PART A- Questions related to ‘The Mystery of the Invisible Hand’
Jevons Marshall is a fictitious pen name used by the true author(s) of the book. Who really wrote the book? What makes ‘Jevons Marshall’ a clever choice for the pen name in this case?
Answer. The pseudonym Jevons Marshall is used by two renowned professors of economics who are William Breit and Kenneth G. Elzinga. The pen name is derived from the surnames of two famous economists named Alfred Marshall and William Jevons. The pen name made from the names of these two economists is deliberately used for writing mystery novels based on economics as where the former (Marshall) was the author of Principles of Economics in London and the latter (Jevons) is known for his remarkable theories on the laws of marginal utility. Hence, the hybrid of these two famous economists makes the pseudonym a highly empowered entity to use the principles of economics in creating successful mystery novels.
If you owned all the land, you wouldn’t be able to charge a monopoly price for any one parcel of it for the same reason why if you owned all the paintings of some artist, you couldn’t sell them at the monopoly price. Explain.
Answer. The monopolistic power implies the autonomy of a seller to change prices (raise or lower) as per his own will and this change in prices is to meet the changing demands of the market with respect to the prices offered by the competitors. However, in the case of a seller owning the entire product in the market, he can never have a buyer without a guarantee that the prices will not be lowered any further. This is because every buyer will try to safeguard the investment value of his purchased product and a monopolistic change in the prices can give him profit or loss accordingly. Hence, each buyer will first ensure that he never bears a loss due to a lowering of prices later on. In the case of real estate or paintings, the sole owner of all the land or art is bound to not lower the prices as earlier sales will guarantee that their investment value is either same or higher but never lower than that of the purchase price.
Answer. The law of diminishing marginal utility is generally taught via a process which explains how the satisfaction and utility recognized from a product gradually diminishes in the mind of the buyer when he specifically increases the consumption of particularly that product and keeps all the other products at a constant figure of consumption. So, the concept tends to state the perceived satisfaction or utility of a product decreases with a rising consumption or usage of that product (Smriti , 2015, p. 2). However, Prof. Spearman’s is slightly different from his colleagues and he believes that although the demand for a good is regulated by the law of marginal utility but the supply of the goods is not entirely dependent on the marginal utility of the product and it also varies with the cost of production for that good (Jevons, 2014, p.42). Hence, the marginal utility of a product decreases when the buyers feel a relatively higher rate of addition of the product to his stock when compared with that of his consumption rate.
‘Poppa, for you, work is consumption good.’ What did Patricia mean by saying this?
Answer. Spearman’s daughter, Patricia always used to find him working at home over the various academic and his social ventures and she used to mock at his excessive inclination towards work (Jevons, 2014, p.44). She also addressed his tendency of being engrossed in work to be an opposite of the attention deficit syndrome and rather termed his work to be a sort of consumable good for his earnest desires to learn and contribute more to the field of economics and its practical applications. Thus, the analogy drawn between work and a consumable good by Patricia is actually a way to mock at her father by using the economic jargons so as to make it more meaningful to him.
‘It’s striking how many economists end up as deans of business schools’. Is that a matter of demand or supply? Explain.
Answer. Abraham mentioned this statement that it was shocking for him to see how many of the economists actually ended up as deans in business schools in response to his comparison of the same figure when applied to the case of liberal arts related streams (Jevons, 2014, p.87). He implied the law of demand supply being applicable in the case that major economists nowadays are more inclined towards grabbing key positions in the federal government offices and are happy with steady income patterns. Although, this limited scope of acting within the job profile limits their knowledge of the application of economics into real life academics which could have transformed the scenario of education. Hence, Abraham has actually mocked at the gradually lowering supply of the economists with respect to the rising demand as deans and educational mentors at business schools.
‘To pay for the stadium, the city didn’t tax local income or property. The tax was on hotel rooms () so the stadium didn’t cost the Citizens of San Antonio a thing’. What is wrong with Compton’s argument here?
Answer. Compton’s argument is flawed as it is based on the assumption that a public infrastructure based project might be developed by just raising tariff oriented taxes on hotels and commercial establishments (Jevons, 2014, p.93). According to the Keynesian principles of government spending into public service based big infrastructure projects; the government uses the fiscal income to create more infrastructures that in turn generates more jobs for labor and skilled workers and business for raw material suppliers. Further, the government spending goes back to people as income and salary which they spend into the markets and this ensures proper circulation of currency in the economy which raises GDP (Sightings, 2012, p.1). However, if the government spending on infrastructure projects is not via fiscal income from the people (income and property tax) proper currency circulation will not occur and money will start fluctuating in its value.
‘All houses are for sale even though not all of them are listed. From the perspective of economic analysis, costs of acquiring them are probably higher than the costs of those that are listed with a real estate agent’. Explain.
Answer. The given statement can be explained as the economic phenomenon where various market factors and cost driving elements come into consideration when a transaction is to be planned. A house that is not for sale will not be listed with the real estate agent and in the case of a choice being made for purchasing the unlisted house; the seller can be monopolistic in demanding the price for his property. The economic factor of monopolistic pricing come into the picture as an unlisted property is not catalogued along with the other listed properties which the real estate agent has and hence it makes a separate market of monopoly for the seller decide his own price. Therefore, more the seclusion from market forces, greater is the chance of an owner selling the house at a higher price than the listed ones.
‘Arbitrage is the economic death of discrimination’. Explain.
