Principles Of Economics In Action - Research Paper Example

Principles Of Economics In Action Bottled water Economics, which is the social study of the production, supply, exchange and utilization of goods and services, is broadly classified into two fields; one is macroeconomics the other is microeconomics. Macroeconomics deals with the overall economy. That is economic studied on the large scale basis. It covers the income and output generated nationally, unemployment, inflation, the countries balance of payments. Macroeconomics field started in the year 1930. John Maynard Keynes, a British economist brought ideas that changed the field. His ideas involved relating macroeconomics to unemployment, inflation and money supply. (Sullivan 65) Opportunity Cost The opportunity cost, is the cost foregone as a result of choosing a given alternative, it is the actual value of the next best alternative that was forgone in the process of making a decision about the current business or investment. Opportunity cost, also referred to as economic opportunity loss is a term derived from Keynesian theory which implies a choice between different options which yield mutually exclusive results, this means that you can only choose one and forgo the other option. It explains the relationship between scarcity and choice and is applied in many areas where financial and monetary decisions are made. For example, the opportunity cost investing in a bottled water company will be the cost foregone in investing the money elsewhere (other business ventures if this was the next best alternative) or the interest lost if that money was left in the bank to accrue interest(if this was the next best alternative). Opportunity cost is evaluated in terms of money, time, material and anything of value. for example someone may decide to go for holiday in Africa and forgo staying in his house and improve it, another may prefer to choose to watch one program and forgo another if the occur at the same time and the person doesn’t have the means of recording the other program. The evaluation of opportunity cost is based on several factors, first is the monetary value of the next best alternative that was foregone. There are other consideration that are usually accounted for such as health and environmental issues which affect opportunity cost, for example the opportunity cost of investing in a business which generates a toxic substance is of important consideration. If the opportunity cost is higher then the risk should be taken, in this case, for the bottling water company the environmental risk is damage to environment due to plastic bottles, however the opportunity cost is higher than the total damage and hence environmental consideration cannot prevent the starting of this business, furthermore, money, less than the opportunity cost can be dedicated into research on biodegradable plastics. Demand Demand can be defined as the ability or wiliness of consumers to purchase goods and services at a given price within a given time frame. The demand graph or the demand schedule is a graphical representation of the effect of price on demand of goods and services holding all other factors constant, if the price of a commodity e.g. bottled water go up, then the demand for it will reduce and vice versa, the graph below illustrates this Figure 1 showing the demand schedule The law of demand states that increase in price of commodities causes corresponding decrease in the quantity demanded. Decrease in price results to an increase in quantity demanded for a given product provided other factors remain constant. Supply These represent the quantity of goods and services that a given producer or manufacturer is willing to bring to the market at a given price. Supply of commodities is greatly influenced by price of the commodity and other factors. The law of supply states that the quantity supplied increases as the price of the product increases holding all other factors constant. This is because the suppliers are able to get a higher profit margin. Figure 2 showing the supply schedule Equilibrium This is the point where the supply and demand curve intersects; it is the equilibrium point such that the quantity supplied is enough to meet the demand of the consumers. Any deviation like increase in price lead to reduction in quantity demanded leading to surplus and consequent lowering of prices to equilibrium. A reduction in price result to reduction in quantity supplied which will result in lack of commodity and consequently increase the price and return the curve to the normal point? If the quantity supplied is greater than quantity demanded, price falls until quantity supplied equal quantity demanded. If the quantity supplied is less than quantity demanded, shortage arises, price hikes until both the quantity supplied and demanded equal. (Pomeranz 132) Ep The equilibrium price EQ The equilibrium quantity Demand curve Supply schedule Figure 3 showing the determination of equilibrium price Ep is the price of goods and Eq is the quantity of goods at equilibrium. It represents the best price that the suppliers can offer their goods to consumers. Changes in the equilibrium price and quantity will occur if other factors are involved, these factors are non price factors. NON PRICE FACTORS THAT AFFECT DEMAND OF GOODS 1) Changes in consumer income Changes in the income of the consumer affect the demand for goods and services; an increase in the income increases the demand for goods. A decrease in consumer income resulting from resignation or laying off of workers will result to decline in the demand for a given price of goods. An increase in consumer income shifts the demand curve outward and this is called increase in demand while reduction in income leads to decline in demand or the demand curve moves inwards. From the graphical analysis below,D2 is the demand curve when income of the consumer reduces, D is the demand curve at equilibrium, while D1 is the demand curve when the consumer income increases. Figure 4 showing the effects of income changes on the demand curve 2) Tastes and preference changes Changes in tastes and preference of a particular good may lead to decrease in demand. This happens if the consumer dislikes a given product or prefers another product to bottled water. This will lead to a decrease in demand and the curve shifts to the left. 3) Price of related goods Related products can take two forms: 1) Substitutes: these are goods that can be used instead of the product in question (bottled water), an example of a substitute to bottled water is a soft drinks like coke or Snapple, if the price of substitute falls, consumers switch from using water to Snapple so the demand for bottled water falls. The demand decreases or contracts. If the price of substitute increases then the demand of the bottled water increases. 