Principles of Economics: Seminar Questions
The workings of the market
Seminar: Monday 28th July
Q1:
(a) Which factors affect (i) the demand and (ii) the supply of shares traded on the FTSE100?
(b) Consider the date in the figure below. Does your answer to part (a) support the data?
(c) Which factors are likely to be the main drivers of the peaks and troughs in the chart below?
Q2: The housing market is crucial to any economy and for that, it reason receives a lot of media
attention. The following are 2 blogs on the UK housing market, with links to some articles and
some questions to discuss. A Housing bubble and How to cool the London housing market? You
may also want to look into data and the performance of the housing market in your own country.
(a) Having read the blogs and researched any additional data, which factors would you identify
as being the main determinants of demand and supply? Do these answers vary depending on
which country you are considering?
(b) Draw a demand and supply diagram to illustrate the housing market. Think carefully about
the shapes of demand and supply and how this helps to explain why house price bubbles can
emerge.
(c) Why are governments so interested in the housing market? What types of policy do we
observe and which part of the market do they affect (e.g. is the policy designed to change
supply/demand/both)?
Q3:
Response to Changes in Petrol
and Ethanol Prices in Brazil
A case in demand and supply
In Brazil, most cars sold since 2003 have been flex-fuel vehicles (FFVs). These are capable of
running on any combination of petrol and ethanol that drivers choose to put in them. When
Brazilian drivers fill up at a garage, they could just use petrol, which already normally contains 25
per cent (anhydrous) ethanol and hence is known as E25. They could, from a different pump,
instead put pure (hydrous) ethanol, known as E100, into the FFV.
Alternatively, drivers can choose to put in a combination of E25 and E100, based on prices. The
‘break-even’ price occurs when the price of ethanol is about 70 per cent of the price of petrol, given
the better performance characteristics of the latter.
All of Brazil’s ethanol is derived from sugarcane, and most is made in mills capable of
producing both ethanol and sugar. As a result, the prices of E25 and E100 are affected by the price
of oil and sugar.
Response to a rise in ethanol prices
In late 2009, heavy rains meant that the sugarcane harvest was half what was expected. This meant
less ethanol could be produced and, as a result, ethanol prices rose.
The government took a decision to reduce the ethanol percentage in petrol from 25 to 20 per
cent – the lowest blend percentage allowed by law – but only for 90 days. This reduced demand, but
by only one-sixth of the total ethanol production lost by the poor sugarcane harvest. Consequently,
it was not enough to bring the price of ethanol back down again. Drivers thus bought more blended
petrol and a lot less E100 ethanol. Newspapers and one of the national TV stations provided regular
(almost daily) updates for consumers on the price movements.
The Spring 2010 sugarcane harvest was back to normal. With it, ethanol production rose,
ethanol prices fell and, once again, E100 became more attractive to drivers relative to E25 petrol.
Since then, another poor cane harvest resulted in drivers again reducing demand for E100. This
time, this effect was reinforced by high prices for sugar. More of the cane that is harvested, is being
used to produce sugar. This has reduced further the production of ethanol, increasing its price still
further. As a result, many drivers do not buy E100 at all.
(a) How would drivers make a ‘rational’ decision about when to switch from E100 to blended
petrol?
(b) What effect would an increase in the demand for sugary desserts have on both the price of
ethanol and the demand for E100?
Q4: The diagram below shows the demand for and supply of petrol. The market is initially in
equilibrium at point x. There is then a shift in the demand and/or supply curves, with a resulting
change in equilibrium price and quantity.
To which equilibrium point (a, b, c, d, e, f, g or h) will the market move from point x after each of the
following changes?
S2
S0
S1
a
b
Price
h
g
c
x
d
f
e
D1
D0
D2
Quantity
The market for petrol
(a)
(b)
(c)
(d)
A rise in the cost of refining petrol
A fall in bus and train fares.
A fall in the price of crude oil and an increase in the price of cars.
A rise in tax on petrol and a reduction in tax on cars.