Topic 3: Blog Challenge

In the 1970s, OPEC caused a dramatic increase in the price of oil. What could have prevented it from maintaining the high price through the 1800s?

In 1970s, US involved in the Yom Kippur War. In response to this, the Organization of Arab Petroleum Exporting Countries initiated the embargo to discourage US to support Israel in the Yom Kippur War. With no other close substitute to replace oil, consumers are not very responsive to the changes in price. Also, during the 1700s, USA went through oil production high period which may be due to increase taste and preferences towards oil and population change of increasingly number of user of vehicles, causing the demand of the oil to shift rightward, leading to an increase in price. This means the degree of need that consumer wants for oil is high. These leads to demand of oil being inelastic.  Since it is inelastic, increasing the price of oil increases the total revenue gain from the sale of the oil. For instance during the period of time, the oil per barrel shot up from $3 to $12 dollar per barrel. This causes the oil firm to earn B-A revenue from raising the price of oil. Since it is profitable, the price of oil remain high for sometime. Also, since the method of extracting oil can only work for oil supply, the factor mobility of oil is low, leading to the oil supply to be inelastic.

Fig. 1 Increase price on inelastic demand of oil.

Firstly, technology needs time to change. In this case, time is needed to change the reliance on oil to other type of alternative to run machinery. This results in the demand of oil to become elastic. This means a small change in prices would lead to a greater than proportionate change in quantity demand of the oil. This would encourage OPEC to lower the price of oil to earn maximum revenue. With advance technology like slant drilling, it would be possible to extract more oil at a lower cost. This leads to an increase in supply, leading to a rightward shift in supply curve. This leads to an increase of quantity of oil while reducing the market price of oil. This helps to prevent oil prices from keeping high in 1800s.

Essay

http://online.wsj.com/news/articles/SB10001424052702303360504577412140401889500
http://online.wsj.com/news/articles/SB10001424127887323420604578651952889248848

Product: Orange Juice

Demand of a product refers to the quantity of goods or services, which consumers are willing and able to buy at different price levels, over a specific period, ceteris paribus. Supply refers to quantity of goods or services, which supplier is willing and able to offer for sale at different price level, over a specific period, ceteris paribus. The interaction of the market demand and market supply curves gives the market equilibrium price and quantity for a particular good or service.

Firstly the change of taste and preferences of the consumer causes the demand for the orange juice to decrease. There is increasingly number of beverages joining the the market, increasing the variety of the beverages. Also, with the advertisement of different variety of drinks, this causes the consumer to change their taste and preference to other types of drinks such "from energy drink Red Bull to Coca-Cola Co.'s Vitamin water, and juice-based health crazes like pomegranate and açai". By changing the consumer taste and preferences, the consumer switched over to other types of drinks, leading to an decrease in demand for orange juice.According to the wall street journal analysis, " domestic retail orange juice sales fell to 39.53 million gallons in the four weeks ended July 6, the lowest on record" This shows that demand for orange juice has decreases. Since the change of taste and preference of consumer is causes them to switch over to other types of drinks, demand for orange juice decreases, leading to a leftward shift in demand curve.

Next, the increase in income has led to a decrease in the demand of the orange juice. Orange juice is regarded as inferior goods compared to wine that is regarded as normal goods. When income increases, people would switch over from orange juice to wines as it become affordable to many people. When this happens, the demand for orange juice decreases and demand for wine increase, leading to a leftward shift of orange juice demand curve and rightward shift of wine demand curve. For example, in China, there is an increase in the real GDP growth rate of 7.60 percent. This shows an increase in income level in the country.
Hence, the increase of income of the people causes orange juice (an inferior goods) to decrease in demand, this leads to a leftward shift of the demand curve.

