Please enable JavaScript.

Coggle requires JavaScript to display documents.

Application of demand and supply analysis to real world markets, Labour…

- - - - Trigger: A fall in supply of rice due to a drought
        -Fall in supply of rice
        -increase in price of rice
        -Demand for rice is price inelastic due to lack of close substitutes
        -quantity demanded for rice falls less than proportionately as compared to the rise in price
        End pt: Equilibrium price increase to P1 and equilibrium quantity fall lesser to Q1
    - - Consumers' total expenditure is equal to the total revenue earned by the producers from the sale of the good
        Impact on total revenue cannot be determined without knowledge of PED.
        If the demand for the good is price inelastic, increase in price will cause a less than proportionate fall in quantity demanded. The increase in consumers' expenditure/producers' revenue due to the increase in price exceeds the fall in consumers' expenditure/ producers' revenue due to the less than proportionate fall in quantity demanded.
        End pt: Hence total consumers' expenditure/ producers' revenue increases
        
        If the demand for the good is price elastic, increase in price will cause a more than proportionate fall in quantity demanded. The increase in consumers' expenditure/producers' revenue due to the increase in price is less than the fall in consumers' expenditure/ producers' revenue due to the more than proportionate fall in quantity demanded.
        End pt: Hence total consumers' expenditure/ producers' revenue decreases
    - - Total tax revenue= tax per unit x quantity traded
        When an indirect tax is imposed on a good, there will be an increase in its price. For goods with price inelastic demand, the rise in price will results in less than proportionate fall in quantity demanded as consumers are less sensitive to the change in price.Tax revenue collected from a good which is demand inelastic is lesser than tax revenue collected from a good which is price elastic demand
    - - Total subsidy= per unit subsidy x quantity traded
        For goods with price inelastic demand, the fall in price will result in a less than proportionate increase in quantity demanded. Government expenditure on the subsidy for good with price inelastic demand is smaller than good with price elastic demand.
  - - - Maximise profits for producers
        Total profit is obtained from total revenue minus total cost and assuming cost is unchanged, this aim can be achieved by increasing total revenue. If demand for the good is price inelastic, the producer should raise price to increase total revenue. The increase in price leads to a less than proportionate fall in quantity demanded. The increase in revenue due to the increase in price exceeds the fall in revenue due to the fall in quantity demanded. Total revenue increases.
      - Make the demand for his products price inelastic. This will allow the producer to increase price so as to increase total revenue.
        Producers can reduce substitutability of their goods by introducing different features.
        Or advertising to increase the demand for the good and at the same time reduce price elasticity of demand
      - Helps the producer decide on the methods of production to adopt
        -if the demand for the good is price elastic, producer can adopt cheaper resources such as cheap labour in developing countries to reduce cost of production which in turn can sell to consumers at a lower price and thereby increasing total revenue.
        Goods with price inelastic demand such as designer jewellery pieces, producers should be looking for a fine craftsmen to produce such goods because consumers are willing to pay a higher price for unique and fine quality products.
    - - Helps government to determine the extent to which a change in supply will affect the price and quantity of the good in the market
        For a good that is demand price inelastic, an increase in supply of the good is likely to lead to a more than proportionate fall in price, leading to price volatility in the market.
        Hence governments often intervene in such markets to stabilise the price to safeguard the interest of both producers and consumers
      - Help governments to predict the usefulness of imposing taxes to raise tax revenues
        If the government wishes to increase revenue via indirect taxation( eg GST), it should target goods with price inelastic demand eg cigarettes because rise in price of these goods will cause quantity demanded for such good to fall less than proportionately as consumers are unlikely to change their consumption patterns of those goods in the short run.
        Hence govt can get a larger tax revenue.
      - Predict the effectiveness of policies to decrease the consumption of certain goods
        Government may want to discourage the consumption of demerit goods(goods deemed socially undesirable by govt) such as alcohol. To reduce the over allocation of resources towards the consumption of these goods, the government may impose a tax on these goods . However for the policy to be effective in reducing the level of consumption to the socially optimal level, the government would have to impose a larger tax on these goods as demand is price inelastic. A larger tax will bring about a considerable fall in quantity demanded for these goods such that it can reach the socially optimal level of consumption.
- - - - Trigger:Fall in demand for private party caused by an expected fall in income in the future
        
        In the short run, will lead to a fall in equilibrium price of private property. The short run supply is relatively price inelastic because existing building projects cannot be terminated to decrease quantity supplied. Resources are not mobile and quantity of inputs cannot be changed. Fall in price will cause a less than proportionate fall in equilibrium quantity.
        
