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ECONOMICS EVALUATION POINTS FOR ESSAY

Demand, Supply and Elasticity


Changes in Demand and Supply Factors

Point: Demand can rise and fall due to non-price factors such as the
taste and preferences of consumers, the price of complements and
substitutes as well as the level of income of consumers.
Point: The quantity demanded can rise or fall due to price factors.
Income level and substitutes are taken into consideration after the
change in prices to influence the demand for the goods in question.

Evaluation: The extent of change in quantity demanded of the goods in


question is determined by its price elasticity of demand. If the demand fo
the good is price-elastic, a given change in prices cause a more than
proportionate change in quantity demanded for the goods, ceteris paribus
and vice versa.

Point: Supply can rise or fall due to non-price factors such as cost of
production, the number of sellers as well as sellers price
expectations
Points: The quantity supplied can rise or fall depending on the price
of the good itself.

Evaluation: The extent of change of quantity supplied in the event of a


change in the price of the good depends on its price elasticity of supply. If
the supply of the good is price-elastic, a fall in the price of the good
causes a more than proportionate decrease in the quantity supplied for
the goods, ceteris paribus. If the supply of the good is price inelastic, an
increase in the price of the good causes a less than proportionate increase
in the quantity supplied for the good, ceteris paribus.

Point: the car industry is used as a case study to illustrate the


following points. A rising income level causes the demand for cars to
increase, as the purchasing power of consumers rises, ceteris
paribus
Point: IF there is a fall in the price of steel, due to the availability of
cheaper imports from China, the cost of production of cars will fall.
Hence car producers will expect their profits to rise, as the unit cost
of producing a car has decreased. This allows them to increase their
level of production and, subsequently, the supply of cars, ceteris
paribus.
Point: the rise in demand and the rise in supply eventually causes
the equilibrium quantity of cars to rise a well. A rigorous analysis of
the market adjustment process is necessary to explain this
occurrence.

Evaluation: The market equilibrium for cars is affected by the extent of


rise in its demand and supply. The rise in equilibrium quantity and

ECONOMICS EVALUATION POINTS FOR ESSAY

equilibrium price occurs when the rise in demand outstrips the rise in
supply. This is likely to happen due to the fact that the demand for cars is
income-elastic. Hence for a given rise in income, there is a more than
proportionate rise in demand for cars as well, ceteris paribus.
Evaluation: In the case where the rise in supply outstrips the rise in
demand, the equilibrium price falls instead. Hence it can be said that the
effects of the rise in demand and the rise in supply towards the
equilibrium price is indeterminate and depends on the relative extent of
the shifts of the demand and supply curves, while the rise in demand and
supply reinforces each other to cause a sharp rise in the equilibrium
quantity.

Income Elasticity of Demand

Point: When national income rises, the disposable income of people


rises as well. Thus goods and services with a positive value for its
YED face a more than proportionate increase in its demand, while
goods and services with a negative value for tis YED face a fall in
demand.

Evaluation: However, with the Singapores governments shift from relying


mainly on direct to indirect taxes, goods that are income-elastic in
demand are more likely to experience an increase in its demand
compared to that of goods that have a negative value for its YED. This is
because when income tax decreases, disposable income increases, as a
smaller percentage of gross income are paid as tax to the government.
Thus, Singaporeans disposable income increases, resulting in greater
purchasing power for goods and services.

Point: The demand for luxury goods, such as luxury bags and sports
cars, is income elastic. Hence a rise in disposable income means
that such goods experiences a more than proportionate increase in
its demand.
Point: The demand for necessities, such as rice and medicine, is
income-inelastic, as they are essential commodities in many
households. Hence a rise in disposable income only results in a less
than proportionate increase in the demand for such goods.
Point: Inferior goods, such as instant noodles and second-hand
electronic gadgets, have a negative YED. Thus, a rise in the
disposable income of consumers causes the demand for such goods
to fall.

Evaluation: However, to determine the nature of the good, we must also


consider the demographics of different groups of consumers. The same
good may be considered inferior or a luxury to different income groups.
For example, to low income groups, instant noodles may be considered a

ECONOMICS EVALUATION POINTS FOR ESSAY

necessity, while for the middle class, instant noodles may be considered
an inferior good.
Evaluation: In this analysis, we have utilised the concepts of elasticity of
demand. However, there are various limitations that may hinder the
application of these concepts in real-life situations. For example, the
ceteris paribus conditions may not hold and the values of elasticities of
demand data may also change over time, as the length of time under
consideration of the analysis have an impact on the data.

