Law of Demand and Supply - Research Paper Example

Articles about Economy Table of Contents Articles about Economy Table of Contents 2 Law of Demand and Supply: UAE Real E Market 3 To cope up with this increasing demand, the real estate developers tried hard to keep up their pace, along with the national government which was in no mood to spoil the investment spree in the economy, as that would have a promising outcome. The national government supported the stance of domestic investors through allowing mortgage loans at cheap, which triggered both the investors and developers to demand and supply more. However, with the financial meltdown following the US housing market crash, the UAE counterpart behaved in a likely manner. Demand for real estate fell down sharply, without any consideration upon the supply for the same. Given the inelastic nature of the supply curve, the impact of a negative demand shock had been rather hard for the market. The result of this oversupply was a depreciation in house price by 45% from what it had been in 2008. In Dubai alone, the fall in equilibrium demand price had been as much as 58%, owing to a sharp fall in the number of tourists. Falling demand for houses is also evident from depreciation in the amount of rents being paid on houses; statistics show this fall amounting to 10% in 2010 from what it had been in 2008. An even more pestering issue is that the nation had invested so much into high-end ventures, that there arises no question of turning back which is why the UAE housing market is preparing to introduce another 26,000 units by 2011 (Menon, “More sharp falls ahead for UAE house prices”). 3 Competitive Market Forces: The UAE Stock Market 4 The stock market of UAE, for example, is a market that follows a competitive structure. Similar to the traits of a monopolistically competitive market, the stocks are found to be somewhat different in their innate features, either due to the brand names that are associated with them or due to the different rates of return that they offer. However, while the former is an apparent factor, dependent upon the perception of the investor, the latter is a variable one. In fact, it is the returns that a stock offers which determine the popularity of the same; the moment a rumour hits the market about a possible downfall, the demand for such a stock falls simultaneously. Hence, competitive market forces are the reason why there are any absences of barriers preventing the economic units to act according to the market moves. For instance, the global financial meltdown resulted to a downward revision of the UAE stock indices as was the case for almost every other nation around the world. Such a development resulted to a reduction in the number of investors in the UAE stock market as well and the market tumbled down further. Many firms, as is the characteristic of markets where competitive forces operate, withdrew their shares from the market and some others remained without earning any profit out of them. However, as soon as the national government introduced a fiscal stimulus, the market revived from its plight and normal activities were retained (Harrison, “How a Financial Crisis Morphs Into a Currency War”). 5 Costs and Pricing of commodities: Surging food prices in UAE 5 Since demand for food is not adjusted with the hike in food prices, they keep on inflating. The situation in the UAE is such that food inflation has reached a 16-month high of 2.7% in September after having reached a height of 2.0% in the previous month. It is thus clear that unless the global food prices and that of oil (accounting for rise in transport costs) could be brought under control, food inflation in UAE will continue to soar (Fuchs, “UAE Sept CPI at 16-mth high on food, transport costs”). 7 Models of Monopoly: China’s hold over rare-earth minerals 7 Such a stance has adversely affected the interests of nations like USA which badly are in need of these minerals to ensure their national security. Though maintaining a monopoly in context of natural resources is a decision fair enough to save the exhaustible mineral stores, exploiting this monopoly to serve personal interests is not fair. Hence it is necessary to end China’s monopoly in this arena, though that might have a detrimental impact as well, if the nation lowers the prices in desperation of retaining its position (Journal Community, “China poses no threat to US national security”). 8 Elasticity and Oligopoly: The television industry of USA 9 References 11 Fuchs, M. UAE Sept CPI at 16-mth high on food, transport costs. 31 October, 2010. Reuters News. 1 November, 2010. 11 Harrison, E. How a Financial Crisis Morphs Into a Currency War. 6 October, 2010. Seeking Alpha. 1 November, 2010. 11 Journal Community. China poses no threat to US national security. 31 October, 2010. The Wall Street Journal. 1 November, 2010. 11 Menon, P. More sharp falls ahead for UAE house prices: Prices in Abu Dhabi to fall another 20 Oct. 27 October, 2010. Reuters. 