Economics: Supply and Demand - Essay Example

 Topic: Supply and Demand a. Why does choice arise in Economics? Use an example to discuss the concepts of choice and opportunity cost. Choice is a decision or a course of action in preferring things to another. Relating this to opportunity cost, it means the value of the foregone opportunity when the choice is made. Foregone opportunity can be seen in the individual, business, and government actions. For example, I have chosen to work as a nurse in the local region, than to go to other countries which offer higher wages. My foregone opportunity cost is the higher wages I will receive when I chose to stay in the region. In government, when US government chose to spend million dollars for military aid in IRAQ and elsewhere rather than spend for health projects locally, the foregone opportunity costs is the health welfare of the Americans who will be jeopardized by the decision . The opportunity cost of not producing cattle in favor of farm production of rice. The opportunity cost of going to a vacation in Hawaii in favor of employment Balancing the economic resources is an act of weighing decisions on opportunity costs and choices of better alternatives. 176 b) What do you understand by the law of demand? Pick a product and list two factors, which, in your opinion, would cause the demand curve to shift to the right. Can you think of two other factors which would shift the supply curve of your product to the left? Demand is the quantity that buyer is willing to purchase at a given price while supply is the quantity sellers are willing to offer at a given price. It is a relationship of price of and quantity that is best understood through a demand curve. It has an inverse relationship as when the price goes higher, the people want less of the product. For example in the graph below, when the price of meat sells at $1 per pound, quantity demanded is 100 pounds per day, but when the price of meat increased to $4 per lb., demand for meat decreased to 40 pounds per day, shifting the demand curve to left. Demand curve shifting to the left can be caused by several factors, price increases, over supply and government intervention such as price ceiling. 135 Demand curve graph. Source: Cyber Economics Price ceiling. Government can impose a price ceiling way above or below the free price market. For example, government sets the price of wheat at $5 per lb. which is way below the market price of $6 in order to regulate the price. The effect will be on the supplier who will drop out of the market causing a reduction on the supply. On the other hand, demand will increase because consumers find that they can buy the same product at a lower price. As a result, quantity demanded exceeds quantity supplied thereby causing a shortage of the commodity in the market. 102 Question 2 (a) List four conditions of demand that are likely to cause the market demand of UK owner-occupied housing to shift. Give your reasons for choosing these factors of demand. UK gives home ownership the biggest value as according to a report, 78% of households in UK are privately owned. (Economics help). Demand for housing was high in 1980s to late 1990s Factors that affected increase in demand in 1980s to 1990s are the low cost of interest rate and liberalization of credit. At that time, prices of houses went up and remortgaging was allowed. This gives house owners available amount for spending that could used to buy another property. In 2008, demands for housing may see a decline caused by economic factors affecting income and expenses of households. Tight economy causes shrinkage on budget spending for housing due to unemployment and interest rates. This causes default on mortgages causing shift on demand for housing going to the left. 129 (b) Are there any factors on the supply side that are likely to cause the market supply of UK owner-occupied housing to shift? If so, what are they? The housing prices in UK are significant index of consumer expectations. A decline of the economy means also a decline of demand for housing in UK. There will be more supply of housing units ready for occupancy pulling the price markets down. This scenario shifts the demand curve down and supply curve upwards, meaning there is more supply than demand. Mortgage debts are another factor to consider as this is one of the causes of economic crisis that has ballooned to an inappropriate direction Mortgage debts can be equated to the 78% household ownership in UK, as reports said that largest section of UK debt comes from mortgages. According to Economist. help, the average mortgage debt per person in UK is £21,000. 122 1. First we have to find the data we need. Old price 8p 10p 8p New price 10p 12p 6p Old rev. demand 480,000 400,000 480,000 New revenue 400,000 360,000 560,000* Calculation for % of demand change [Q demand new-Q demand old] /Q demand old 400,000-480,000 / 360,000-400,000 / 560 – 480 / 400,000 = 0.20% 360,000 = -0.111 480 = 0.166 Calculation for % of price change 10p-8p / 8p = 0.25 12p-10p /10p = 0.20 6p -8p /8 p= 0.25 Price elasticity of demand = (0.20 /0.25) -0.8 = (0.111 / 0.20 = 0.55 = (0.166 / 0.25) 0.664 *estimated figure QDemand(NEW) - QDemand(OLD)] / QDemand(OLD) [Price(NEW) - Price(OLD)] / Price(OLD) PEoD = (% Change in Quantity Demanded)/(% Change in Price) The price elasticity of demand is used to determine how sensitive the demand for a good is to a price change. Because the rule of thumb is “the higher the price elasticity, the more sensitive consumer are to price changes. “ A high price elasticity suggest that when the bus raises its fare, consumers will ride less from it, but when it lessens down the price fare, consumers will ride more. However, when it reduces the fare to a very low price, changes in price have very little influence in demand. Mofatt, Mike) W.c. 214 If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes) If PEoD = 1 then Demand is Unit Elastic If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes) In our calculations above, all fares are less than 1 meaning it is not very much sensitive to price changes 2. In the example given, at the bus fare of 10p is relatively much better than 12p as the price elasticity of demand is higher. This means passenger will ride more from the bus fare of 10p, but when it is increased to 12p, passengers will ride less. 3. When the bus reduces fare to 6p, relative elasticity no longer influence demand. It does not matter to passengers anymore. It will be an additional cost to the bus company as the capacity of the bus is underutilize and will be better off with the 10p fare. References Cyber Economics. Demand Curve. Retrieved 04 March 2009 from Economics Help. The effect of the Housing Market on the UK Economy. Retrieved 05 March 2009 from http://www.economicshelp.org/2007/04/effect-of-housing-market-on-uk-economy.html Mofatt, Mike. Price Elasticity of Demand. About.com: Economics. Retrieved 06 March, 2009 from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm Read More