The Economic Boom and the Demand of the Goods and Services - Essay Example

Question FACTOR AFFECTING DEMAND AND SUPPLY of OWNER OCCUPATION HOUSING Demand Factors The demand of the goods and services increases or decreases based on the price factor. In addition there are also factors other than prices that shift the demand pattern either increasing or decreasing at given prices (Froyen, 2009). The demand for the owner-occupied housing can increase as the price of the rental housing reduces. This is called the substitute effect. In case the rates of renting are reduced making it less profitable for the owner to rent out house then the demand for owner occupation will increase. Therefore, the shift in demand in such case has been caused by the factor other than price. In the economic boom many invested in real estate and rented houses at a higher price to add consistent income. Such investments were centrally made in the business cities. However, the recession has caused unemployment and therefore demand for the rented houses has declined as people on being jobless moved back to their respective cities. In such cases, cost of retaining empty house increased such as maintenance cost etc. Therefore, the decline in income from rented houses caused by the decline in its demand had a positive shift in the demand of the owner occupation housing. Government to meet the challenge of crisis and budget deficit has been exploiting higher income people. In such case government can identify rental income as an additional source of income for people and therefore increases tax on the rental income. This measure of government to increase income would have a positive outward shift in the demand of the owner occupation of housing. People will prefer to self occupy houses than renting it out for additional income to benefit from tax escape. The mechanism can also be in contrast. Such as government reducing the subsidies to people that have been hit by the recession but are living in own houses can have negative shift in the demand of the owner occupation housing. People in such case can would then prefer to live in rented houses and therefore demand of the higher subsidies from government. In contrast to above proposition, in case government takes measure to generate the economic activity in certain areas to deal with affects of global crises. Among such measures can be a scheme of providing business loan at lower interest rate to the people that wishes to start own small business venture in local areas. The scheme also offering concession in the electricity and water bills to such people can have positive shift in the owner occupation in that particular area. Therefore, people to take the advantages of scheme as well reduced prices of the complementarities can have positive shift in the demand of the owner occupation housing. Similar to demand, there are factors other than price that can shift the supply of product or service. Further, these factors are present for the supply of almost all goods and services (Mankiw, 2009). The supply of the owner occupation housing at similar price can increase in case government to gear up economy invests in construction of houses and condition the subsidized sale to people with owner housing only and restricts renting of property for gaining subsidy. In such cases despite prices of the houses will remain same government intervention can result positive shift in the supply of the owner occupied housing in certain areas. An instance shifting the supply curve to left (decrease) of owner occupied housing can arise from scenario as people that own houses have taken loans for various purpose from bank. Recession hit causing loss of job and hence inability to pay of loans. Therefore, lending institutions can claim the personal property of defaulters to recover the amount of loan. In such case supply of the owner occupation housing can decline for the factor other than price. Hence, demand and supply of owner occupied housing can increase or decease for many other factors other than price. All the above factors and their respective impact have been discussed in context to the economic recession. Question # 2 (a): PRICE ELASTICITY OF DEMAND BETWEEN 8P AND 10P BY MID POINT FORMULA: The mid - point formula for the price elasticity of demand is as follow: Mid – point elasticity = [(Q1 – Q2) / {(Q1+Q2)/2}] / [(P1 – P2) / {(P1+P2)/2}] (Leamer, 2009) Substituting values for this: Mid – point elasticity = [(4– 6) / {(4+6)/2}] / [(10 – 8) / {(10+8)/2}] Mid – point elasticity = [– 2 / {10 / 2}] / [2 / {18 / 2}] Mid – point elasticity = [– 2 / 5] / [2 / 9] Mid – point elasticity = - 9/5 Mid – Point elasticity = -1.8 This means that the demand for buses is elastic. PRICE ELASTICITY OF DEMAND BETWEEN 8P AND 10P BY % FORMULA: The decrease of price from 10p to 8p will result in following percentage change: Percentage change in price = [10 – 8 / (10+8/2)] * 100 % Percentage change in price = [2 / (18/2)] * 100 % Percentage change in price = [2 / 9] * 100 % Percentage change in price = 22.22 % On the other hand the percentage change in the demand in this case will be: Percentage change in price = [4 – 6 / (4+6/2)] * 100 % Percentage change in price = [-2 / (10/2)] * 100 % Percentage change in price = [-2 / 5] * 100 % Percentage change in price = - 40 % Hence, the price elasticity of demand in this case is: Price elasticity of demand using percentage formula = - 40 % / 22.22 % Price elasticity of demand using percentage formula = -1.8 The price elasticity of demand is elastic. PRICE ELASTICITY OF DEMAND BETWEEN 10P AND 12P BY MID POINT FORMULA: The mid - point formula for the price elasticity of demand is as follow: Mid – point elasticity = [(Q1 – Q2) / {(Q1+Q2)/2}] / [(P1 – P2) / {(P1+P2)/2}] Substituting values for