Supply and Demand Using Supply and Demand in Economics - Assignment Example

1.-Supply and Demand AND Using Supply and Demand in Economics; Elasticities The concept of ’supply and demand’ is concerned with the availability of product in balance to how much the consumer is willing to purchase. The Law of Supply says that when prices are high, producers will have more of their goods on sale than when prices are low. They will increase supply when prices are increasing, and decrease when prices are decreasing The Law of Demand says that when a product is at a lower price, consumers will purchase more when nothing changes. When a product has a lower price, people have the capacity to purchase more items and purchase them more frequently. Supply and Demand as used in economics is a variant acquired from variables concerning a product such as price and an amount that can be put into equations to determine how to create pricing for products and in what quantity the supply should be created. In dealing with these variables, a demand curve and a supply curve can be created to assist in assessing the performance of a product. Elasticity is the way in which supply and demand will respond when variables are introduced. In considering the pricing of goods and services for a business, it is essential to consider the measure of price elasticity of demand. This equation determines the level of demand that will be generated for a product when price fluctuates in regard to the same product. A simple form of an equation that is used to determine this ratio is: e= (percentage change in quantity) / (percentage change in price) (Schenk, 2009) This ratio can help to determine the potential for a business to attain a profitable state. A product is considered inelastic when consumers are less interested in price consciousness than in attaining the product. As exampled by Schenk (2009), when a price increases 10% and the consumer response is to decrease their purchases by 20%, the computed value of the elasticity coefficient is at a -2. “In practice, the negative value is ignored, and price elasticity is referred to as a positive number” (Daly 2002, p. 24). When consumers have strict limits on how much they are willing to spend for a product, it is considered to be elastic. 2.-The Aggregate Demand/Aggregate Supply Model The Aggregate Demand/Aggregate Supply model, also known as the AD/AS, is used to determine price and output in a relational expression within macroeconomics. The aggregate demand is a representation of the demand that consumers have for goods and services during a time period. The aggregate supply is the amount of goods that are available to consumers during a time period. This information helps in “the studies of growth, unemployment and inflation”(Lipsey, 1994, pp. 388). 3.-Recession/Depression The term Recession refers to an economy that is not seeing growth. When two terms or more have failed to see growth, then the economy is considered in a recession. As well, when a rise in unemployment at 1.5% (Eslake, 2008) is felt and a diminished gross domestic product is experienced, these are the signs of recession. Depression is developed when a “significant and sustained downturn”(Eslake, 2008) is experienced. This is seen when a decline in the GDP is at 10% or more or when “a contradiction in real GDP lasts more than three or four years”(Eslake, 2008). An example of recession was seen in the 1980’s when the economy declined and widespread unemployment emerged. Depression occurred in the 1930’s and was marked by debilitating poverty spread throughout the United States. 4.-Market Failure versus Government Failure Market failure occurs when economic factors within the private sector fail to produce and have been mishandled. An example of this would be the current real estate crisis that was created through the mishandling of home loans. Government failure occurs when economic policies fail to address and protect economic stability. An example of this is the failure to provide oversight on home loans that were given at variable rates and then, when those rates increased, buyers could no longer afford the payments, thus losing their homes. 5.-International Trade Policy, Comparative Advantage, and Outsourcing International trade is the importing and exporting of goods across international borders. The International Trade Policy is developed through the way in which countries will relate to one another through trade. Policy issues can concern worker’s rights, the establishment of tariffs, and environmental concerns and in what respect these issues must be addressed by one country in order to trade with another. An example of this is within the airline industry where some countries put restrictions on the number of airlines that can operate within the country and the number of flights that can land. Comparative Advantage is when one country has advantages in creating a product that are not available in other countries. Some examples of these advantages include lower wages creating cheap labor, climate, and or availability of materials at a lower cost. Outsourcing occurs when a company decides to hire other companies to create products or to provide a part of a process that aims toward the creation of a product in order to have a cheaper cost of goods. An example of this is seen within the Nike company that hires manufacturers from all over the world to make their shoes. 6.-Economic Growth, Business Cycles, Unemployment, and Inflation A state of Economic Growth is seen when an increase is seen in the production of goods and services. Growth is defined by the Gross Domestic Product (GDP). This is concerned specifically with product, not with employment. An example of this is: “U.S. real GDP in 2004 was 10.76 trillion and in 2005 it was 11.13 trillion. Thus the growth rate of real U.S. GDP from 2004 to 2005 was (11.13 – 10.76) / 10.76 = (0.37) / 10.76 = 0.034 or 3.4%” (Goodwin et al, 2008). Business Cycles refers to the way in which economic factors fluctuate over a course of time. In understanding the business cycle, the market has the opportunity to plan for expected variations that will have an effect. As a small scale example, a painting company may realize that more business is available in the spring, the summer can be slow, and the fall has sharp increase that declines in the winter. By understanding this, the company can prepare for declines. This is a simple version of the way in which the Business Cycle relates to these fluctuations over an economy wide basis. Unemployment is the percentage of people who are not employed but are looking for a job and willing to work. This figure can be used to determine a wide variety of economic factors, including the overall economic health of a nation. The most desirable state is a very low rate of unemployment and the least desirable is a steady increase in that rate. As of March 6, 2009, the current US unemployment rate is at 8.1%, the highest it has been since the 1980’s (Clark, 2009). Inflation can be defined by two situations: the increase of the cost of goods and the decrease in monetary value. As the dollar decreases in value, prices raise and the cost of living increases. When wages to not raise to meet these increases, the cost of living changes the way in which economic needs can be met. 7.