Tax incidence of Indirect Tax on Consumers and


Producers

Point: In the event where the government implements indirect taxes


on goods and services, the consumer burden becomes higher if the
goods demand is relatively more price-inelastic compared to goods
which demand is relatively more price-elastic.
Point: The government also collects more tax revenue when the
goods in question are relatively price-inelastic in demand compared
to goods that are relatively price-elastic in demand.
Point: If the supply of the good is relatively more price-elastic than
its demand, consumers will bear a greater burden of the indirect tax
compared to producers.

Value Judgement: The effect of an indirect tax in terms of relative price


increase and relative share of tax burden between consumers and
producers is influenced by the price elasticities of demand and supply as
well as the YED of the goods and services.

Comparing between different commodities (Petrol


vs Food)

Point: The rising prices of petrol may be caused by the rising


demand for oil by emerging economies such as Brazil and China to
fuel their export-oriented economies.
Point: The rising prices of petrol can also be caused by the limited
supply of oil wells due to the peak oil phenomenon, as oil is a nonrenewable energy source.
Point: The rising prices of food can be caused by the increase in
global population, especially in the developing countries, causing a
rise in demand.
Point: The rising prices of food can also be caused by a fall in the
number of farmers who are cultivating food crops. This is so as
these farmers would rather cultivate crops meant for bio-fuels,
which may ultimately give them more profit.

ECONOMICS EVALUATION POINTS FOR ESSAY

Evaluation: The rise in price of petrol may be more significant compared


to that of food, as the supply of petrol is relatively more price-inelastic
compared to that for food. This is because a longer time period is needed
to set up oil drilling sites and to train qualified petroleum engineers
compared to setting up land for farming and training farmers. Hence
assuming that the increase in the demand for both goods is identical, the
price of petrol rises more significantly.
Evaluation: Although in the short run, due to the higher demand of oil by
emerging economies, the increase in the price of oil is significantly greater
compared to the rise of food prices, it is highly likely that tin the long run,
food prices will rise more significantly. This is due to the falling oil output
as seen in the peak oil phenomenon. In the long run, there will be an
increase in demand for oil substitutes such as bio-fuels and more farmers
will be enticed to convert food crops into bio-fuels instead, causing the
supply of food to fall, ceteris paribus. With the demand due to the growing
global population, the outcome will most likely result in a great spike in
the price of food.
Value Judgement: All of these will occur assuming that there is no
government intervention in both markets. However, in reality, the
probability of government intervention occurring in the two markets is
high, as both the goods are considered to be necessities. For example, the
Malaysian government once established a price ceiling for chili as the
ingredient is considered as necessity in the country. Hence the extent of
the rise of prices may be limited by government intervention.

How price Elasticity of Demand, Income Elasticity


of Demand and Cross Elasticity of Demand Can
Affect Producers/Firms Output and Pricing Policy

Point: The concepts of elasticity of demand may be useful for the


managers of firms in deciding the strategy they should adopt. An
example of a coffee shop shall be used to illustrate the points.
Knowledge of price elasticity of demand of the coffee that the shop
is selling can help the businessman to decide whether he should
revise his price upwards or downwards so that he can adopt an
appropriate output and pricing policy. Assuming that the coffee sold
is a premium blend of coffee obtained from exotic sources, the
demand for it should be price-inelastic and the businessman may
want to increase the price so that the quantity demanded will fall
less than proportionately, ceteris paribus. This will lead to an
increase in total revenue and hence profits.

Evaluation: The coffee shop may not gain any additional revenue if a price
war ensues between rival coffee shops after it lowers it prices, when the
demand for the coffee is price-elastic.

ECONOMICS EVALUATION POINTS FOR ESSAY

Evaluation 2: Costs may have also risen and thus the owner has to factor
in rising costs when he decides to lower its prices, as it may have an
adverse effect on profits.

Point: Knowledge of the YED will help the owner to decide on the
type of goods to be sold under different economic circumstances.
The global economic landscape has recently been affected by the
sub-prime mortgage crisis in the US. Hence many countries are
facing recession and falling real national income. Thus it will be wise
for the coffee shop to differentiate its products and offer economical
coffee blends with cheap lunches and coffee sets instead of selling
just premium blends of coffee, which demand is income-elastic. If he
firm embarks on this strategy, the fall in demand will be less than
proportionate and the shop can preserve its revenue.

Evaluation: The shop may incur additional unit cost of production from this
strategy, as it may have to advertise and promote new economical sets,
and therefore profits may be adversely affected.

Point: Knowledge of the cross elasticity of demand will help the shop
to decide on appropriate pricing and marketing strategy as a
response to the pricing policies of its rival shops. For example, the
aforementioned local coffee shops blend of coffee may have a high
degree of substitutability with those offered by large coffee chains.
Hence the local coffee shop has to be extremely conscious of its
rivals pricing strategies. IF its rivals decide to lower their prices, the
shop will have to follow suit. IT can also engage in non-price
competition such as product differentiation using a delivery service
to compete with its rivals if it cannot engage in price competition.