this: Mid – point elasticity = [(3– 4) / {(3+4)/2}] / [(12 – 10) / {(12+10)/2}] Mid – point elasticity = [– 1 / {7 / 2}] / [2 / {22 / 2}] Mid – point elasticity = [– 1 / 3.5] / [2 / 11] Mid – point elasticity = - 11/7 Mid – Point elasticity = -1.5 This means that the demand for buses is elastic. PRICE ELASTICITY OF DEMAND BETWEEN 10P AND 12P BY % FORMULA: The decrease of price from 10p to 8p will result in following percentage change: Percentage change in price = [12 – 10 / (12+10/2)] * 100 % Percentage change in price = [2 / (22/2)] * 100 % Percentage change in price = [2 / 11] * 100 % Percentage change in price = 18.88 % On the other hand the percentage change in the demand in this case will be: Percentage change in price = [3 – 4 / (3+4/2)] * 100 % Percentage change in price = [-1 / (7/2)] * 100 % Percentage change in price = [-1 / 3.5] * 100 % Percentage change in price = - 28.57 % Hence, the price elasticity of demand in this case is: Price elasticity of demand using percentage formula = - 28.57 % / 18.88 % Price elasticity of demand using percentage formula = -1.6 Hence, the demand is elastic. Question # 2 (b): No, the 10p was not the best fare originally. As the profit at 10p was: £400.000 – £340.000 = £60.000 However, at the 8p fare the profit could have been increased to: £480.000 – £360.000 = £120.000 Hence, the fare of 10p was not best decision originally. Question # 2 (c): If the fare is reduced to 6p the demand will increase to 8.5 million and hence the total revenue will be: Total revenue = 6p * 8.5 million Total revenue = £510.000 However, the decision of reducing to 6p can only be made after analysing the overall cost and profits at this price. As the overall cost will increase to £ 490.000 hence the total profit will be: Total profit = total revenue – total cost Total profit = £510.000 - £ 490.000 Total profit = £ 20.000 The fare should not be reduced to 6p as the total profit will decrease. Question 3 What is the effect on the market for DVD players if: The price of DVD rises There is a negative relationship between the price of the goods and services and demand (Wessels, 2000). With the increase in the prices of the DVD, the demand reduces. Therefore as the price of DVD rises, there would be a reduction in the demand of the DVD players as DVD players are complementary goods. So supply being constant, the prices of DVD players will be reduced. The price of DVD falls There is a negative relationship between the demand and prices of the products. So with the reduction in prices of DVD, more people would be willing to purchase the DVDs and thus its demand would increase and it will result in increasing the demand of DVD players. So as the demand of DVDs will increase it will result in increasing the demand of DVD players, and hence the supply of the DVD players will increase. It will put pressure on the prices and the prices of DVD players would increase in the short run. The supply of DVD increases As the supply of DVD increase, it will result in increasing the demand of DVD players. So with higher demand of DVD players, it will result in an upward shift and thus the price of the DVD players will increase. Consumers’ income decreases When the income of the consumers would decrease, it will result in decreasing the demand of good (Gartner, 2009). So it will reduce the demand of the DVD players. So with reduction in DVD players’ demand and the supply being constant, it will influence the equilibrium point. The new equilibrium point will be matched with reduced demand and same supply, which will eventually result in reducing the price of the DVD players. The wage rate of workers who produce DVD players increases If the wage rate of the workers that are involved in the production of a good then it will result in increasing price and thus reducing the demand (Arnold, 2008). So, it will result in increasing the price of DVD players. DVD players’ price would increase. Therefore it will result in reducing the demand of the DVD players. The wage rate of workers who produce DVD players rises and at the same time the demand for DVDs increases? Explain the two stages to your answer. If the wage rate of the workers increase that are involved in the production of DVD players then it will result in reducing the demand of the DVD players. However, if the demand of DVDs increases then it will have an opposite effect as DVD is a complementary good of DVD player. So to analyze whether there would be an increase in the demand or a reduction in demand because of the increased wage rate of the workers involved in the DVD players or because of increase in the demand of DVDs, there are two possibilities. In order to analyze whether the demand would increase or not; there can be two stages: If the demand of DVDs has increased with a greater proportion and it has a higher influence on the DVD players than the change in wage rate and its effect on the demand of DVD players, then it will eventually result in increasing the demand of DVD players. If the demand of DVDs has increased but this increase has a less impact on the demand of DVD players, and the increase of wage rate of the workers involved in the production DVD players has a higher impact, then it will result in reducing the demand of DVD players. References Arnold, R. (2008). Economics. Mason, OH: South-Western Cengage Learning. Froyen, R. (2009). Macroeconomics: Theories and Policies, (ninth edition). New York: Pearson. Gartner, M. (2009). Macroeconomics, 3rd edition.  Harlow: FT Prentice Hall. Leamer, E. (2009). Macroeconomic Patterns and Stories. Heidelberg: Springer-Verlag Berlin Heidelberg. Mankiw, G. (2009). Principles of Economics. Mason, OH: South-Western Cengage Learning. Wessels, W. (2000). Economics. New York: Barron’s Educational Series. Read More