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- Subject Code : MAEP101
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- Subject Name : Economics
Economic Terminology and Analysis
Question/Answers
Q1. The consumers always want a lower price while the sellers demand a higher price which leads to conflict of interests. If the consumers are successful in their lobbying then the government imposes a legal maximum price (price ceiling) at which the good can be sold. In response to high charges of the medical services charged to the consumers, the government of Thailand imposed price control list on all the medical related fees (Silva et al., 2017).
Basically, there are two possible cases when a price ceiling is imposed. First, which is non-binding. In this scenario, there is no effect on the market price and the quantity supplied as shown in fig.1. In this case, maximum price set by the government is above the equilibrium price which makes no change in the market. The other case is when the price ceiling is binding. Here, the ceiling price is less than the equilibrium price as shown in fig. 2.
It is expected that the revenue of the private hospitals will be reduced by the price ceiling (from the source provided in the question) which further implies that the price ceiling will be binding here. In fig. 2, because the price ceiling is below the equilibrium price P1, the market price equals P2. Forces of supply and demand move the price toward the equilibrium price, but when the market price hits the ceiling, it cannot rise further. At this price, OD is demanded and only OS is supplied, so there is a shortage of OD-OS quantity of medical services. The quantity demanded rises but the quantity supplied falls. This excess demand will lead to shortage of medical services and any of the customers will not be able to buy it at the going price.
However, the consumer gains(net) and the producer loses. The producer of the medical services loses since the quantity supplied decreases as well as the price falls. Also, this price control often hurt the people whom the government wants to help. The rationing mechanisms that develop due to shortage under price ceilings are rarely desirable.
Q2. The support provided by the government to the Chinese electric vehicle industry substantially led to the increase in the supply of electric vehicles in China. This means that the Chinese authorities want the EV industry in the country to flourish.
When the government provides assistance, producing EV’s is profitable, and firms supply more EVs. Thus, the supply curve shifts to the right in fig.3 i.e. at every price, the total amount that firms are willing and able to sell is increased. Figure illustrates this increase in supply as a shift in the supply curve from S1 to S2.At the old price of P1, there is now shortage of demand for EVs, and this shortage causes firms to reduce the price. As a result of the assistance by the government, the price of the EV falls, and the quantity of EV sold rises leading to the increase in the market share of EV in China (Rodrigues et al., 2018).
While China's cheap electric vehicle could disrupt the substitutes market. There will be a negative impact on the market of normal petrol powered vehicle. Since the fall in the price of EV will attract the customers which will lead to a shift from normal petrol powered vehicle to EV (Guerrero-López et al., 2017). This will tend to shift the demand curve of petrol powered vehicle to left. This will further lead to fall in the equilibrium price and quantity sold of petrol powered vehicle as shown in fig.4, thereby reducing their market share.
Q3. Home prices usually rise in response to either an increase in home sales (demand) or a decrease in the number of homes for sale (supply). Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible depending on the relative size of the demand and supply shifts (Badarinza & Ramadorai, 2018). First, both equilibrium price and quantity rises. Second, the equilibrium price rises but the equilibrium quantity falls.
In this scenario, second outcome is being noticed. We see a drop in overall supply, so it's likely that the strengthening prices were the result of fewer homes for sale instead (from the source provided in the question). Both curves must shift. The low interest rate affects the demand curve because it alters the income of the consumers (Balli et al., 2015). At the same time, when there is a low level of supply of houses for sale, this drives up the home prices. The demand curve shifts to the right, and the supply curve shifts to the left. Fig.5 illustrates these shifts. As figure shows, supply falls substantially from S1 to S2 while demand rises just a little from D1 to D2, the equilibrium quantity falls. Thus, these events certainly raise the price of houses from P1 to P2.
Q4. The drought in Brazil affected the production of coffee beans which in turn affected the supply of coffee globally. The availability of coffee beans which is an input for making coffee, affects the supply curve. It reduces the amount of coffee that firms produce and sell at any given price. The demand curve does not change because the unavailability of inputs does not directly affect the amount of coffee consumers wish to buy.