Next, the bad weather condition and government policies have led to a decrease in supply of orange juice. Bad weather condition causes the yield of the oranges to fall, decreasing the harvest of the orange during harvest season.  Government implements import restriction against goods that does not comply to the regulation of the country. As there is restriction on the oranges supply, this leads to decrease in orange supplied.This leads to a decrease in supply of oranges. When there is a decrease in supply of orange, the supply curve of orange shifts leftwards, leading to an increase in price for the same quantity supplied. When the price of orange increases, input prices for orange juice increase. This makes the firms less profitable, leading to a decrease in supply of orange juice. For example, "the spread of citrus greening, a disease that chokes off nutrients to fruit and causes them to drop prematurely from the tree, reduced supplies". Other than this, "several crop-damaging hurricanes in 2004 and 2005" in Florida has lead to a decrease in orange supply. Since the bad weather conditions have lead to an increase in price of oranges, this causes an increase in input prices, making orange juice less profitable, This causes a decrease in supply of orange juice as firm would not want to produce too much, leading to a leftward shift of supply curve.

Also, expectations of future price of orange juice may lead to an increase in supply of orange juice. When the producer expect the price of orange juice to rise in the future, producer would want to hold their stock to sell it off at higher prices in the future. This causes a decrease in supply of orange juice. For example, "Prices of orange juice have fallen 17%". This means, the price of orange juice is relatively low due to other factors such as government policies and bad weather condition for a short-term. However, "the ban never materialized" and better weather condition may cause the price of orange juice to rise in the future. As the price of orange juice may rise in the future, producer would hold their stock by reducing orange juice supply. This leads to a leftward shift of the supply curve.

Fig 1. Simultaneous decrease in demand and supply in the orange juice market

As shown in Fig 1, at the initial equilibrium of E0, equilibrium price is P0 and equilibrium quantity is Q0. When the demand curve shifts to the left from D0-D1, and when the supply curve shifts to the left from S0-S1, quantity demanded exceeds the quantity supplied. There would be a shortage of Qa -Qb leading to a upward pressure on price. As price increase, there would be a upward movement along the demand curve D1, as quantity demand decreases. As price increase, there would be a upward movement along the supply curve S1, as quantity supplied increases. The price adjustment process continues until quantity demand is equal to quantity supplied  at the new equilibrium E1. At E1, equilibrium price is P1 and equilibrium quantity is Q1.
In conclusion, the increase in income level and change in taste and preferences leads to a decrease in demand for orange juice, leading to a leftward shift of demand curve, the government policies, bad weather and the expectation of future prices leads a decrease in supply of orange juice, leading to a leftward shift in the supply curve.Hence, the quantity of orange juice decreases and the price of the orange juice increases.

Chapter 2 Resource Allocation in Competitive Market

K: Price Mechanism
    What to produce?
    How to produce?
    To whom to produce?

H:
Is there anymore non-price determinant factors other than the ones listed in the book for supply curve?



L:
I know the theory of demand and supply.
I know the law of demand and supply.
I know the reason why demand curve has a inverse relationship between price and quantity demanded. ( Income and Substitution effect)
I know the reason why supply curve has a direct relationship between price and quantity demanded. ( Increasing marginal cost and allocation of resources to product that fetch a higher price)
I know that change in price causes a movement along the curve of both demand and supply.
I know that non-price determinant shifts demand and supply curve leftward and rightward.
The non-price determinant for demand is. Expectation of future price/Government Policy/Income/Price of related goods/Taste and Preferences and Population change
The non-price determinant for supply is Weather/Technology/Expectation of future pricing/Price of related goods/Input Prices/Government Policies/Number of Sellers.
I know how to explain market equilibrium




 

Articles

Chinese Economy

The effect of investing resources into capital goods.

http://www.bbc.co.uk/schools/gcsebitesize/history/tch_wjec/usa19101929/2riseandfall2.shtml
How production of consumer goods affect the the economic growth and eventually the production of other goods

Video

Video of Capital and Consumer Goods on PPC

Why is Capital Goods Important

Essay

The choice between investing in capital goods and producing consumer goods now affects the ability of an economy to produce in the future.

It is necessary for an economy to make choices as there are limited resources for production to meet the unlimited want of the people to produce the best combination that’s suits the need of the economy. In this case, economy has to make choices in investing in both capitals goods and producing consumer goods that affect the ability of an economy to produce in the future. One example of such economy is Economy of China.

