Economics Basics: Demand and Supply - Essay Example

Qn a) Part The demand for laptops has dipped over the last two years. Most of the population is moving towards the use of tablets. This in turn has led to the decline in the demand for netbook computers, laptops and desktops in Western Europe. As a matter of fact the demand of these three types of computers has fallen by about 20% over the past one year. Due to the fall in the demand for laptops, which is one of the aforementioned types of computers that have faced a decline in demand, sellers have had to lower their prices to get more customers to buy their laptops. The manufacturers also are faced with a situation where they have to lower the supply of laptops and instead focus on the production of tablet computers. An example of tablet computers is the iPad. In the last one year, netbooks and laptops have been hit the hardest by the new consumer appetite. Due to this; netbook shipments declined by 53%, while desktop PC’s demand fell by 15.4%, over the same period. (Halliday, 2011) The process above can be explained economically using the demand and supply theory. Demand is simply the purchaser’s desire and ability to pay for a price of a given commodity. Supply and demand meet due to one thing- Supply. Thus, where a seller is offering to dispose a commodity at the level of price that a purchaser is ready to pay; then, the purchaser and the seller are at an agreement point known as market equilibrium. (Ball and Seidman, 2011 pp9, 10) Demand and supply concepts are basically the most primary concepts of the field of economics. It forms the core of a market economy like that of the U.K. Price serves as a reflection of the effects of demand and supply on the market. This relationship that exists between supply and demand is the one that drives resource allocation. To understand this concept further, and to be able to understand it in the context of laptops, the laws of demand as well as supply are going to be looked at. The demand law, simply states that, ceteris paribus, the higher a commodity’s price is, the less will the demand be for that commodity. That of supply states that, the higher the price of a commodity, the higher the supply of the same commodity will be. Therefore, the higher the levels of prices, the lesser the demanded quantity of a commodity. The illustration shown presents a case scenario of an interaction between demand and supply. Fig1: equilibrium between supply and demand Price Supply curve equilibrium Demand curve 0 Quantity (investopedia.com, 2011) In the scenario of the study, it is the demand of laptops that declines due to an introduction of a new substitute product in the market. Due to this, the demand curve would shift leftwards to reflect a decline in laptop’s demand. Also, as the laptops demand continues declining, manufacturers of laptops realise the fall in revenues and thus, focus on the production of other computers like tablets. This, leads to a decline in supply and it would cause a shift in the supply curve to the left. Through this, a new equilibrium is obtained. A shift in the supply and demand due to the changes in the laptop market can be illustrated as follows: Fig 2: A fall in demand and a fall in supply of laptops in U.K. Price S1 S0 E1 D1 D0 0 Quantity (Nicholson and Snyder, 2008 pp402, 403) The changes in demand and supply and demand have been presented as shown in the diagram. For demand it is a shift from D0 to D1 and for supply as S0 to S1. As a result a new equilibrium is gotten at E1. The changes lead to a fall in prices due the demand for new computer types and a rise in prices due to a fall in supply. Eventually, there has been a slight fall in prices. Part 2 The prices of laptops are likely to decline, but steadily. This is while applying the explanations in (fig 2). This is according to the prediction of the study. This is due to the fact that shifts in demand as well as supply curves happen in the long run. The graphical presentations below can reflect further on this explanation; Fig 3: Future expectations in the prices of laptops Price S1 S0 E1 D1 D0 0 Quantity (Nicholson and Snyder, 2008 pp402, 403) As seen in the diagram, the demand for laptops will fall. So will be the supply of laptops due to the rise in demand for tablets. Qn 1(b) Year 2010 Fiscal policy The fiscal policy undertaken by the U.K. budget of year 2010 had an aim of reducing the risks in the way of an economic recovery. There were two major aims and these were; increasing the speed at which the plan on reducing the