There’s very low price elasticity of demand for coffee therefore the demand curve will be steeper. Prjce elasticity of demand (sensitivity of the customer), refers to how demand is impacted by a positive or negative change in price of a good (Yohannes et al., 2016). Here, an increase in cost will cause little, if any, decrease in demand. Caffeine addicts will remain addicts (from the source provided in the question).
The supply curve shifts to the left because, at every price, the total amount that firms are willing and able to sell is reduced. Figure 6 illustrates this decrease in supply as a shift in the supply curve from S1 to S2. At the old price of P1, there is now an excess demand for coffee, and this shortage causes firms to raise the price. As figure shows, the shift in the supply curve raises the equilibrium price from P1 to P2 and fall in the quantity sold.
When demand is inelastic (a price elasticity less than 1), then price and total revenue move in the same direction. If the price increases, total revenue also increases. When demand of coffee is inelastic, the extra revenue earned from selling at higher price is greater than the lost revenue from selling fewer units (figure 6).
Q5. Taxes are such an important policy instrument and affect our lives in many ways. Government use taxes to raise revenue for public projects, such as roads, schools, and national defense. The immediate impact of the excise tax is on the sellers of imported cars. Because the tax is not levied on buyers, the quantity of imported cars demanded at any given price is the same; thus, the demand curve does not change. By contrast, the tax on sellers makes imported car business less profitable at any given price (Grigolon et al., 2018). Since the tax on sellers raises the cost of producing and selling imported cars, it reduces the quantity supplied at every price. The supply curve shifts to the left.
For any market price of imported cars, the effective price to sellers—the amount they get to keep after paying the tax is $2,000 lower (10% of $20,000). The market price of imported car is $20,000+a as shown in figure7 and the effective price received by sellers would be $20,000-b. Whatever the market price, sellers will supply a quantity of jmported cars if the price were $2,000 lower than it. In other words, to induce sellers to supply any given quantity, the market price must now be $2,000 higher to compensate for the effect of the tax (Stroebel & Vavra, 2017). The supply curve shifts left from S1 to S2 by the exact size of the tax ($2,000).
Figure 8 shows that the equilibrium price of imported cars rises from $20,000 to $20,000+ a and the equilibrium quantity falls from 10 million. Because sellers sell less and buyers buy less in the new equilibrium, the tax reduces the size of the imported cars market (Liu et al., 2017).
In the new equilibrium, buyers pay more for the good, and sellers receive less. Thus, both of them are worse off. The government gains by the amount of tax revenue shown in the fig. But overall the chinese economy loses as it can be seen by the triangle in the figure which shows the deadweight loss created to the economy.
References
Badarinza, C., & Ramadorai, T. (2018). Home away from home? Foreign demand and London house prices. Journal of Financial Economics, 130(3), 532-555.
Balli, H. O., Balli, F., Flint-Hartle, S., & Yang, X. (2019). Towards Understanding the Volatility of Housing Prices and Exploring the Tourism Demand Impact. Tourism Analysis, 24(4), 453-465.
Grigolon, L., Reynaert, M., & Verboven, F. (2018). Consumer valuation of fuel costs and tax policy: Evidence from the European car market. American Economic Journal: Economic Policy, 10(3), 193-225.
Guerrero-López, C. M., Unar-Munguía, M., & Colchero, M. A. (2017). Price elasticity of the demand for soft drinks, other sugar-sweetened beverages and energy dense food in Chile. BMC public health, 17(1), 180.
Liu, C., Huang, W., & Yang, C. (2017). The evolutionary dynamics of China’s electric vehicle industry–Taxes vs. subsidies. Computers & Industrial Engineering, 113, 103-122.
Rodrigues, N., Losekann, L., & Silveira Filho, G. (2018). Demand of automotive fuels in Brazil: Underlying energy demand trend and asymmetric price response. Energy Economics, 74, 644-655.
Silva, S., Soares, I., & Pinho, C. (2017). Electricity demand response to price changes: The Portuguese case taking into account income differences. Energy Economics, 65, 335-342.
Stroebel, J., & Vavra, J. (2019). House prices, local demand, and retail prices. Journal of Political Economy, 127(3), 1391-1436.
Yohannes, M. F., Matsuda, T., & Sato, N. (2016). Substitution in Consumer Demand for Coffee Product Categories in Japan. Journal of Agricultural Science, 8(4), 50.
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