30 October, 2010. 11 TV makers brace for price war in US. 1 November, 2010. New Zealand Herald. 1 November, 2010. 11 Law of Demand and Supply: UAE Real Estate Market Housing market of Dubai had faced a huge demand from investors during the first half of the decade. The change had merely been a reflection of what was going on in the USA prior to the house price bubble exploded. Rise in the demand for houses in USA created a rise in aggregate demand as well, leading to rise in fuel imports from oil-producing nations of the world, of which UAE is one. The excess revenue that was generated, were invested in real estate, leading to a surge in the demand for the latter. Another reason for a hike in demand was to accommodate the increasing number of tourists visiting the land during the boom. A burgeoning demand for real estate in the nation took the form of a positive demand shock when the equilibrium price of a commodity soars up. Since supply of new buildings cannot be heightened overnight, demand price rose up excessively. The phenomenon is represented by a moderately elastic demand curve but an almost inelastic supply curve; a positive demand shock in this case pushes up equilibrium price by a great degree (from P1 to P2), even though the shift in quantity demanded is nominal. To cope up with this increasing demand, the real estate developers tried hard to keep up their pace, along with the national government which was in no mood to spoil the investment spree in the economy, as that would have a promising outcome. The national government supported the stance of domestic investors through allowing mortgage loans at cheap, which triggered both the investors and developers to demand and supply more. However, with the financial meltdown following the US housing market crash, the UAE counterpart behaved in a likely manner. Demand for real estate fell down sharply, without any consideration upon the supply for the same. Given the inelastic nature of the supply curve, the impact of a negative demand shock had been rather hard for the market. The result of this oversupply was a depreciation in house price by 45% from what it had been in 2008. In Dubai alone, the fall in equilibrium demand price had been as much as 58%, owing to a sharp fall in the number of tourists. Falling demand for houses is also evident from depreciation in the amount of rents being paid on houses; statistics show this fall amounting to 10% in 2010 from what it had been in 2008. An even more pestering issue is that the nation had invested so much into high-end ventures, that there arises no question of turning back which is why the UAE housing market is preparing to introduce another 26,000 units by 2011 (Menon, “More sharp falls ahead for UAE house prices”). However, the phases of a business cycle are not perennial ones; the economy is expected to stand back by 2010. But the lesson that it left behind is that demand or supply shocks to a market economy are mostly exogenous in nature and hence, cannot be checked beforehand, though remedies are available to correct them in future. Competitive Market Forces: The UAE Stock Market Stock markets of any nation could be regarded as one of the most competitive of all. The obvious reason behind this statement is an evident absence to entry barriers and the presence of a huge number of sellers and buyers. However, the quality of stocks present in a secondary market depends upon the buyer’s perception, i.e., two stocks issued by two companies might not be valued equally by a potential buyer. Hence, there is a lack of homogeneity in the quality of goods being marketed, which is why it cannot be referred to as a perfectly competitive one; rather terming it as a monopolistically competitive market will be more appropriate. The stock market of UAE, for example, is a market that follows a competitive structure. Similar to the traits of a monopolistically competitive market, the stocks are found to be somewhat different in their innate features, either due to the brand names that are associated with them or due to the different rates of return that they offer. However, while the former is an apparent factor, dependent upon the perception of the investor, the latter is a variable one. In fact, it is the returns that a stock offers which determine the popularity of the same; the moment a rumour hits the market about a possible downfall, the demand for such a stock falls simultaneously. Hence, competitive market forces are the reason why there are any absences of barriers preventing the economic units to act according to the market moves. For instance, the global financial meltdown resulted to a downward revision of the UAE stock indices as was the case for almost every other nation around the world. Such a development resulted to a reduction in the number of investors in the UAE stock market as well and the market tumbled down further. Many firms, as is the characteristic of markets where competitive forces operate, withdrew