1.1:Demand for Bitcoin comes from collective want of consumers and the law of quantity demand supports this concept. According to law of demand, price and quantity demanded for any product follows an opposite relationship for which the demand curve also slopes downward (Blundell et al. 2015). The term ‘quantity demanded’ means any particular amount of good that buyers can intend and able to buy at a certain price. For Bitcoin, this economic concept is applicable as well. Few years ago, price of a single Bitcoin was around USD 1200 and consequently fewer amounts of people intended to purchase this cryptocurrency. However, in 2015, value of each Bitcoin has decreased and become around USD 225, which in turn has led the demand for Bitcoin to increase further (Ciaian, Rajcaniova and Kancs 2016). Other factors that can influence this demand except its own price are number of buyers, preferences and their income along with their expectations and advertisements. At present, Bitcoin is not classified under either a normal good or an inferior one.
Figure 1: Demand curve
Source: (created by author)
Figure 1 represents downward slopping demand curve for Bitcoin. From this figure it can be said that when price remains at P0, demand for this currency remains at Q0 level. When price per unit of Bitcoin increases and becomes P1, its quantity demanded becomes Q1 amount, which is comparatively lower than Q0 amount.
Supply of Bitcoin, on the other side, refers to the suppliers’ collective ability to produce Bitcoin and this comes from the block chain, which is a series of calculations. Several computers solve those calculations and they are called Bitcoin miners. Bitcoin suppliers also follow the law of supply indicating that price and quantity supplied have positive relationship with each other. Hence, the supply curve is an upward slopping curve. However, the supplier or algorithm is going to restrict the supply of Bitcoin in 2140 after reaching to its optimum level of 2.1 million (Ciaian and Rajcaniova 2018).
Figure 2: Supply curve
Source: (created by author)
Elasticity implies the change of quantity demanded or quantity supplied of any product when its price changes accordingly. When quantity demanded for any product changes by large amount compare to its price change, then the product is called demand elastic (Loi 2017). This is also true in the context of supply. From the concept of cross price elasticity, Bitcoin is an elastic product as it many substitute and acts as a currency.
1.2:Market price of Bitcoin is determined by its market demand and supply curves. Equilibrium price can be obtained from the intersection point of these two curves. In other words, at the Market Clearing Price, consumers purchase all units of a particular product and this can be obtained under free market mechanism (Hua, Schwartz and Sipress 2017). The following figure has represented market price of this Bitcoin.
Figure 3: determination of market price
Source: (created by author)
Figure 3 has represented market demand and supply curves of Bitcoin and these two curves have intersected each other at point E. Hence, corresponding amount of market price is Pe while corresponding amount of Bitcoin is Qe.
This market price can be increased if the demand for Bitcoin in market increases further. Moreover, this situation can also be occurred if supply of Bitcoin decreases as well. In 2009, the market value of this digital currency has remained $0.00 though within few years, this value has increased and in 2011, it has become USD 1000 per Bitcoin (Jang and Lee 2018). This happens due to increasing demand for this cryptocurrency in world market. At present, large-scale companies such as Virgin Airlines, Dell Computers and PayPal and other companies transact through this digital currency.
Figure 4: Increase in demand for Bitcoin
Source: (created by author)
Figure 4 has represented the situation where price of Bitcoin has increased from P0 to P1 as quantity demanded for this product has increased from D0 to D1. On the other side, supply of this cryptocurrency has remained same during short period.
1.3:Including Bitcoin, all cryptocurrencies can be a common medium of exchange to perform particular economic activities such as transactions for a county as the demand for these digital currencies are increasing rapidly. Hence, it can be said that economic importance of those digital currencies are becoming comparatively high at present situation. Hence, it is essential for the government of any country to control those currencies with affective monetary policies like other domestic currencies; otherwise, the economy can break down in future. As transaction plays an important role to improve national income of a country, governmental restriction is important. Moreover, central bank also plays important role to control money supply maintain lower inflation within the country. In this context, the government uses its monetary policies such as control of bank rate, open market operations and so on (Cúrdia and Woodford 2016). However, if the government of Australia along with Reserve bank of Australia do not control supply of and transaction of cryptocurrencies, then the gross domestic product (GDP) of this country can decrease further. This can decrease economic growth and development of this country as well in future (Peters and Panayi 2016). Moreover, the country can experience higher rate of inflation and other form of market failure if the government does not control these market of cryptocurrencies.
2.1:Tariff is one of the method of taxation in order to enhance the sustainability of the domestic firms through imposing tax on the importable and it is one of the widely utilised trade policies that is being used by several economies around the world (Leamer and Stem 2017). There are various benefits and drawbacks in utilisation of the tariff, however, considering the case of the Canada as mentioned in the given article, it can be seen that the tariff program has deliberately being imposed by the government of Canada in order to safeguard the domestic wine makers (Dix and Kovak 2015). As article opines, main motive of imposing the tariff is to bring the price of the domestic wine lower, whereas tariff imposed on the Australian wine makers will enhance the price of the same in the Canadian market with burden of the additional tax. Now, post tariff scenario, how the market of Canada will response what will be the consumer and producer surplus and how much government revenue will be enhanced can be explained with the aid of the below diagram.