2) Price of complements: these are goods that are consumed together with the product in question i.e. bottled water. An example is pretzels with are eaten with water, increase in price of pretzels leads to their decreased consumption hence affect the demand of bottled water making it demand contract. D2 change in demand curve if the price of a substitute falls D1 is the demand curve if the price of a substitute increases Figure 5 showing the effects of changes in the price of substitute goods on the demand curve D2 demand curve when the price of complementary goods increases D1 demand curve when the price of a complementary good decreases Figure 6 showing the Demand curve change due to change in price of a complementary goods 4) Natural disasters Natural disasters may cause destruction of the consumer residence, or a decrease in the population size which will lead to contracted demand. The natural disasters may also affect the infrastructure or even destroy the factory creating a scarcity. 5) Discoveries and technological awareness Discoveries may lead to advancement of products, e.g. technological production of cheaper plastic bottle lowers the price of the bottled water increasing demand. D1 Shift in demand curve after the discovery of cheap methods of manufacturing goods Figure 7 showing the demand change due to technological advancement 6) Advertising Advertising and creating product awareness increases the sale of a product as people are convinced that a given product is the best. This will lead to increased demand at the prevailing market prices. D1 shift in demand curve after advertising Figure 8 showing the demand schedule change due to advertising 7) The number of consumers in a given market Changes in the age, size and distribution of population affect the demand for bottled water, if the population increases then more of the product will be demanded at prevailing market conditions. Different age groups prefer different products. The youths may prefer more bottled water as compared to the old people thus a market with more youths may lead to a rise in demand for the product. 8) Seasonality Some goods are demanded more during certain seasons, during Christmas, people buy more soft drinks and bottled water. Thus the demand for the product will rise at such seasons. During the cold seasons the demand for bottled water reduces. In the tropical areas the demand for water increases in summer time. D1 demand curve for bottled water during Christmas D demand curve for bottled water during winter Figure 9 showing the demand schedule change in different seasons 9) Consumer expectation of changes in price If the consumer expects the price of a product to rise, he will buy more today, this will lead to increased demand. On the other hand if the consumer expects prices of the product to fall then he will buy less hence lead to contracted demand. This however does not affect bottled water to a big extent this phenomenon is illustrated below. D1 demand curve shift due to expectation that goods will be expensive in the future D2 demand curve shift due to consumer expectation of price decrease Figure 10 showing the demand schedule changes due to future expectation in changes in price NON PRICE FACTORS AFFECTING SUPPLY (BOTTLED WATER) 1) Technological advancement Technological advancement can lead to new improved methods of manufacturing products, e.g. new cheaper methods of producing bottled water or even new methods of making the plastic bottle then productivity will increase prompting the suppliers to bring more products to the market (Gitlitz 45). So supply curve at equilibrium S1 supply curve shift due to improved manufacturing methods Figure 11 showing the supply schedule changes due to technological inventions 2) The existing business within a given region The existing business within a given area affects what is supplied. Many suppliers in the market lead to abundant supply of the product to the market. Less suppliers in the market lead to a contracted supply curve. So supply curve at equilibrium S1 supply curve shift due to presence of many suppliers in a given geographical area. Figure 12 showing supply curve changes due to abundant supply 3) Seller expectation in changes in price The expectation of future changes in price of inputs used to manufacture products affect what is supplied, if the seller expects the input price of raw materials used to produce bottled water to rise, then he will produce more, if he expects the price of bottled water to rise in the future then he will produce less. So supply curve at equilibrium S2 supply curve shift due to supplier/seller future expectation of price rise in input (materials) S1 supply curve shift due to supplier/seller expectation of rise in the price of product Figure 13 showing the changes in quantity supplied due to changes in future expectation of price changes by the supplier 4) Decrease or increase in the cost of related goods Related goods can take the form of substitutes and compliments, substitutes are goods that can be manufactured instead of the good be supplied. E.g. instead of manufacturing bottled water, the company can switch to manufacture soft drinks if the price of soft drinks goes up or if the price of bottled water decreases. Suppliers and manufacturers will always produce what is giving them more profit. Complimentary goods are those produced with another good, e.g. bottled water and the plastic container, if the price of bottled water increases the suppliers are willing to bring more to the market, the supply of plastic bottles must also increase. So supply curve at equilibrium S1 supply curve shift due to rise in price of other soft drink (suppliers will switch to manufacture such products) supply of bottled water will reduce Figure 14 showing the effects of rise in price of other soft drinks 5) The cost of factors of production Increase in the cost of the factors of production affect the general supply of goods and services. Increase in land, Labour, capital and entrepreneurship costs, which are necessary to produce goods, will lead to a decline in the quantity of products supplied. If the cost of making plastic bottles, workers wages and electricity costs increase, then more suppliers will produce little at the existing market price So supply curve at equilibrium S1 supply curve shift due