Capital goods are goods that are man-made aid to production. These goods are produced not for final consumption. Capital goods are important to economy because it is needed to produce goods. Capital goods also brings efficiency in production of goods as it reduces the need to have high number of manpower to do a certain job. Some examples of business producing capitals goods are Boeing – Production of Airplanes, Caterpillar Inc– production of bulldozer. We can see from the BBC article regarding the China economy, "Capital spending on buildings, factories, infrastructure and other physical assets made the biggest contribution to China's growth (54%)"."This investment-heavy expansion arrested a tentative trend towards consumption-led growth" This shows how capital goods is important for economic growth through the improvement of the ability to produce goods. However, an economy cannot solely invest all resources into production of capital goods. When all resources are put into production of capital goods, there would be no resources available for the production of goods. This would cause lower standard of living of the people as there is no consumer available to purchase with the money they have earned.

Consumer goods are goods that are produced for final consumption. Consumer goods are important as it increase the standard of living of the people in the country by providing comfort and lifestyle choices for people. By having consumer goods, people in the country would be motivated to work harder for the things they would like to have. With people working harder, this improves the production of goods quantity and quality. Also, with the production of consumers goods, economy can sells it of to other country to earn more money to obtain more resources for the production of even more goods. We can see from the same BBC article, " For the first time since 1961, China's production of services (which include transport, wholesaling, retailing, hotel, finance, real estate and scientific research, among other things) exceeded its industrial output", "The income earned from all this production". This shows how important is consumers goods production toward the economy, which provides revenue for the country to obtain more money to buy more resources for production/services. However, an economy cannot produce solely consumer goods only as the economy would not be able to produce goods efficiently due to the lack of capital goods to aid the production of goods. This results in the drop of production of consumer goods, causing the standard of living to drop in a long run.

Thus, choices have to be made in deciding on what to produce to benefit the economy production of goods for the future in a long run. With reference to BBC article on China economy, "The economy's growth was, however, substantially slower than the expansion of credit, adding to worries about financial fragility and potential defaults" shows that the need to decide on producing consumer and capital goods is very crucial as it could affect a country economy, especially in the areas of production. While in the BBC GSCE Bitesize, " What causes economic boom", we can see that in US, people would mass produce capital goods( factories), which drives the production of goods to a higher level. The choice of the government of producing more capital goods first than production of goods allows the country's economic to boom. From this, we can see how important choice is needed when deciding and what to produce. By using the PPC graph, we can see that as we are producing lesser capital goods, we are producing more consumer goods. The choices required are to find a point on the curve that suits the economic production needs. If there is advance technology, this means we may require less of capital goods as less capital goods is required to produce more of the consumer goods. (i.e Point A) If the economy requires a high amount of consumer goods, the economy may have to decide to allocate more resources into capital goods as more man-made aid are required to produce enough consumer goods to meet the demands of the people. (i.e Point B) Hence, the choices between investing in capital goods and consumer goods would determine the ability an economic can produce in the future.

Fig. 1

In conclusion, in every economy, it is crucial to have both capital goods and consumers’ goods to be produced as both of these resources affect the production of quality and quantity of goods. There is no economy that could sustain with only one type of goods if the country wants to achieve economic growth. 

Reflection TIme

K What I Know

Scarcity: Scarcity is the situation when there is an insufficient amount of resources to produce all goods needed to satisfy human wants.

Choice: It is possible and necessary for individuals and societies to make choice on how to satisfy their wants because resources have alternatives uses.

Opportunity Cost: The opportunity of using it for some other purpose is lost when a choice is made to use a resources for a particular purpose.

Production Possibility Curve: Shows whether the economy is able to produce the various combination of resources.

Resources: CELL

Capital- Man-made aid to production. 2 types of capital: Human and Capital 

Entrepreneur- Specialised type of labour that involves risk-taking and decision making.

Land- The natural resources available.

Labour- Physical and Mental effort / Resources available from working population.

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W What I want to know

How does investment help in promoting economic growth?

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L What I learned