        In the long run, firms can adjust the contracts and able to adjust the quantity of inputs. Thus, there is a greater availability and mobility of resources.Supply of private property becomes price elastic. Fall in price results in a more than proportionate fall in equilibrium quantity.
    - - Decision making by the Producers
        With an increase in demand, producers with price elastic supply will be able to respond more readily to the rise in price by increasing quantity supplied. Producer with more spare capacity will be able to increase production levels by a larger extent to meet the increase in demand. Hence, if a producer discovers that supply is becoming less price elastic, stocks need to be replenished or more labour and capital resources must be employed.
      - Decision making by the government
        PES allows govt to determine the extent to which a change in demand will affect the price and/or quantity of the good in the market.
        If the supply of a particular good is price inelastic, an increase or decrease in the demand for the good is likely to lead to a substantial rise or fall in price of the good, leading to price volatility in the markets. Govt may be concerned with such price volatility as it can have destabilising effects on the economy. Govt may intervene if the price of the good goes too high esp in countries that depend significantly on that good.
      - Increase in Cost of Production/ Tax Incidence
        When an indirect tax is levied on a good, this has the effect of shifting the supply curve upwards by the amount of the tax due to an increase in marginal cost of production. Producers would have to pay tax for every additional output it produces. Supply curve shifts up by amount t when t is the amount of tax. Tax increase price and reduce quantity. The extent of price rise depends on the PED and PES. The rise in price from P1 to P2 multiplied by the quantity denoted by area P1P2AB is the amount of tax burden passed on to the consumers and thus represents the tax burden on consumers. The remainder is the tax burden on producers.
        (Draw a vertical line up from the new quantity Q2 till it touches both supply and supply+tax. The consumer tax burden is from the original price to the new price with the width as 0Q2 the rest is producers)
        
        For goods that are price inelastic demand relative to supply, consumers are less responsive to changes in the price of the good compared to producers.
        For eg, the demand for cigarettes is price inelastic due to its addictive nature to smokers while the supply of cigarettes is relatively price elastic as it is easily manufactured. Most of the tax burden falls on consumers as even with a significant increase in the price of the good due to tax there will be a less than proportionate fall in quantity demanded.This shows that the impact on consumers due to imposition of tax is greater as they bear a larger tax burden compared to producers.
        
        For goods that are price elastic demand relative to supply, consumers are relatively responsive to changes in the price compared to producers. When tax is imposed, the producers abosorb more of the tax burden as they are aware that given an increase in price, there will be a more than proportionate fall in quantity demanded. This indicated that the impact on consumers due to the imposition of tax is smaller as consumers bear less of the tax burden compared to producers.
      - Fall in Cost of Production/ Subsidy
        The government is funding the subsidy using taxpayers' money and both producers and consumers of a product benefit from the subsidy.
        Assuming the govt wants to increase the consumption of a good from Q1 to Q2, it would have to provide a subsidy per unit of P3-P2 and the total amount of taxpayers' money used by the govt to fund the subsidy will be the total shaded area( amount of subsidy per unit multiplied by the new amount sold, Q2.
        
        For goods that are price inelastic demand relative to supply, consumers are relatively less responsive to changes in the price of the good compared to producers. Even with a fall in price due to subsidy, there will be a less than proportionate increase in quantity demanded. To increase quantity demanded for the good, a significant fall in price paid by the consumers is required. Consumers share of subsidy is larger as they get to enjoy larger share of subsidy compared to producers.
        
        For goods that are price elastic demand relative to supply, consumers are relatively responsive to changes in price, compared to producers. A fall in price will lead to a more than proportionate increase in quantity demanded. To increase the quantity demanded for the good, a small fall in price paid by the consumers would be sufficient. When subsidy is granted on the market of that good, impact on consumers in terms of share of subsidy is smaller than producers.