level of deficit and reduce the percentage of debt on GDP and an action to keep at bay the build-up in the levels of risk financially and the systematic macroeconomic risks, which would enhance lower dependence on debt financing and other unsustainable activities. The main aim according to the 2010 budget was to bring under control the national finances. It was to do this by reducing the level of national borrowing as well as debt. This would increase the level of confidence both internationally and in the local scenes. The confidence would be raised, majorly, by way of a fiscal policy. As a result, there would be an impact on the U.K. economy as the budget further puts it. Expenditure would decline from 2009/10’s 48% of the country’s GDP to about 40% by the time the period 2015/16 sets in. Revenues were projected to increase from 37% to 39% over the same period of time. Net internal borrowing would end up being reduced by around 8.4% from the 2009/10’s percentage of GDP that stood at 8.7%. This would, thus, mean that Net internal borrowing would stand at just 0.3% of the country’s GDP once the fiscal policy was implemented and come the period 2015/16. Since January 2010, the U.K. government had come up with a way of reducing its expenditure, which led to a savings of about £6.2 billion. As seen in the budgetary proceedings this case is about a contractionary fiscal policy aimed at getting the economy to recovery after the previous year’s financial difficulties due to the global economic downturn. Pailwar explains this better in his book. The case aforementioned by the 2010 U.K. budget is that of a fiscal policy. Pilwar describes this in his book to be a contractionary fiscal policy. A fiscal policy is defined as contractionary if the net effect on expenditure and revenues is higher revenues in comparison to expenditures. Thus, the scenario of the economy of U.K. in 2011 was a contractionary fiscal policy. The vice versa would only refer to an expansionary fiscal policy as opposed to the former. (Pailwar, 2008 p156) Year 2011 Fiscal policy In year 2011, the budget’s fiscal policy was aimed at bringing the public finances at a controllable level. Its aim was at addressing the issue of the biggest deficit in the budget of U.K. since WWII. Through, various consolidations as per the 2011 budget, there will be a reduction in the levels of expenditure of approximately £95 billion and at the same time a net raise in taxes, which will fetch about £30 billion. This fiscal policy’s plan is currently put into practice. Through the fiscal policy of the year 2011 budget, there will be a fall in the national spending of U.K. from a high percentage as seen in the 2009/10 budget of 47.5% of the country’s GDP to about 40% of GDP by the years 2015/16 budget. Over the same period of time’s projection, there will be a rise in the levels of projected revenues from taxation from 36.5% to approximately 38.5% of the country’s GDP. (cdn.hm-treasury.gov.uk, 2011) This can be interpreted in economic terms to mean a contractionary fiscal policy (the raise in taxes’ revenue and the reduction national expenditure). The case aforementioned by the 2011 U.K. budget is that of a fiscal policy. Pilwar describes this in his book to be a contractionary fiscal policy. A fiscal policy is defined as contractionary if the net effect on expenditure and revenues is higher revenues in comparison to expenditures. Thus, the scenario of the economy of U.K. in 2011 was a contractionary fiscal policy. The vice versa would only refer to an expansionary fiscal policy as opposed to the former. (Pailwar, 2008 p156) Reference list: Ball, Madeline K. and Seidman, David. (2011). Supply and Demand. The Rosen Publishing Group. pp9, 10. cdn.hm-treasury.gov.uk. (2011). Budget 2011. Retrieved 28 November 2011 http://cdn.hm- treasury.gov.uk/2011budget_complete.pdf Halliday, Josh. (2011). PC shipments fall as customers opt for tablets. Retrieved 28 November 2011 http://www.guardian.co.uk/technology/2011/aug/17/pc-shipments-fall-tablets hm-treasury.gov.uk. (2010). Budget 2010. Retrieved 28 November 2011 http://www.hm- treasury.gov.uk/d/junebudget_complete.pdf investopedia.com. (2011). Economics Basics: Demand and Supply. Retrieved 28 November 2011 http://www.investopedia.com/university/economics/economics3.asp#axzz1f1RW8Bl1 Nicholson, Walter and Snyder, Christopher. (2008). Microeconomic theory: basic principles and extensions. Edition 10. Cengage Learning. pp402, 403. Pailwar. (2008). Economic Environment of Business. PHI Learning Pvt. Ltd. p156. Read More