The Supply of Eggs in Market for Biscuits and Governmental Taxation - Assignment Example

?Topic: SE Q1. The shortage in the supply of eggs has had a number of implications on the production of food products in Britain. Egg is an important ingredient in the production of biscuits and based on the concept of derived demand, the demand for biscuits is dependent on the demand for eggs (Cassel, 2002, p. 16). In the case presented by the newspaper article, the market for eggs is experiencing acute shortages of supply which eventually has led to a sharp increase in prices. This makes it very expensive for biscuit manufacturers to purchase eggs which are an essential input in the production process. According to the article, the price of eggs has more than tripled and this may have a similar effect on the prices of biscuits. The market for biscuits will be affected in the sense that high prices caused by an increase in the cost of an input will increase the price of biscuits. The demand for biscuits will fall drastically given the fact consumers are price conscious. According to the rule of demand, customers are willing to buy more at fewer prices and buy less at higher prices. This is illustrated by the diagram below: P D P2 P1 D Q2 Q1 Q The sale of biscuits will no longer be lucrative because businesses will be recording low sales volumes. This will result in most of the business closing down such lines of businesses or resort to importing biscuits produced outside the British market. This can be explained by the fact that foreign biscuits are produced cheaply hence less expensive. Textbook economic theory would agree with the statement “it is no longer about price, it is about supply.” According to the law of supply, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa (Altman, 2004, p. 39). Suppliers will be more willing to supply eggs given that they fetch very high prices in the market. This is to maximize profits from the supply of eggs. This is explained in the diagram below: P P2 S P1 S Q1 Q2 Q Q2. A mixed economy is characterized by the presence of both public and private institutions. The two institutions are involved in addressing the needs of consumers and solving economic challenges that may exist in the market. Consumer needs and demands can be addressed adequately when the institutions utilize existing opportunities in making goods and services available in the market. According to principles of economics, scarcity refers to a situation whereby the available resources in an economy are not adequate to meet the needs of the economy. This results in consumers having some of their needs unsatisfied. Depending on the demands of consumers, the government has the responsibility of analyzing and determining their level of importance in improving the welfare of the consumers. The government also determines the appropriate procedures to be used in addressing such needs. Opportunity cost can be defined as the cost of a foregone alternative. For instance, the concept opportunity is best illustrated in a situation whereby someone decides to become an entrepreneur after completing college. In such a case, the person gives up the chance of getting fulltime employment and the opportunity cost of his decision to become an entrepreneur is the monthly income and allowances attached to the fulltime job. The two concepts of scarcity and opportunity cost are very important to the government given that the government collects revenues and uses them in running the economy. The government has the responsibility of making sure that the economy is running smoothly by spending its revenue on essential projects. Government spending should be influenced by a number of factors such as challenges, costs and benefits of such projects. The government needs to develop a list of all the projects it intends to put in place and determine their relevance to the economy (Cassel, 2002, p. 122). This means that the government needs to implement projects based on their level of importance to the citizens of the country. The projects should in response to the needs of consumers in the market in order to make them relevant. The main reason for any form of government taxation is to collect revenues for the funding of public projects and to control the demand and supply of certain goods and services. Taxation on goods such as alcohol, cigarettes and petrol is no exception. However, such goods have unique characteristics in terms of their demand and price elasticity. The demand for alcohol and cigarettes is price inelastic because of their ability to cause addiction among consumers. Addicted consumers will always not change their quantity demanded whenever there are changes in prices. The government is aware that increasing its taxation on cigarettes and alcohol will not reduce consumer demand by a greater. However, the government will impose taxes on cigarettes and alcohol in order to control its consumption. When their prices are relatively higher, consumers may respond by reducing their levels of consumption. In the case of petrol, the government taxes the good for the main reason of collecting revenues and controlling its consumption. The use of petrol has adverse effects on the environment in form of harmful gases that are released as by products. The government may increase its taxation on petrol to encourage manufacturers as well as motorists to use alternative fuels that have low impacts on the environment. Q3. There are a number of economic reasons that the government should regulate the consumption of sugar and its related products. The main reason is that regulating the consumption of sugar aids the government in reducing government spending on public health. In recent times, many economies across the world have recording huge spending on public health. This is attributed to the fact that there has been an increase in the number of health cases related to sugar diseases such as diabetes. Controlling the consumption of sugar through taxation has the implication of reducing its consumption by increasing its price in the market. Higher prices will make sugar unattractive hence people will consume less of sugar products and eventually reduce the spread of sugar related ailments. Sugar regulation through taxation is also an effective way of improving government revenue collection. This is because sugar is among the highly consumed products in a given economy. This means that the government will be able to collect large amounts of revenue that will be used in improving the welfare of the economy. A large number of consumers using sugar products are unaware of their side effects because they have little information about their side effects. However, the use of education is an effective method of controlling sugar consumption in a given economy. Educational materials such as results from scientific research studies can be made available to consumers in an economy to educate them on the effects of sugar consumption and encourage them from consuming high levels of sugar. Eventually, consumers will be convinced to reduce their sugar consumption. However, the supply of sugar and its related product will remain unaffected. This can be illustrated by a diagram below: P D1 S P1 D2 P2 E2 D1 D2 S Q2 Q1 Q Taxation has the effect of increasing the cost of sugar in an economy. Manufacturers will find it expensive to use sugar as a raw material in their production processes and they will pass the tax burden to consumers in terms of higher prices or even reduce their supply. Consequently, consumers will respond to the increase in prices by reducing their demand for sugar and its related product. This is illustrated by the diagrams below: a). Effect on Consumers P D P2 P1 D Q Q2 Q1 b) Effect on Suppliers P S2 S1 P2 P1 S2 S1 Q2 Q1 Q Q4. In 2008, there was government intervention in the US insurance industry and an example is the case of American International Group (AIG). AIG was and is still one of the largest insurers in the world. The firm is large in size and has massive financial resources. In 2008, it received a credit rating of AA but by the end of the year it was facing the threat of becoming insolvent. However, the US government came to the rescue firm by injecting close to $173.4 billion. The US government also replaced the CEO and some members of the board of directors of the firm to gain control over its operations. The main reason the US government intervened is that the firm had employed a large number of people and was paying a lot of taxes. AIG had more than 70 subsidiaries in the US with a turnover of more than 77.301 billion and employing about 96,000 people as of 2010. The collapse of the company would mean that 96,000 people would become jobless. The government intervention has the effect of retaining jobs. Additionally, the government also acquired a large stake in the company estimated to be around 76 percent. This is a good investment for the US government because the government will record higher revenues in terms of both taxes and profits from company operations. WORD COUNT: 1,538 words References Altman, M., 2004, “The Nobel Prize in Behavioral and Experimental Economics: A Contextual and Critical Appraisal of the Contributions of Daniel Kahneman and Vernon Smith.” Review of Political Economy 16(1): 3–41. Cassel, G., 2002, The Theory of Social Economy, London: Ernest Benn. Read More