-Politics, Deficits, and Debt A deficit is based on the concept that a person, company, or government has spent more money than it has received. In Politics, the term used to refer the way in which society creates functions for decision making processes, a budget deficit is defined by the country spending more on public services than it has received in taxation funds. Debt occurs when money is owed to other parties who have loaned finances to an individual, a company or a government. The national debt is the amount of money that the country owes to other parties. “As of March 4, 2009, the total U.S. federal debt was $10,942,165,294,650.89, or about $37,851 per capita”(United 2009) 8.-Monetary Policy The term Monetary Policy is used to describe the way in which a financial authority, such as a government or a central bank, controls the supply and availability of money and the interest rate in order to serve objectives of growth and stability within an economy. The monetary policy is currently utilized in the open-market and the way in which it operates, with the focus of policy being on short-term interest rates. The relationship that exists between interest rates and the money supply determines the Monetary policy and the current incarnation it will develop. A contractionary policy develops when there is a reduction in the money supply or an increase in the interest rate. An expansionary policy exists when there is an increase in the money supply or a decrease in the interest rate (Monetary 2009). 9.-Measuring the Aggregate Economy How do changes in interest rates, inflation, productivity, and income affect exchange rates? The way in which Wall Street views interest rates, inflation, productivity, and income is related to the confidence that buyers will have in investing. Therefore, when these things show negativity, the market drops. When a positivist activity is shown, investment increases as the confidence in the economy is increased. The complex interrelationship of these factors creates an overall view of the health of the economy and will affect exchange rates as they fluctuate. Is a strong U.S. dollar always good for the U.S. and global economies? Why or why not? In general, a strong dollar is good for the U.S. and for the global economy. While the U.S. influence become slightly diminished, the saying still stands that ’ as goes the U.S., so goes the rest of the world’. However, the Euro has been at an approximate 40% higher value than the dollar for the past couple of years, which gives that monetary system a 40% increase in buying power. In this way, the dollar being weaker is an advantage for other systems. However, as the economy has shriveled, the global economic health has felt the affects. Therefore, a strong dollar, which is a sign of good global economic health, would have a positive overall affect on the world economy. This would discontinue, however, should a collapse in the United States create a void for another country to attain the dominant economic position. 10.-Fiscal Policy and Public Finance “Fiscal policy is carried out by the executive and legislative branches of government that make policy regarding government spending programs and taxation. Unlike monetary policy that can be changed by the Chairman of the Federal Reserve immediately, fiscal policy is part of the process of making laws and government budgeting, although emergency expenditures can be undertaken“ (Principles). In the creation of fiscal policy, the U.S. government most often takes a minimal participation in the development of the economy. Classic thought on the fiscal policies of the United States is that the economy should have as little economic interference from government as possible in order to be successful. Recessions and depressions would always be a short-term state and, if left alone, the economy would self-adjust. However, the depression of the 1930’s would prove this concept inaccurate as the economy did not self-adjust and rampant decline and poverty gripped the nation. The modern dynamic stochastic general equilibrium approach to economics is considered the new synthesis in economic theory. “Essentially, the New Synthesis sees the macroeconomic problem as a gigantic dynamic general equilibrium optimal control problem and looks at the full optimization of individuals and firms, arriving at a solution by using rational expectations and model consistency assumptions”(Collander, 2006, pp. 390). In other words, the way in which economic stability must be approached is to utilize all members of influence in order to create the most stable version of the economy that is possible in a given time and place. Although, these influences must be used on a minimal level as most economic issues will “wash out”(Collander, 2006, pp. 390) as natural adjustments occur in response to influential variations. This model suggests that intelligent minimal action be taken as necessary, by whomever is most capable, in order to maintain respect for the balance, or equilibrium that the economy is always seeking. List of References Clark, A. (6 March 2009). “US unemployment rate surges to worst since 1983”. The Guardian. Retrieved on 15 March 2009 from http://www.guardian.co.uk/ business/2009/mar/06/us-unemployment-rate-jobs Colander, D. C. (2006). Post Walrasian macroeconomics: Beyond the dynamic stochastic general equilibrium model. Cambridge: Cambridge University Press. Daly, J. L. (2002). Pricing for Profitability : Activity-Based Pricing for Competitive Advantage. New York: John Wiley & Sons, Inc. Eslake, S. (23 November 2008). “What is the difference between a recession and a depression”. Club Troppo. Retrieved 15 March 2009 from http://clubtroppo.com. au/2008/11/23/what-is-the-difference-between-a-recession-and-a-depression/ Goodwin, N.R. et al (12 December 2008). “Defining economic growth” The encyclopedia of earth. Retrieved 15 March 2009, from http://www.eoearth.o rg/article/Economic_growth Knoop, T. A. (2004). Recessions and depressions: Understanding business cycles. Westport, Conn: Praeger. Lipsey, R. G., & Harbury, C. (1994). First principles of economics. Oxford: Oxford University Press. “Monetary Policy” (12 March 2009). Wikipedia. Retrieved 15 March 2009 from Schenk, R. (2009). Price elasticity. Retrieved 15 March 2009, from http://ingrimayne.com/econ/elasticity/Elastic1.html “Principles of Macroeconomics: Fiscal Policy”. The University of Colorado. Retrieved 15 March 2009, from http://www.colorado.edu/Economics/courses/econ2020/s e ction9/section9-main.html and also found at http://answers.google.com/ answers/threadview?id=183170 “United States public debt”. (4 March 2009). Wikipedia. Retrieved 15 March 2009, from http://en.wikipedia.org/wiki/United_States_public_debt Read More