Economic Models and Concepts in Analysing Current Economic and Business Issues - Coursework Example

Economic Models and Theories By + Reasons for the falling prices of used cars in In there was a low demand for new vehicles in the market. This can be attributed to a number of factors such as the lack of finance to enable consumers to purchase such vehicles. As a result, there is a surplus of vehicles in the market that have not been sold and this has a direct impact on the other areas of the motor industry as it drives down the prices of both the new and used cars. The price of the second hand cars can be attributed to the supply and demand of the various car models and this is illustrated in the diagrams below (Neumann 2010). According to this diagram, the supply and demand of goods have a direct impact on the price of the commodity. When there is an increase in the supply of a product the demand for the product is expected to drop. The demand for products is highest when the supply of a given product is quite low. In that scenario, people are willing to pay an extra amount so as to get the product since it is not readily available. On the other hand, when the supply is high, the demand is low and this pushes the price of the product much lower so as to increase uptake. However, when the demand and the supply curves cross is where there is an equilibrium point. This point is marked by selling of Q1 products at a price of P1 (Neumann 2010). In the context of the situation in the UK market is flooded with both used and new cars. Consumers are opting to keep their old cars longer while some are trading in their new cars for less expensive models. This further increases the amount of used cars in the market. The financial situation has made it difficult for people to maintain their luxury vehicles and many are opting to dispose them off. This has increased the supply of used cars in the market. This results in a shift in the supply curve as illustrated in the diagram below (Dutta 2006). sed cars in the markply of it difficult for people to maintain their luxury vehicles and many are opting to dispose them off.r The shift in the supply curve upwards results in a lowering of the equilibrium point. This means that the prices of used cars will fall from Pe to P1 as indicated in the diagram above. Impact of government intervention in the markets Any given market consists of sellers and buyer each with a particular product or service that they want to sell to others (Neumann 2010). The prices of goods and services are usually determined by the supply and the demand of the particular product. The law of demand states that there is an inverse relationship between the price of a product and the demand for the particular product. In this regard I will discuss the market demand, the market supply before looking at how government intervention affects the various aspects of the market. The Demand Curve This illustrates the law of demand; the higher the price of a good the lower the demand of the particular good. On the other hand the lower the price of a good the higher the demand for the particular goods. The demand curve is downward sloping as illustrated in the diagram below (Dutta 2006). The diagram illustrates the prices for a particular product and the quantity demanded of the product at the various prices. The curve is a direct reflection of the marginal benefit that is obtained when consuming goods. Consumers are willing to pay a high amount for goods but as additional units are consumed there is less satisfaction that is derived from the product, as such they will be willing only to pay a small amount (Chatnani 2010). Furthermore, when the price of a good is reduced it becomes cheaper than the prices of the other goods and so the quantity demanded is higher. The income effect also comes into play whereas the prices are reduced, the consumers have some money left and this makes them slightly richer. There is an increase in their buying power. This implies that they can buy more of that type of goods or other that they may be interested in. The demand of goods is further affected by the prices of other related goods. These are complements and substitutes, Substitutes are a direct replacement to a particular class of goods. This means that if the price of good increases consumers will simply shift to alternative goods. Complements are goods that are used together. If the price of one of these goods increases then the demand is likely to drop, as such the demand for the complements also drops. The Supply Curve This curve shows that an increase in prices results to an increase in supply. The producers are more willing to produce goods if they expect to get higher returns (Dutta 2006). As price of a good rises from P3 to P1, the producers of the goods are willing to increase their output from Q3 to Q1. There are several factors that might affect the supply of a good and they include; prices of other related goods, production techniques and taxes and subsidies that have been offered by the government. Market Equilibrium The equilibrium is the point at which the demand curves and the supply curves intersect. This is represented in the diagram below (Mandal 2007) The quantity demanded of a particular good can change due to various factors such as a change in the tastes and preferences of the consumers (Blaug 2006). This means that at the present selling price there will be more stock in the market (surplus) resulting in a decrease in the prices of the goods. As such this new equilibrium will occur at a point that has a lower price and a related lower quantity. Market Intervention by the Government in Car Markets At times, the government might find it necessary to protect either the consumers or the producers of particular products. The natural forces of supply and demand that are outlined above might not be beneficial to these groups of people and therefore the government can put in place policies that control the prices of the goods. These can be in the form of price ceilings and price floors. Price Floors A diagram showing the impact of price floors (Katzner 1998) The government can set a price floor. This refers to the minimum price that a particular good may be sold. The aim of this policy is to protect the consumers of a commodity by making sure the prices are much higher than those that are set naturally by the market equilibrium. For such a policy to be effective, the price floor has to be above the given market equilibrium. If the price is above the equilibrium, there will be a surplus in the market since the quantity that is supplied will exceed the quantity that is demanded in this market. One particular industry where the use of price ceilings is common is in the agricultural sector. The government can put in place price floors in regards to the prices of wheat. As a result, the price will be higher than that which is set by the equilibrium, resulting in an increase in supply by the producers. However, the increased price will have an effect on the consumers’ purchasing power and they will therefore buy less of the commodity. This results in a surplus in the wheat market. In this situation, producers would have lowered the prices so that they could sell their products but this is not allowed by the law. The government therefore has to take another action to deal with this situation and in most cases it decides to buy the surplus products from the producers at the set price. Advantages The main advantages of price floors are to