the quantity demanded for a good equals the quantity
supplied. At equilibrium, the price has no tendency for further change. The video uses a
$30 “super delicious breakfast” with limited supply (for simplicity, draw a vertical supply
curve) of only 100 sets per day to illustrate the concept of shortage / excess demand.
(a) What is excess demand? In the video, is the price of “super delicious breakfast”
($30) an equilibrium price? Explain your answer with a demand and supply
diagram.
(b) Apart from price competition, the first-come, first-served basis acts as a non-price
allocation device to help allocate the “super delicious breakfast”. Time cost is
incurred when people line up for the “super delicious breakfast”. What will be the
disadvantage of this kind of allocation mechanism?
(c) Suppose the allocation of “super delicious breakfast” will be based on a random
ticket draw instead of the first-come, first-served mechanism. The winner of the
draw will then pay $30 together with the ticket for the breakfast set and the ticket
is not transferable. What will be the disadvantage of this method of allocation?
(d) Suppose now tickets from the draw are transferable. If the demand curve
intersects the supply curve at a price of $35 and transaction cost is negligible, who
(which group of people) will get the tickets at last?
(e) Among the three allocation methods in (b), (c) and (d), which of them is/ are NOT
necessarily allocating the breakfast to the consumers who have the highest
willingness to pay for it?
(f) Among the three allocation methods in (b), (c) and (d), which one is fair?
(g) Positive statements attempt to describe the world as it is while normative
statements attempt to prescribe how the world should be. Classify the analysis in
part (e) and (f) as positive, normative or ambiguous and explain your answer.
P. 7
Suggested Answers
True / False Questions:
1.T
2.T
3.F
4.F
5.F
6.F
7.F
8.F
9.F
10.T
MC Questions:
1.C
2.B
3.A
5.A
6.D
7.C
8.C
9.A
10.C
4.B
Discussion Questions:
1.
(a) Since people expect the price of computer mice made in Japan will rise sharply
soon, their present demand will increase. There will be a rightward shift of the
demand curve from D1 to D2, raising the equilibrium price of mice made in Japan
from P1 to P2.
Computer Mice made in Japan
P
S
P2
P1
D2
0
D1
Q
(b) Another brand of mice of the same quality acts as a substitute good to the
computer mice made in Japan. Therefore, some consumers will buy the substitute
computer mice instead. It shifts the demand curve of computer mice made in
Japan leftward. The equilibrium price is lowered from P2 to P3 and the quantity
remains unchanged.
P. 8
Computer mice made in Japan
S
P
P2
P3
D2
D3
0
Q
2.
(a) NaNa’s signed posters and unsigned posters are substitutes. If the price of the
signed posters in second-hand market soars rapidly, there will be an increase in
the demand for the unsigned posters. On the other hand, the unsigned posters are
essential inputs of the signed posters. Therefore, the increase in the price of signed
poster will lead to an increase in the derived demand for the unsigned posters.
(b) As the demand for the unsigned posters increases, the equilibrium price will
increase from P1 to P2 and the equilibrium quantity will increase from Q1 to Q2.
Unsigned posters
P
S
P2
P1
D2
0
D1
Q1
Q2
Q
(c) After tax, the market supply of NaNa’s posters will decrease, the supply curve
will shift leftward by the extent of the per-unit tax rate (t) from S1 to S2. The price
will thus rise from P1 to P2 and the quantity at equilibrium will decrease from Q1
to Q2. The amount of government tax revenue received is shown by the shaded
area (A + B) on the diagram.
P. 9
NaNa’s posters
S2
P
S1
t
P2
A
P1
B
F
D
0
Q
Q2 Q1
(d) After effective education, the market demand for NaNa’s poster will decrease,
which is represented by a downward shift of the demand curve from D1 to D2. The
price will thus decrease from P1 to P2 and the quantity at equilibrium will decrease
from Q1 to Q2.
NaNa’s posters
P
S
P1
A
P2
B
0
D2
Q2
Q1
D1
Q
P. 10
(e) In (c), the change in total expenditure of consumers is (A - F). In (d), the decrease
in total expenditure of consumers is the shaded area (A + B).
If the government’s objective is to reduce the quantity purchased and total
expenditure of the consumers, then the education measure should be adopted.
According to the previous analysis in (c) and (d), both quantities at equilibrium
are reduced. The total expenditure of consumers under tax measure will increase
if the price elasticity of demand is low, but the total expenditure of consumers
under education measure will certainly be reduced. In addition, the demand is
inelastic, the quantity demanded may not be reduced that much under the tax
measure.
