Managerial Economics - Assignment Example

Name Course Tutor Date Managerial Economics Question (a) Rubber is one of the basic commodities with high demand in Indian market.The records reveal that the consumption capacity exceeds the production capacity by almost eight times. This implies that the rubber produced in India is just about 10% of what is needed. Therefore, the deficit is bought from foreign markets. Now in the given situation, the production of rubber was interfered and dropped at about 10% of what is normally produced (Nicholson, W & Snyder, 2009), This means that the deficit of this commodity increased given that the rate of consumption remnant the same. The figure below shows the shift occurred. Imports Pro 3 Pro 2 Pro 1 i3 i2 i1 P3 P2 P1 Production From the diagram, the local production of rubber was at P1 during the year 2013, this was a normal production every year. However, when the conditions were unfavorable and the production capacity dropped, the production capacity shifted to P2. Some of the likely causes of the drop in the production of this commodity might be poor whether conditions that affected the rubber trees. Therefore, farmers could not tap the normal quantities that they get during the previous years. Another likely reason for the drop in the production is that there was another economic activity, which the farmers harvested good income as compared to what they get from rubber; therefore, they concentrated on it (Nicholson& Snyder 24). Moreover, the cost of production may have gone up and farmers unable to produce the normal quantities. From the above graph, we can realize that when the production of rubber dropped shifting from P1 to P2, the imports increased from i1 to i2. This is because the demand for rubber remained at the same level regardless of the drop in the production. Therefore, the deficit of rubber in the market attracted more imports to fill the gap. It implies that the deficit created more market in India for foreign countries rubber producing countries. This also reveals that when the production drops further to P3, more imports would increase from i2 to i3. This means that when production goes down, the imports would be flown in until they meet the demand. Even when production falls to zero, the imports rubber would still be needed at the same quantity and this would be imports from other nations. Therefore, one interesting fact here is that production of any commodity is inversely proportion to the imports as long as the demand of the same commodity remains the same (Nicholson& Snyder 24). This mostly happens on basic commodities, which cannot be avoided. Rubber is among the basic commodities that would cost even nations to have because it is used to manufacture car tires and many other commodities that are used on daily basis. The second diagram still compares the consumption verses the imports. Imports Imports C1 C2 C3 i3 i2 i1 In a market where the consumption of the basic commodity is constant, even if when the production falls, consumers would still want to consume the same amount of the commodity. To supplement the deficit of the consumption quantity, traders would import more of the commodities from outside the market (Ehnrenhaft, 1997), This means that when the consumption remains the same while the production drops, the imports would flow in large quantities. From the diagram, we can realize that in a situation where the consumption of a certain commodity drops from C3 to C2 to C1, the imports would also drop from I3 to I2 to I1and when the consumption rises, imports would rise. Technically, it shows that when consumers consume a commodity in large amounts, the market fails to provide enough hence forcing the importation of more of the commodity to take care of the deficit. Thus, consumption in any market is directly proportional to imports. The drop in production and the constant consumption of rubber on the Indian market triggered an increase in imports. Due to this shifts in production, India is becoming more dependent on the world market for rubber in order to have the same level of consumption. Another reason why India is going to depend on the imports is that the imports would be cheaper as compared to the locally manufactured rubber (Nicholson, W & Snyder, 2009), This is because the locally produced rubber would have high price because of scarcity while the imports would be lower. Therefore, the manufacturers would prefer to go for the cheaper imports than the local commodity. Therefore, the imports would remain high in case the production does not improve sooner. From the economic point of view, when a country imports more than what it exports, its economy would not be favorable. It is good for a country to export more than what it imports. Thus, when the imported rubber has a large percentage on the total imports of India, then the economy might be affected negatively. Question (b) Imports p2 p1 i2 B i1 A C Consumption From the diagram, when consumption remains constant and production shifted to the left side or drops, the imports increase. The imports incase at the same percentage at which the production has fallen (Nicholson, W & Snyder, 2009) Therefore, when there is a 10% drop in production, the imports would increase at 10% to meet the consumption level. This is why the distance between A and B is equal to the distance between i1 and i2. Therefore, the two variables are inversely proportional. Question (c) (i) A tariff on imports tends to add costs of importation. Thus, when the cost of importation of rubber would rise, it means that the prices on the local market would rise too. The imports appeared to be cheaper than the local rubber. However, here, the price of the imports now includes the tariff meaning that they are higher than the previous prices. Assuming that Indian is a small market on the global market when the significant tariff is imposed on the imports, it means that the importers would refrain from importing because they would incur bigger expenses (Maheshwari 45). Therefore, they would export their rubber top other countries that do not have tariffs on the commodity. They will ignore India since it is just a small market and shift their commodity to bigger markets. This would have a bigger negative impact to the India’s economy. The prices of both the imports and the locally manufactured rubber would be extremely high. Furthermore, when the importers withhold their rubber, there would be a serious shortage hence; the prices of the available rubber would shoot up beyond expectations (Roy, Tirthankar, 7), This would be very much different from the global market price because the exporting countries would sale their rubber to countries that do not impose tariff to the imports. It may imply that India would be left to struggle with its shortage of rubber while the other countries enjoy better pricess on the market. At this moment when production is drooping, India should not try to impose a tariff to the imports for it to have the price of rubber manageable. (ii) In case where a significant tariff is imposed on the imports and when India holds a large share of the global market. The exporting countries would have no option other than accepting the situation and still take their rubber to the Indian market. This would at least contain the situation since rubber would be available to the Indian consumers and the prices would a bit higher but manageable. Generally, the situation would be fairer if the Indian market share is bigger on the world market than when it is insignificant. From this fact, we can deduce that an import tariff works best to a country when it has a bigger share of the world market. Thus, when a tariff is imposed to the imports, the importers would still import to maintain their flow of their sales (Maheshwari 72). Moreover, when for example, India has a large share of the world market and it declares a tariff on the imports, it would trigger the price of the whole world market to rise. Other exporting countries would generally raise their prices to cater for the additional costs and this would apply to the whole market. Question (d) This delicate situation should be handled with care. There are several options, which the minister can settle on. However, not all the options would give the best results. From the above discussion, imposing an import tariff on a commodity that has a high demand or consumption rate would be dangerous (Ehnrenhaft 38). The tariff would discourage those countries importing into India to shift their commodities to other countries that have fair terms of trade. This would lead to even more shortage hence the situation would be aggravated. The price of the available rubber would be hiked forcing the consumers to strain much financially. Therefore, in simple terms, the minister should avoid tariffs on imports. Declaring quotas on the importation of rubber would be a bit fairer compared to tariffs. An import quota is a restricted percentage or quantity of rubber allowed to enter India (Roy, Tirthankar, 7), In this option, the prices on the Indian market would go up given the fact that the consumption is still high and yet the local rubber plus the imported would not be enough to serve the available consumers. Therefore, the scarcity of this commodity on the Indian market would make the prices to stay up. The best option for this minister to take is to declare tariff free imports and competitive importation. When there would be no charges on the imported rubber, many and no restriction on the quantity imported, many countries would bring their rubber and they will compete for the available consumers (Ehnrenhaft 56). Therefore, the prices would be lower and still the consumers would be served fully. The minister should do this but he should put some short-term mechanisms of helping the local farmers to improve their production capacity. When the local production improves, the market would have excess and this would in turn push the prices down. This would naturally discourage the importers and the normal situation would recover. The trick is just to support the local producers to boost their production capacity. Some of the ways he can assist them creating a loan kitty where they can borrow some loans to assist them in production. Moreover, he can consider reducing the taxes on the locally produced rubber; this would encourage the producers to produce more. Works Cited Ehnrenhaft, P. “Policies on imports from economies in transition: Two case studies”. (1997) World Bank publications. Maheshwari, Y. Managerial economics. (2012). PHI Learning Pvt Ltd. Nicholson, W & Snyder, C. Intermediate Microeconomics and its Application. (2009). 11 Ed.Dartmouth Collge; Cengage Learning Roy, Tirthankar. "Trading Firms in Colonial India." Business History Review 88.1 (2014): 9-42. Academic Search Premier. Web. 7 Sept. 2014. Read More