Answer. The discrimination of price is implied when there is an assurance that there are mutually separable markets. The separation of markets provides an opportunity of varying pricing structures and different wants for the product on the basis of the buyers and sellers of the different markets. Arbitrage is a process of buying a product from a market and selling it into another market (McAfee, 2008. p.473). As the product gets listed in the pricing practices of another market, the relative price discrimination scope gets almost eliminated in this discourse. Further, the product which could have capitalized on its movement into another market’s demand cycle gets restricted to the specific market’s demand-supply based pricing after arbitration. Hence, it is clear that arbitrage eradicates the economic possibilities of price and value discrimination of a product (Jevons, 2014, p.245).
Why most artists opt for exclusive sales arrangements with just one gallery?
Answer. The artists generally ensure that their artworks are sold via exclusive sales arrangement executed through a single gallery to ensure that there is no hampering or manipulative effect on the prices set for each piece. The sales arrangement executed by just one gallery make it a monopolistic market sort of situation where the supply-demand ratio is a constant figure and this further puts a certainty that there is no impact on the pricing for each art. The artworks are often subjected to an estimation of their worth in terms of viewer’s response, the single gallery type of sales arrangement works in the best financial interest of the artist by affirming the worth of his each artwork to be constant (Mayyasi, 2015, p.1). Therefore, within a gallery, the demand and supply for all the paintings remains fairly stable irrespective of higher or lower value perceived by the viewers and buyers for any of them.
How did the bell curve and the death effect help Spearman in solving the crime and theft mysteries?
Answer. The notion of death effect as proposed by Spearman explains the implementation of the impact of scarcity of an art on its price and perceived marginal utility. Thus, the death effect explains how the price of an artist’s work goes high after his death or if he stops producing art anymore. Spearman came to a conclusion that if a middle-aged artist dies then the market responds back by bidding higher prices to ensure that his remaining works are purchased before they are finally bought from the market. Thus, Spearman used this theory for ascertaining the cause of Tristan Wheeler who died at the age of 46 years and the bell curve theory was applied to analyze what will be the average pricing of most of Wheeler’s works after his sudden demise.
PART B- An essay on “Why off-peak train tickets are so much cheaper? ”
Introduction
It is generally observed that the peak hours of the train and metro tickets have higher pricing than that of the moderate and off-peak hour prices. This strategic change in prices on the basis of nature and time of peak demand is called surge pricing, which also known as the surge is pricing. This alteration in pricing strategy with respect to varying loads is generally misconceived by the common people and owing to the discomfort and lesser ease of access in travelling via trains. Most of the people believe that the peak load train prices should be lower than the off-peak hours. Therefore, this essay tends to explore the underlying rationale of market equilibrium (demand –supply ratios) behind the time and demand based pricing strategy in train tickets.
Train service (Supply side) factors
The operations of the train during peak load require higher power by the engines and this increases the overall cost of operations for managing profitability during the peak-hours. Further, more drivers need to be deployed for a larger number of trips (to and fro) during the peak hours. It is very crucial to have backup support during the peak hours to avoid any situation of hampered operations during the peak (Walker, 2014, p.1). Similarly, the maintenance and other operational costs are twice that of normal load hours during the peak hours. Hence, all the above factors affirm that the train prices should be higher during the peak hours to keep up with the desired profitability in operations during the peak hours.
Passenger travelling preference (Demand side) factors
The peak hours are generally office going hours when the majority of people travelling through trains and metro rails are trying to reach offices as soon as possible. So, to ensure higher safety and lesser inconvenient travelling experience for all, it is better to encourage less traveling by those travelers who have an option to travel at other time of the day or to avail any other cheaper medium of conveyance during the peak hours (Walker, 2014, p.1). It is also true that the average midday traveler has less income than that of the peak-hours traveler so the differential pricing aids in maintaining their sense of affordability during their individual routine commutation during different times of the day. Hence, demand-based pricing is justified for managing the means of travelling via train for passengers who have differing preferences in travelling via trains.
Conclusion: Market equilibrium and Train ticket pricing
An entity which has higher demand at constant supply should face a surge in its prices and an entity which has lower demand at a constant price should be relatively dragged down to a drop in its prices so as to comply with the market equilibrium principle of economics (O'Sullivan, Perez and Sheffrin, 2008, p. 51). Therefore, a peak demand based ticket price should be relatively higher because supply is almost constant when the demand is doubled and this should be marked by a rise in prices. Similarly, the midday travel should have cheaper tickets to attract more customers as the demand is already low during such hours.
Bibliography
Jevons, M., 2014. The Mystery of the Invisible Hand: A Henry Spearman Mystery. New Jersey: Princeton University Press.
Mayyasi, A., 2015. Why Is Art Expensive? Price Economics, [online] Available at :< http://priceonomics.com/why-is-art-expensive/ > [Accessed 06 March 2016].
McAfee, P.R. "Price Discrimination". Issues in competition law and policy, Vol.1 (2008): 471-473.
O'Sullivan, A., Perez, S. and Sheffrin, M.S., 2008. Macroeconomics: Principles, Applications, and Tools. 4th Ed. New Delhi: Pearson Education.
Sightings, T., 2012. How Would Keynes Save Our Economy? US News, [online] Available at :< http://money.usnews.com/money/blogs/on-retirement/2012/07/17/how-would-keynes-save-our-economy> [Accessed 06 March 2016].
Smriti, C., 2015. Law of Diminishing Marginal Utility (Explained With Diagram). Your article library, [online] Available at :< http://www.yourarticlelibrary.com/economics/law-of-diminishing-marginal-utility-explained-with-diagram/38940/ > [Accessed 06 March 2016].
Walker, J., 2014. Should Fares Be Higher During Peak Hours? Human Transit [online] Available at :< http://humantransit.org/2010/05/should-fares-be-higher-during-peak-hours.html> [Accessed 06 March 2016].
