Explain what you understand by the term the “invisible hand “and competitive market. Why would the workings of a competitive market result in an efficient allocation of resources as first suggested by Adam Smith?



Question 1
Adam Smith, in his book, The Wealth of Nations, 1776, tried to explain 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) Explain what you understand by the term the “invisible hand “and competitive market. Why would the workings of a competitive market result in an efficient allocation of resources as first suggested by Adam Smith? When does a market achieve allocative efficiency?
Use the Supply and Demand model in your explanation.

b) Give at least two examples you see of the invisible hand at work on campus or in the market place or online.
(4 +2 Marks)

Question 2
Crude oil is a world commodity and the primary input into the production of many products.
a) List some goods (of different categories) produced from crude oil or produced using crude oil as a main input.

b) Who are some of the largest producers of crude oil? List the 10 largest companies that produce oil. Use a table to indicate their total output per day. Also list the 10 largest oil-producing countries. Use a table to show their ouput as a percentage of world output.
(2 + 2 Marks)
Question 3
This question requires you to construct a time-series graph of quarterly oil price movements from 1970 to the present (July 2014/15). You can use the data provided in the MS Excel file in the assessment folder in Moodle entitled “Data for crude oil prices”.
Present this data in a time-series line chart/graph using MS Excel. The graph must be titled and the source cited.
Comment on the movement of oil prices through the four decades and give possible reasons for the changes in oil prices. State the periods that had significant changes in oil prices. Your answer should include a mention of any main “player/s” or significant world events that impacted on the price of crude oil. Did producers in the world oil market have any power to influence oil prices?
Note: You may like to check these websites when preparing answers to this question:
(4 Marks)
Question 4
Consider the effect of oil prices on the demand, supply and equilibrium prices of products in the following markets. Answer the following questions using concepts from the Demand and Supply model and concepts on elasticity of demand and supply. Start your answers for each part below with a Demand and Supply graph showing the relevant market initially in equilibrium. Explain what happens to the market demand, supply and equilibrium price and quantity, following a significant rise in the price of oil
i) The market for 4-cylinder versus 6-cylinder motor vehicles
ii) The market for hybrid cars
iii) The market for inner-city homes and suburban houses.
Your answers should include some comment on how the elasticity of demand and/or supply impacts on the magnitude of change in market price and quantity where relevant.
(6 marks


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