However, our conclusion so far ignores the administration and implementation
costs of the education policy. If the costs involved are too high, tax measure may
be a better option.
3.
(a) It’s not necessary for lower-priced goods or services to be inferior goods. Whether
a good is inferior depends on how the demand changes with a change in a
consumer’s income. A good can be regarded as a normal good by one customer
while as an inferior good by others. For example, the lower-priced tutorial course
is regarded as an inferior good by a student, but may be regarded as a normal
good by another student.
(b) Possible answers:
Buffet dinner at a five-star hotel is a normal good for me. When my income rises,
I will be more willing to enjoy a buffet dinner at a five-star hotel, and thus my
demand for it will increase. A meal in a chained fast-food restaurant is an inferior
good for me. When my income rises, I will be less willing to dine in a chained
fast-food restaurant, and thus my demand for it will decrease.
Another possible example of normal good is leisure.
4.
(a) The toll for the Lion Rock Tunnel is set at $8 which is below the market
equilibrium price (P1) during rush hours. As a result, there is excess demand
which is shown by the traffic congestion problem.
P. 11
(i) Lion Rock Tunnel
P
S
P1
$8
D
Excess Demand
0
Q
Q1
The toll for the Tate’s Cairn Tunnel is set at $15 which is higher than the market
equilibrium price (P1’) during rush hours. As a result, there is excess supply which is
shown by the excess capacity.
(ii) Tate’s Cairn Tunnel
P
S
Excess Supply
$15
A
P1’
D
0
Q1
Q
(b) No. Different users of tunnels have different opportunity costs, since they have
different time costs. For example, we may measure the time cost of an individual
by his wage rate. A less affluent person may put a larger emphasis on the toll
rather than the extra time wasted due to the traffic congestion when considering
the choice of tunnels as their time cost is likely to be lower. Therefore, less
affluent one is more likely to use the Lion Rock tunnel during the peak hours.
(c) One possible way is to reduce the toll for the Tate’s Cairn Tunnel, which is
P. 12
indicated by arrow A on diagram (ii). When the set price is adjusted to the market
equilibrium price (indicated by P1’), there is no excess supply for the Tate’s Cairn
Tunnel. As the substitute’s price is lowered, the demand for the Lion Rock Tunnel
will decrease, which can reduce the excess demand for the Lion Rock Tunnel.
Alternatively, raising the price of the Lion Rock Tunnel may achieve similar
results.
5.
(a) Excess demand is a state when the market quantity demanded is greater than the
market quantity supplied at a certain price level. It is also known as shortage.
The price of “super delicious breakfast” ($30) is not an equilibrium price in the
video. The supply curve is vertical due to the limited supply of 100 sets per day.
As it can be seen from the story, the boy rushed to the canteen but failed to buy
the breakfast set, which implies that there is excess demand in this case. Therefore,
we can conclude that the current price is lower than the market equilibrium level.
P
Super delicious breakfast
S
P1
P2 = $30
D
Excess Demand
0
Q1= 100
Q
(b) Under the first-come, first-served mechanism, time cost is incurred for every
potential buyer. Customers can spend the waiting time doing something more
economically productive if they are not required to line up for the breakfast. Thus,
the allocation mechanism may cause resource loss. Besides, with the extra time
costs the good isn’t necessarily allocated to consumers who have the highest
willingness to pay for the good.
(c) Under the random non-transferable ticket draw, the good isn’t necessarily
allocated to consumers who have the highest willingness to pay and thus
allocation efficiency cannot be achieved.
(d) If the tickets are transferable, then consumers who are willing to buy the breakfast
set at a higher price will buy the tickets from those lucky people who won the
draw. Gradually, the market price of tickets will reach equilibrium at $5. At last,
P. 13
consumers who are willing to pay $35 for the breakfast set will buy the tickets.
(e) The first-come, first-served basis in (b) and random nontransferable ticket draw in
(c) allocation mechanism may not allocate the breakfast to the customers who
value it most highly.
(f) In conclusion, under the first-come, first-served basis, consumers who have the
lowest time cost will get the breakfast. Under the random nontransferable ticket
draw allocation mechanism, the luckiest consumers will get the breakfast. Under
the random transferable ticket draw allocation mechanism, consumers who have
the highest willingness to pay for the breakfast will eventually get the breakfast
set. In other words, under different rules of game, there will be different groups of
winners. It’s hard to conclude which mechanism is fair and which is not.
(g) The analysis in part (e) is a positive analysis as it refers to a well-defined
definition and contains no value judgment to determine. On the other hand, the
concept of fairness can vary from countries to countries due to different cultural
values. Thus, the analysis in part (f) is normative since it involves value judgment.
P. 14