the farmer. This is because they are assured of higher prices for their produce and even if their production is in excess, government comes in and purchases the extra commodity. They are therefore safe from any loses. Disadvantages The consumers who use the products on a regular basis will have to pay higher prices for them. If the price floors were not in place the prices would have been much lower. The government will also charge higher taxes so that it can be able to get enough funds so that it can purchase the extra produce from the producers. This means that the consumers have a double burden due to the presence of price floors (Dean 2005). Price ceilings A diagram representing impact of price ceilings (Mandal 2007) The main aim of setting price ceilings is to protect the consumers from very high prices. For this to be possible, the price ceiling must be somewhere below the equilibrium set by the market. When the price ceiling is set, producers have a maximum price that they can set for particular goods. They are therefore not willing to put a lot of resources in production of these particular goods. This results in a shortage in the market and consumers have to develop other ways of getting these products. Advantages Consumers are able to get certain goods at a lower cost than the price that had been set by the demand and supply factors. Goods that were previously unaffordable can now be consumed by them (Mandal 2007). Disadvantages There is a shortage in particular goods. Producers are not willing to produce certain goods if they cannot break even and get profits. They may therefore halt production of these selected goods. Price ceilings also lead to the development of black markets where consumers can purchase these goods but at much higher prices. Government intervention in car markets When the government introduces subsidies in regards to the electric car industry, the expected result is that there shall be a reduction in the costs of production. The companies will therefore be able to lower the costs of each vehicle unit. This is expected to make them cheaper to the consumers. The advantage for this is that the consumers will be able to get them cheaply, but there are also other factors that decide the choice of cars that consumers buy. Electric cars are seen as a seasonal substitute when the prices of fuels sky rocket but when they go down most of the users revert back to fuel powered vehicles (Katzner 1998). The use of subsidies also means that the government reduces the amount of revenue that it collects from this industry and this implies that consumers will have to pay higher taxes so that the government operations are not affected. Given this scenario, the government should not involve itself with the car markets as experience shows that the move to increase the use of electric cars is not widely supported by majority of the consumers. Price Elasticity of Demand The price elasticity of demand measures the change in the demand of particular goods due to be a change in the price of the goods (Mandal 2007). The change can be inverse or direct. In a case where a small price change results in a huge variation in the quantity demanded, the product can be termed as being elastic. However, if a large price change results in only a small change in the amount demanded then the product is said to be inelastic. The demand of motor vehicles is linked to the price of fuel. When the price of fuel goes up, the demand for electric cars increases. But when the price of fuel goes down, the demand for electric cars reduces in this case; fuel is elastic as it affects the demand of the cars. Income Elasticity of Demand This refers to the change in the demand of a particular good due to the change in the income of the individuals. The change in quantity due to change in real income depends on whether the good is a luxury good or a normal good (Little 1995). As the income of an individual changes there is an increase in the amount of normal goods that are demanded. They therefore have a positive income elasticity of demand. Inferior goods have negative income elasticity of demand and their consumption reduces with increased incomes. Luxury goods have a positive income of elasticity. This is because most consumers will use any extra income to purchase luxuries (Gale 1999). This situation was reflected in the car markets in 2012. Consumers could not access the financial services to enable them purchase new luxury vehicles. Lack of financial services implies lower aggregate income for individuals. As a result, they opted for cheaper models of vehicles and discarded the luxury models. Economies of Scale This refers to the benefit that is gained by a business due to mass production of its products. Production on a large scale ensures that the fixed and variable costs of each unit are lowered (Katzner 1998). This is because these costs are shared over a large number of the products. This phenomenon has been used to reduce the costs of electric cars. When there is a huge demand of electric cars by the public there is an increase in the production of these cars and as a result the costs are further reduces due to the economies of scale. The economies of scale therefore play an important part in price of a commodity. Impact of cartels A cartel involves a group of firms that dominates a given market and uses their influence to set the products for the goods in that market (Mandal 2007). The dominant companies in this industry therefore lock out smaller players in the industry. Cartel activity only benefits a few people but is a disadvantage to majority of the population. The companies in the cartel remain relevant in the market as they are the most visible. It is possible that the production costs can be significantly reduced if a cartel is used positively. The companies in the cartel can also get monopoly profits from this arrangement as their costs of marketing are reduced significantly by use of the cartel setup. It has been proven to be cheaper if industries are able to market their goods as an individual seller rather than each entity by itself. Companies that do not join the cartel are effectively locked out of the market since the cartels benefits from economies of scale (Little 1995). The cartels also charge higher prices for their products than the prices that would have been charged if the market was left to operate freely. Given the dominance of these industries, consumers have no option but to pay the higher prices. Cartels are known to undercut the competition and make the conditions unfavorable for their operations. They can decide to either lower their prices to force the small firms out of business or increase the prices so that they can increase their profits. The Lorry manufacturers might have ensured that entry into the lorry industry in the UK was limited and it is only them who could operate without facing any competition. In conclusion, fair business practices should be embraced in all industries so that all the players can have an equal competitive field. All businesses want to get profits from their operations; however, this should be done in a fair way that does not affect the operations of other companies. Bibliography BLAUG, M. (2006). Economic theory in retrospect. Cambridge, Cambridge University Press. CHATNANI, N. N. (2010). Commodity markets: operations, instruments, and applications. New Delhi, Tata McGraw Hill Education Private Limited. Dean, Joel. (2005). 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