Evaluation 1: Rising costs due to additional costs of undertaking nonprice competition, such as advertising and undertaking R&D may
encroach on the shops profits.
Evaluation 2: In this analysis, we have utilised the concepts of
elasticities of demand. However, there are various limitations that may
hinder the application of these concepts in real-life situations. For
example, the ceteris paribus conditions may not hold and the values of
the elasticities of demand data may also change over time, as the
length of time under consideration of analysis may have a crucial
impact on the data.

Price-Elasticity Concepts on Government


Microeconomic Policies

Point: The price elasticity of demand and supply influences the


effects of the governments microeconomic policies. For example, in
the case where the government implements a price ceiling, the

ECONOMICS EVALUATION POINTS FOR ESSAY

severity of the shortage after its implementation actually depends


on the price elasticity of demand and supply. The more price-elastic
the demand and supply of the goods, the greater is the shortage.
Point: The implementation of tax to correct market failure resulting
from the production or consumption of goods that generate
negative externalities is also influenced by the concept of the price
elasticity of demand. If demand for demerit goods such as
cigarettes is price-inelastic due to ingrained habits, the rising prices
of cigarettes due to the presence of tax will only cause a less than
proportionate fall in the quantity demanded for the cigarettes.

Evaluation: In this analysis, we have utilised the concepts of elasticities of


demand. However, there are various limitations that may hinder the
application of these concepts in real-life situations. For example, the
ceteris paribus conditions may not hold and the values of the elasticities
of demand data may also change over time, as the length of time under
consideration of analysis may have a crucial impact on the data.

Price controls

Point: governments policies to employ price controls such as price


ceiling and price floor may be justified, as they may help to address
the issue of inequity in society.

Evaluation 1: However, the governments decision to employ price


controls may result in a shortage or surplus.
Evaluation 2: Furthermore, these price control policies have the potential
to further worsen the livelihood of the groups of people they are intended
to help. In the case of minimum wage for low-skilled workers, the
implementation of minimum wage means that there will be a surplus of
low-skilled workers and some of them may even be retrenched.
Evaluation 3: Furthermore, price controls may result in the worsening of
the fiscal situation of the government. This is so in the case of a price floor
for food crops. The government then has to guarantee that it will purchase
the surplus crop. This may result in the worsening of the fiscal situation of
the government.
Evaluation 4: Price control is hard to monitor and manage. When price
mechanisms cease to function in allocating resources and goods and
services in the economy, the government has to step in to allocate
resources and goods and services through methods such as rationing or
coupons .This is not efficient, as the goods may not be allocated to those
who need them most.
Evaluation 5: In the case of setting price ceilings, black markets may
emerge in the economy. This is so as price ceilings can result in the
shortage of goods in question. This then compels desperate consumers to

ECONOMICS EVALUATION POINTS FOR ESSAY

pay the higher black-market prices to consume the goods. The higher
price in the black market in turn negates or worsens the effects of price
ceiling.

Scarcity, Opportunity Costs and Choices in


Government Interventions

Point: The concepts of scarcity, opportunity cost and choice are


basic concepts in the field of economics and are actually very
influential in determining the policies that governments choose to
undertake.
Point: The concept of scarcity dictates that people have unlimited
wants but there are only limited resources that are available to
satisfy these wants .Hence, the government has to take note of this
concept whenever it plans to introduce policies that require huge
amounts of resources. For example, the scarcity of resources may
necessitate a choice between building a bigger national museum or
allocating funds into education. When choices are made, trade-offs
and opportunity costs will be incurred.

Evaluation: However, there are always other factors that influence the
governments choice of policies. One of the factors may be the issue of
equity. The subsidising of primary school education in Singaporeans
occurs not because of the absence of scarcity but because the
government believes that this policy reduces the issue of income
inequality in Singapore.

Free Market System and The Price Mechanism

Point: The free-market system may be the best market system to


adopt in order to tackle the central economic problem of scarcity.
The price mechanism ensures maximum social benefits if each
individual seeks to maximise his or her private interests. The price s
ignals sent by each individual then allow the price mechanism to
efficiently allocate resources to produce goods and services
demanded by the consumers in the market.

Evaluation: However, the free market system is not always perfect in realworld situations and market failures may emerge from various sources,
such as the presence of public goods, merit goods and demerit goods as
well as the problem of income inequality.
Value Judgement: Despite all of its flaws, the free-market system is still
the best market system that economies can make use of. The alternative
to the free-market system is the command economy, which allocates
resources based on the preferences of the government which is inefficient,
as so it does not directly cater to the needs of consumers. The free-market

ECONOMICS EVALUATION POINTS FOR ESSAY

system should still be used but with a certain extent of government


intervention to minimise its flaws.