Changes in Quantity Supplies, Non-Excludable Goods - Assignment Example

1. The supply curve slopes upwards because at a higher price suppliers are willing to supply more products in the market. This helps to create a positive relationship between the price and quantity supplied. The changes in supply happens due to various factors like Change in cost of production. For example, if cost of production falls supply of butter will increase Changes in price brings about a change in demand as suppliers supply more products at a higher price compared to products at a lower price Change in price of substitute. For example, if the price of coffee rises the supply of tea will fall Change in tax structure. For example, a reduction in tax will increase the supply of liquor Change in firms’ objective. For example, it the firm looks towards increase in sales then supply will rise Future expectation of demand. For example, it the firm expects demand for wheat to raise then supply will increase. Changes in quantity supplies happens when there is a change in price of the goods whereas changes in supply curve occurs when factors other than price changes. Example of movement in supply curve increase in supply of bread due to rise in price and example of shift in the demand curve is increase in supply of bread due to fall in price of flour. 2. A free market is a situation where the market forces determine the equilibrium quantity and price. The graph looks as The above graph shows a free market as supply and demand forces determine the equilibrium level. This helps to differentiate between price and value. Price is the actual amount which a customer pays out of his pocket whereas value is the perceived value of the products and includes the non monetary parameters like satisfaction, pride and others. Value is thus a much wider concept and people are willing to pay the price for the product when the perceived value is higher than the price paid for the product. Thus when equilibrium in the market is determined the value the customer perceives for the product matches with the price and is the maximum amount that the customer is willing to pay for a particular product or services. An important aspect to note here is that value has some non-pricing parameters so products and services which are able to provide those are able to get a higher price thereby enabling the supplier to earn more. 3. Elasticity of demand has a special position in the eye of the stakeholders as it helps to determine the price and the total revenue the business looks to earn in the near future. The following graph shows that a change in price affects the quantity supplied and the quantity demanded. It is seen that as demand increases from D1 to D2 it increases the price making people supply more which reduces the price again and determines the equilibrium price. Income elasticity determines the change in demand due to change in the income or the real purchasing power of the customer. Business units look forward to integrate this elasticity in their formulation of future plans so that they are able to better understand the market. The graph for the income elasticity appears as follows The price and income elasticity for agricultural foods in Australia has little relevance. As the country is developed so changes in income have little or no effect on the demand for food products. 4. Price ceiling is a mechanism which the government uses. In this mechanism the governments sets the maximum price which the product can be sold and it is usually below the market equilibrium price. The graph after imposing the ceiling looks as follows It is seen from the above diagram that P* is the point where there is equilibrium i.e. demand matches supply. The government imposes a ceiling as P which is below the equilibrium. Producers and sellers have to ensure that they sell it below ceiling and selling above it is illegal. This creates a situation where the “marginal benefit derived exceeds the marginal cost leading to a dead weight loss” as seen from DWL. To ensure that the price ceiling continues and the price is set at that point then the government has to interfere by supplying the goods so that stability is maintained at that price point. Price floor on the other hand is an opposite mechanism as compared to price ceiling. Price floor determines the minimum price that needs to be paid for a particular product and is devised to protect the producer. The graphical representation looks as follows It shows that the price floor has been set above the equilibrium price which was $2 to protect the producers. It creates a gap between demand and supply. Since the price is more so suppliers supply more. Consumers are not willing to purchase at this point as they have to pay more. To ensure that the price floor mechanism works government will have to interfere and “purchase the excess supply, subsidies consumption, use strict measures to ensure that the price is same and decide how much needs to be produced”. This will help demand and supply to match thereby enabling the equilibrium price to be the floor price. Thus, price ceiling is a better option that the government has to employ. This will result in the government bearing the cost of subsidy but would result in the people receiving the vaccine thereby protecting more lives and performing the social responsibility which the government is entrusted with. 5. Diminishing marginal return and diseconomies of scale differ in many ways. Diminishing marginal returns is when an input of production is added keeping the others the same the output diminishes whereas diseconomies of scale state that when an input is doubled the output increases but less than the input. The graph looks as The above graph shows both the diminishing return on scale and diseconomies of scale. The white dotted line is the diminishing returns on scale and the red line is the diseconomies of scale. This brings forward following difference Diminishing returns on scale is used for the short run where as diseconomies of scale are used in the long run and it engulfs the lowest point of the short run curve. While finding diminishing return to scale one factor of input is varied and others are kept constant whereas in diseconomies of scale all the factors of input are varied. Thus, there are varied differences that exist between the diminishing return on scale and diseconomies of scale highlighting the importance of both in different situations. 6. Economists have identified different type of market structures like monopoly, monopolistic competition, perfect competition and oligopoly. All the market structures provide a different framework in which business is carried. Before moving on it is important to define the key terms Demand: Quantity of goods a consumer is willing to purchase at a particular price. Aggregate Demand: Total market demand of goods at a certain price. It is the sum of the total individual demands and gets affected by change in price. Supply: Quantity of goods a supplier is willing to supply at a particular price. Aggregate Supply: Total market supply of goods at a certain price. It is the sum of the total individual supply and gets affected by change in price. Perfect Competition is a type of market structure where there are many players, have homogenous products, there is freedom of entry and exit and also complete information is available about the product in the market. This is also seen in the diagram below. It can be seen that price is determined where supply matches demand for the market. $ MC $ S ATC P AVC Monopoly on the other hand is a market structure where there is a single seller who controls the market. The player has good control over the market and can influence the decision of the buyer and the market on a whole. This is evident in the following chart Thus the comparison of the perfect competition and monopoly business structure shows that monopoly results in super normal profit which is not evident in perfect competition. This thereby shows that market is able to garner better efficiency in perfect competition compared to monopoly. 7. Public goods are those goods which are non-rival and non-excludable. Non-excludable goods mean that the public cannot be excluded from enjoying the services and need not pay for it. For example the neighbours watching television at the owners flat from their window. Non-rival is when even by allowing the people to come and enjoy the product won’t increase the cost of the product. For example, if the neighbours come and watch the television at the owners flat the cost of electricity won’t increase. Private firms’ don’t look towards providing public goods because they operate with the motive of profits. Government looks towards providing services to the society and can therefore look towards providing public goods. For example roads which are constructed by the government and is a public good provided to every individual of the society without any additional cost. To overcome this problem and ensure that public goods are provided government needs to intervene. They need to draft rules and regulations which help them to provide public goods and also make the private firms think on similar lines. This will ensure that the society is able to benefit in the long run and will help the government to ensure proper management policies. 8. Real wages has a large effect on the supply of labour. When learned and experienced carpenters enter into business the wage rate which is already high will fall as supply will exceed demand. Factors other than real wage rate which affects the labour force in the market and has an effect on the income leisure choice are as follows Income Effect: When the income level of the employees raises then their basic necessities of the activity can be met with less money. This means that the employee needs to work for fewer hours. This increases the leisure activity and decreases the labour force. The rise in the income level thereby has an effect on the labour market as the employees prefer to work for fewer hours and relax more. Substitution Effect: The substitution effect also has an effect on the supply of labour. When an incentive to work increases labour reduces their leisure activity. This is because the labour receives more benefit from working over time. This makes the employees to look towards increased working hours thereby reducing the leisure activity and has an effect on the supply of labour. Thus the demand for carpenters gets affected by more people entering the market. Read More