their shares from the market and some others remained without earning any profit out of them. However, as soon as the national government introduced a fiscal stimulus, the market revived from its plight and normal activities were retained (Harrison, “How a Financial Crisis Morphs Into a Currency War”). Costs and Pricing of commodities: Surging food prices in UAE Costs and prices are two intricately related factors being used in economics. By general rule, the higher the cost of production is, the greater will be the market price associated with the final product. The cost associated with a commodity however, might not always be related to that of producing the same, but also includes other costs incurred before bringing them to the vicinity of the customers. These costs are exogenous in nature, i.e., do not depend upon the quantity being marketed, and hence could be regarded as external costs of production. UAE saw a hike in its food prices due to an appreciation of a few such external costs of production. The food inflation in UAE is a reflection of a rise in the costs of transports across global boundaries. UAE primarily concentrates on the production of oil rather than that of any other commodity. Moreover, the climate in the nation is also not conducive for the growth of adequate food for its people, which is why the nation has to import huge amount of food grains from abroad. Hence, any upheaval in the global scenario is likely to mirror upon the UAE food market as well. In the present case too, a rise in oil prices throughout the world led to a hike in the cost of transport of commodities across borders. Increase in oil price had been stimulated by a boom in the year 2008, since when costs of transport have reached a peak. Due to a hike in the price of oil, expense incurred in shipping of goods from food exporting nations to UAE has increased as well. Moreover, various other factors playing out in different food-exporting nations have led to an inevitable increase in the global price of food. The rise in cost of transport or that in the global food prices could be equated with a rise in the cost of supply given that now, the same quantity of goods could be supplied at a much higher price. Since demand for food grains remains almost unchanged at any circumstance, the demand schedule for food is quite steep in nature. On the other hand, the supply of food depends upon a number of factors and is not as inelastic as the demand is. Hence, the impact of a negative shift of the supply curve in this case leads to a relatively higher appreciation in food prices than the fall in the equilibrium quantity being demanded. Since demand for food is not adjusted with the hike in food prices, they keep on inflating. The situation in the UAE is such that food inflation has reached a 16-month high of 2.7% in September after having reached a height of 2.0% in the previous month. It is thus clear that unless the global food prices and that of oil (accounting for rise in transport costs) could be brought under control, food inflation in UAE will continue to soar (Fuchs, “UAE Sept CPI at 16-mth high on food, transport costs”). Models of Monopoly: China’s hold over rare-earth minerals Monopoly is a type of market structure containing a single seller but a large number of buyers. Since the aggregate demand is far higher than what a single seller can produce or sell, it is reflected through an upward shooting price of such goods. Moreover, monopolists also take an added advantage of exploiting their solo power to charge a high price China accounts for almost 97% of rare earth materials in the world. There are 17 such elements in all, each of which are used for the generation of nuclear power. Given the nature of these elements, their value for ensuring the safety of a nation is quite high. In an age when more and more nations are instigated to attack their rivals on one ground or another, possession of such powers is essential for any nation; in fact, the need multiples with the extent of global power in the hand of the nation. But with a scarcity in the availability of the minerals, China had strictly been rationing the supply of the same. Rationing in this case comes not only in the form of a restricted supply of the commodities, but also through an increased price. The functioning of a monopoly market structure could be illustrated through a diagram similar to that of intersection between demand and supply schedules. The supply schedule however, is represented with the help of a marginal cost curve (MC). The rationale behind such a supposition is that a producer always decides the quantity to be produced depending upon the price that he expects to draw against it. On the other hand, the price that the producer is willing to sell at depends upon the marginal cost incurred in producing each additional unit of a commodity. Hence, marginal cost could well be equated with the supply price of a commodity. In the present case, this supply curve or