to rise in price of factors of production Figure 15 showing changes in supply schedule due decrease in factors of production 6) Seasonal changes Seasonal changes affect the quantity of produce brought to the market. more bottled water and soft drinks are supplied during the festive seasons such as Christmas. So supply curve at equilibrium S1 supply curve shift of bottled water during festive seasons Figure 16 showing changes in supply schedule in festive season 7) Discoveries in science The discoveries in science may unveil products more superior to the current product in the market affecting its supply. Discoveries may also discourage people from taking a certain product e.g. if scientific evidence shows sugar is harmful then suppliers of soft drinks like coke will switch to produce bottled water increasing the supply. So supply curve at equilibrium S1 supply curve shift for bottled water after a scientific discovery discouraging use of soft drinks Figure 17 showing changes in supply curve due to discoveries 8) Natural disasters and calamities Natural disasters lead to destruction of industries leading to scarcity; they also extensively damage the infrastructure making it difficult for distribution of goods hence reduces supply of goods. So supply curve at equilibrium S1 supply curve shift for bottled water after a disaster, the magnitude of the disaster determines the change in supply Figure 18 showing supply curve changes due to effects of natural disasters 9) Population changes Increase in population lead to an increase in supply, the number of people in a given geographical area determine the supplied quantity, supply is low in less populated areas and high in more populated areas. 10) Sociological aspects e.g. sex, age marriage education, religion etc The distribution of a given population affects what is supplied. Males and females don’t have the same preferences; different age groups have different wants. Young people who like traveling are better customers of bottled water as compared to the old. Thus in a given population the supply may increase for one particular product. 11) Advertising and creating consumer awareness Advertising leads to broadening of the market making suppliers sell more hence they will ultimately produce more hence increase supply. Promotions of goods lead to increased supply to counter the increasing demand. Taxation Taxation is the act of imposing a financial levy or cost to someone or to a company; taxes are either direct or indirect. Tax is payable through cash or equivalent Labour. Tax is imposed by a country to its citizens and foreigners to generate money to support the government or it can be a legislative payment. Taxes are compulsory and are usually enforced by the government. Taxes take several forms which include; custom, duty, excise, gabel, impost, subsidy, aid, toll, tribute, among others (Li 78). The government policy may affect the demand and supply of a given goods, if the government awards subsides to a given product then it will lead to lowering of the price of this good and consequently will increase the demand. Government waiver on tax to certain products may reduce their cost thus increasing demand. The government laws may also impose heavy tax leading to price hikes and consequently reduce the demand of the goods and services. For example, if governments in developing countries promote bottled water to curb the usage of untreated water with the aim of reducing waterborne diseases may lead to lowering tax on this commodity which will lead to reduced price hence increase the demand for bottled water. Gross domestic product (GDP) The gross domestic product (GDP) which is also referred to as gross domestic income (GDI) is used to gauge or measure a nation’s income. It is calculated by totaling the value of all goods and services produced by a given country economy GDP is computed by; GDP=government spending +total investments +consumption + (exports-imports) GDP = G+I+C+(X-M) Various depreciation and capital stock aren’t deducted from the GDP hence the name “gross”. War on drugs A drug is a substance that when absorbed by the body of any living creature alters the normal functioning of that creature. Drugs may be used for medicinal purposes to cure diseases, however the term has been broadly used to describe chemical that are used for recreation by human being producing excitation and recreation. Taking any drug for purposes not related to medicine or therapy is generally described as drug abuse. Common drugs that are consumed include cocaine, methaqualone, opium, alcohol, barbiturates, amphetamines and benzodiazepines. The effects of taking these drugs include physical, social and psychological harm. Taking of some of these drugs may lead jail sentence as some are illegal. The war on drugs is very important to protect the deterioration of the society and especially the youth. Television adverts are very effective methods of campaigns against drugs. These should be supported by conclusive tax funded programs to create awareness. Of late bottled water companies have been accused of not adhering to the standard set, bottled water has been found to contain drugs, medications, quantities of fertilizer and various disinfection chemicals, according to a research conducted in the Iowa university, a total of 38 chemicals were found in 10 leading bottled water brands.(natural news).some bottled companies have beautiful diagrams showing that water come from a spring, yet some don’t come from sources the manufacturer claim they come from. There is need to reinforce the laws on food and drugs. Water is also used by drug addicts to counter the dehydrating effect of ecstasy drugs. Drugs are also slipped into the bottled water during recreational parties. The bottled water companies need to discourage people from taking drugs by having anti drug statement on the bottle label. Proper legislation can also help to arrest and charge those involved. References Gitlitz, Jennifer. "Water, Water Everywhere: The growth of non-carbonated beverages in the United States", New York: Container Recycling Institute.2007. Li, Jinyan. Taxation in the People's Republic of China. New York: Praeger.1991.  Natural news. “Bottled Water Found Contaminated with Medications, Fertilizer, Disinfection Chemicals”. 2007. Retrieved on 2009-04-16 From: www.NaturalNews.com/025993.html">. Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the Modern World Economy. Princeton: Princeton University Press.2000. Sullivan, Arthur. Economics: Principles in Action. New Jersey: Pearson Prentice Hall: 2003 Read More