Choices and Tradeoffs in the Market - Assignment Example

ARTICLE ANALYSIS Fortune. "CNN money." Agriculture, Conservation, sustainability, water shortage. May 1st, http tech.fortune.cnn.com/2014/05/01/brainstorm-green-water/?iid=SF_T_River (accessed may 19th, 2014). Introduction Recently most companies in North America have become worried that soon the global amounts of water will outstrip supply. According to leaders of the economic world, the solution is that people are made to pay more1. A case scenario is that of Sarah Woolfs 1,200-acre farm which supplies a quarter of Americas food. It has suffered a massive drought for the past three years due to the lows of Californias river and reservoir levels2. It became so severe that the government and the federal state cut off the water supply that runs from (sierras to the valley) to the farmers. This left them with options of either to cut back on farming sharply or to buy water up to four times the regular price. Therefore, this excerpt summarizes various economic theories that are highlighted on the article by fortune Tech. Supply and demand theory Notably, supply and demand is a critical in economics; essentially, demand refers to the desire of a product or services by buyers whereas supply refers to the extent to which the market can offer. In other words, demand is the price that people are willing to purchase the demand quantity and this relationship forms a demand relationship. On the other hand, the amount that suppliers will be willing to supply given a certain offer is the quantity supplied and this correlation is termed as supply relationship. For instance, there comes a time that supply outstrips the demand and an example would be the case of a third generation farmer “Woolf” who grows onions garlic and tomatoes. Her intentions were to cultivate on half of her farm since customers were asking more of their product. They cannot deliver because water is still the problem3. Experts have said that an estimate of 500 000 acres of rich land will be left fallow this year and keeping in line with the laws of demand and supply food prices will rise. Most of the things with high demand are very limited. Since we live in a world where wants are unlimited, the available resources to satisfy our wants are limited too. Demand and supply explain how prices are determined in a market system. This is reflected by the demand curve and a demanding schedule. The law of demand has a negative correlation between quantity of goods that consumers need and the price they are ready and able to pay, when other factors are held constant. The factors that affect demand other than price include price of related goods that are substitutes and compliments, income, tastes and preference, population and demographics, and expected future prices. Therefore, changes in any of these factors results in changes, in the demand curve hence a decrease or increase of demand respectively. On the other hand, supply of any product on the market is highly affected by one major factor, which is the price of the commodity. Moreover, supply schedule consists of the lists of different prices of a product and the quantities supplied at these prices, this relationship can as well be reflected in a supply curve4. Other than price, supply of a commodity on the market is affected by other factors which include; prices of inputs, technological change, and prices of substitutes in production. Moreover, other factors include the future price expectation, as well as, the quantity companies in the market. Inherently, changes in any of the factors, results in a significant change, in the supply of that commodity that is depicted by a shift in the supply curve. In addition, price elasticity of demand refers to the resultant change in the quantity that consumers need for a good divided by the change in the products price. Notably, when the quantity demanded is responsive to price change, then the elasticity of price of demand will hence be greater than one; therefore demand of the commodity is elastic. Conversely, the demand of the product is seen as inelastic when the quantity demanded does not result in relative change, in price, therefore, the elasticity of demand will be less than 1 in absolute value; demand is inelastic. Demand is unit-elastic when the percentage change in quantity demanded equals the percentage change in price and the absolute value of the price elasticity of demand equals. There are factors that affect the elasticity of demand include availability of close substitutes for the product, time, luxuries versus necessities, and the definition of market5. Moreover, elasticity of demand has different view point as one moves along a demand curve, the value of elasticity will be relatively great at high prices and lower when prices are lower6. The price elasticity of supply equals the change in the quantity that producers are supplying to the percentage change in price. The price elasticity of supply will always be a positive number otherwise will be equal to zero if supply is perfectly inelastic. The economic problem of having limited amount of resources is shared by every society and thus produces a limited amount of goods and services. Tradeoffs are faced particularly when answering the following questions; what commodities will be produced? How will they produce? Moreover, who will receive them after production? In answering the above societies organize their economics in two main ways. A society can have a centralized planned economy or can have a market economy allocate resources. The curve below shows an elastic demand. The curve is described as a flatter curve. Economic models are meant to simplify reality while analyzing real world situations. Thus, the model is only accepted if its hypotheses can be confirmed via statistical approaches. In determining what is fair economists rely on normative economic analysis which tells how the world should behave or exist7. Positive economic analysis focuses on “what is” and it tells how the world is. In most cases, economists can agree on positive analysis whereas disagree on normative analysis since positive analysis can be tested whether true or false unlike normative which is based on assumptions. Remedy of Tragedy of the Commons theory In order for a market system to work well, the government must protect rights to private property. As one would argue that the solution to this water problem is to let water prices swim closer to its value a problem still occurs8. Notably, this will cause the price of the services in the market will go demand will reduce and water will be saved. If water prices rose to its value, investors would splash money for projects to strengthen the water system and this would solve the water crisis. Access to clear water seems to be a human right and treating it like gold or oil might seem disturbing. Thus, the UN passed regulations on that in 2010 since letting the forces of the market takeover would put lives of individuals in jeopardy. Supporters of the idea of treating water as other commodities in the market argue that we can have both human protection as well as a free market for the rest of the water9. Water should be available for domestic purposes for free but when it comes to things filling swimming pools or car wash should be treated as a normal commercial commodity covering the full cost as of infrastructure. In addition, the government plays a major role in competitive market equilibrium, in a number of ways such as regulating the price ceilings and price floors. Price ceiling refers to the maximum legally determined amount that a supplier demands while price flour refers to the minimum legally determined price that sellers may receive. Most countries worldwide e.g. Australia has imposed the cap and trade system. This system is essential in helping water conservation, as well as projects in water saving. Such a local market price might make a dent in the global water crisis through too early to tell. Business and local communities are already on a collision due to the water scarcity10. We are told that farmers complained that the coca cola company drew too much from the aquifers. This made the farmers drill deeper and use heavier pumps to water their fields thus raising their water cost. For all business to exist there must be entrepreneurs steer wheeling the market. Entrepreneurs are vital to the operation of the market system. They risk their capital to venture into business and those successful are rewarded with profits though others suffer financial losses and business failure. For instance, most firms are now considering investing in water conservation projects even though the water market price is near zero. Therefore, the economic impact by the government on markets can be understood through consumer and producer surplus. Consumer surplus refers to the net benefit that consumers get by paying a price on goods that are less than the market prices that they would pay11. Whereas producer surplus refers to the net benefit that producers get for selling their commodities at a greater price than the minimum prices that they will be willing to sell. Thus, equilibrium in a competitive market leads to an efficient economic output level. An example of consumer surplus is shown below Conclusion Choices and tradeoffs in the market influence scarcity and opportunity cost. Scarcity is a situation whereby the human wants exceeds the available resources that are essential in the production. Notably, production of services is critical in satisfying consumers. This is an important discipline of economics where all the other disciplines lie. Without scarcity choices would not exist. From the article, we see that it mostly talks about the theory of supply and demand and how the supply has been affected. This derives other key issues such as the government intervention on the market, how the entrepreneurs come in and also the local people as they determine the demand. Bibliography McEachern, William. Microeconomics: A Contemporary Introduction. Chicago: Cengage Learning, 2013. Anderson, Benjamin M. The Value of Money. Ludwig von Mises Institute, 1926. Anna Alberini, ‎James R. Kahn. Handbook on Contingent Valuation. Newyork: Edward Elgar Publishing, 2009. Becky Pettit, ‎Jennifer L. Hook. Gendered Tradeoffs: Women, Family, and Workplace. 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