rather the marginal cost curve is steeply rising, i.e., inelastic in nature. This is because of the rarity of the goods involved; each additional unit will be supplied only if a hefty amount of marginal price is offered. On the other hand, marginal revenue curve is relatively elastic since the demand from the consumer side is more flexible than the supply is. However, given the fact that China is the sole producer of rare earth minerals and with the nation already having collaborated with some of the most influential people around the world, they no longer need it necessary to maintain affordable prices for the goods. The nation actually has revised their criteria upwards, causing a still higher price to be paid per unit of the good. Such a stance has adversely affected the interests of nations like USA which badly are in need of these minerals to ensure their national security. Though maintaining a monopoly in context of natural resources is a decision fair enough to save the exhaustible mineral stores, exploiting this monopoly to serve personal interests is not fair. Hence it is necessary to end China’s monopoly in this arena, though that might have a detrimental impact as well, if the nation lowers the prices in desperation of retaining its position (Journal Community, “China poses no threat to US national security”). Elasticity and Oligopoly: The television industry of USA Oligopoly is a market structure characterised by a few sellers and a large number of buyers, so that each seller enjoys the power to influence the market to a certain extent. Oligopolistic firms earn super-normal profit though the entry of new players in the market is restricted by means of barriers to entry which might be artificially or legally formulated. One of the most evident examples of a firm which is part of an oligopolistic market environment is the industry of television manufacturers in USA, which is featured only by a few players. To be precise, there are four big names operating in the industry at present, namely, Sony, Panasonic, Samsung and LG. With the market power shared between these Big Fours, the influence that each have over the market is quite high as well. Such a scenario might prove to be detrimental for the future of these companies unless they are involved in some form of a cartel amongst themselves. Though formation of cartels between firms is often treated as an illegal measure in most of the nations, such a step often stops the companies from waging price wars between themselves. Price wars in many of the cases do not help in winning customer loyalty and the firms end up losing. In economic theory, an indefinite period of price war often leads a firm to charge a price equal to the break-even point where it earns normal profit. Any further deterioration triggered by a further price fall initiated by a rival forces the former firm to move out of the firm. Such a situation is expected to be experienced by one of the four major television manufacturers in USA who are likely to adopt a price war strategy in their urge to capture a bigger share of the market. Almost all of them have expressed their willingness to initiate a price war. Sony even has hinted about their strategy to curtail profit margins to get an edge in the price war. The predictions made by certain analysts reveal an anticipated price cut equal to 25 percent by the beginning of 2011. With demand remaining stagnant and the supply price of sellers being revised downwards, the equilibrium market price is bound to fall and with it, the chances of earning hefty profits. The ultimate situation might be such that one of the firms is completely swept out from the industry, before the price war comes to an end. Hence, the firms usually make loss through waging such price wars; in fact, according to the kinked demand curve, the extent beyond which any such competition should be stopped could be represented by the kinked demand curve. The point E in the diagram is where every oligopolistic firm must aim to reach at. To the left of this point, waging a price war is not dangerous and hence, the demand curve is elastic. However, beyond E, the consumers get indifferent to the price revisions as they already are affordable. Hence, a price war in such a case only leads to loss of revenue as the demand curve gets inelastic (New Zealand Herald, “TV makers brace for price war in US”). References Fuchs, M. UAE Sept CPI at 16-mth high on food, transport costs. 31 October, 2010. Reuters News. 1 November, 2010. Harrison, E. How a Financial Crisis Morphs Into a Currency War. 6 October, 2010. Seeking Alpha. 1 November, 2010. Journal Community. China poses no threat to US national security. 31 October, 2010. The Wall Street Journal. 1 November, 2010. Menon, P. More sharp falls ahead for UAE house prices: Prices in Abu Dhabi to fall another 20 Oct. 27 October, 2010. Reuters. 30 October, 2010. TV makers brace for price war in US. 1 November, 2010. New Zealand Herald. 1 November, 2010. Read More