Figure 5: tariff one wine
Source: (Created by Author)
Considering the above figure if it is assumed that the initial price of wine in the Canadian market is P0, then it can be seen that domestic consumer would have demanded, Qd amount of wine; whereas, domestic suppliers will supply only Qs amount of wine. The gap between the Qs and Qd at price P0, would have been the amount of importable wine in order to satisfy the demand of the domestic consumers. Now, as it can be seen that, government of Canada has imposed tariff on the importable wine, overall price is now P1. At this price, domestic producer will supply Qs’ amount of wine; however, demand will remain still high at Qd’. The gap between the Qs’ and Qd’ at price P1 will be the amount of wine imported from the Australian market. Under the new price situation during the post tariff, E section will be the consumer surplus and (A+A’) will be the producer surplus. In addition to this, there will be a rise in the tax revenue by C section, however, society will loss (B+D) amount of earning as deadweight loss (Caliendo and Parro 2015). Under this situation, consumer surplus will be reduced by (A+B+C+D) amount, however, producer surplus will be enhanced by A amount and there will be a deadweight loss by (B+D) amount. If the (B+D) will be higher that the C, then it can be said that the tariff is effective for the societal and the governmental perspective, however, if it is less than the government revenue, then it would be better for the Canadian government to roll back the tariff program (Yu 2015).
2.2:Subsidy is another way to control the interest of the domestic players that aids the domestic suppliers in order to reduce their selling price and compete with the international players (Hakobyan and McLaren 2016). There are various benefits and credits in case of utilising the subsidy program depending upon the condition of the economy. Considering the case of the given article it can be seen that government of Canada has imposed subsidy on the domestic wine producers through various channels and it has aided them to keep the selling price lower than the Australian sellers making the market of the Australian wine producer’s market shrink (Felbermayr et al. 2015). In order to understand the change in the consumer and producer surplus in case of the subsidy, following diagram can be utilised.
Figure 6: Subsidy on wine
Source: (Created by Author)
As it can be seen from the above diagram that, if the initial price of the wine is P0, then the equilibrium price and demand will be P0Q0. Now, as the government has providing subsidy to the domestic market players, then it would reduce the price of the Canadian wine leading to rise in the supply. Considering this, above figure demonstrate that supply curve will shift from S0 to S1 and the equilibrium will occur at P1 price and Q1 demand (Brandt et al. 2017). At Q1 demand consumers will be willing to pay P2 price that would enhance the price from P1 to P2. Under this situation it will change the consumer as well as the producer surplus of the wine industry. A’+A will be the new consumer surplus and E+E’ will be the new producer surplus. During post subsidy situation, there will be a deadweight loss of D+D’ amount and the government expenditure rise will be P0P2*Q1 (Siddig et al. 2014). Consider the post subsidy situation, it can be said that due to implication of restriction on the Australian wine import in Canadian market and providing subsidy to the domestic wine producers in order to keep their selling price lower would hamper the interest of the Canadian government instead of helping them. It would bring down both the consumer as well as producer surplus in different scenario and more importantly, there will be deadweight loss, which will reduce the societal benefit.
2.3:In order to deal with the tariff imposition and subsidy to the domestic player of Canada, Australian government can utilise the following trade pacts:
Canada-Australia Trade and Economic Cooperation Arrangement (TECA):
This is one of the goods and service related trade pact between the Canada and Australia, signed during 1995. One of the main objective of the same was to expand the special trade bond and cooperation between these two trade participating nations. In addition to this, it was aimed to provide both the parties free access to the respective nations so that the trading can boost between them and the relationship fosters (Solaymanu et al. 2015). TECA firmly supports the growth of the liberalization and promotion of trade of goods and services between these two nations. Utilising the same, government of Australia can object the tariff imposition act of the Canadian government in the case of the wine market.
Trans Pacific Partnership (TPP):
Though the US government has withdrawn its signature from the TPP, yet it is an ambitious pact among the Trans Pacific nations in order to enhance their economic performance through international trade. It was supposed to be came in force during 2016, however, two nations have ratified the same and moreover, US has withdrawn its signature that has made it paralysed. Under this situation a modified version of the TPP model has come in that holds most of the principal of the TPP and in order to bring in the same in force in real world, Australia can utilise the same in the case of the biased imposition of tariff and subsidy towards the domestic wine producer of Canada (Brandt et al. 2017).
3.1:As per the efficiency wage theory, as the wage increase, it enhance the productivity of the labour. Thus, if a firm enhance its wage, then it will recouped through higher labour productivity and staff retention (Bishp 2018). If the wage of the labour are fixed, then it will enhance the morality and the productivity of the labour due to the fact that, they will earn more than the market clearing wage. In addition to this, as the efficiency wage theory suggest, if the wage is enhanced, then it will enhance the retention rate, which will provide job security to the labour and through this firm can enjoy more output per labour (Meer and West 2015).
3.2:There are various disadvantages in case of binding minimum wage. It not only makes the labour market distorted rather makes it inefficient in long run. Some of the disadvantages of binding the minimum wage are as follows (Dube et al. 2016):
3.3:As per the given scenario, it can be seen that there are various loop holes in the new policy of the new start-up of Australia. Firstly it has initiated minimum wage without concerning the labour union and secondly, wage has been constrained irrespective of the working culture and market scenario of different places. Being a multinational firm, it should have taken more optimistic approach and sets it minimum wage strategically so as to enhance the performance of the labour of different location. As the recommendation following can be mentioned for the firm:
Reference:
Bishop, J., 2018. The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss (No. rdp2018-06). Reserve Bank of Australia.
Blundell, R., Browning, M., Cherchye, L., Crawford, I., De Rock, B. and Vermeulen, F., 2015. Sharp for SARP: nonparametric bounds on counterfactual demands. American Economic Journal: Microeconomics, 7(1), pp.43-60.
Brandt, L., Van Biesebroeck, J., Wang, L. and Zhang, Y., 2017. WTO accession and performance of Chinese manufacturing firms. American Economic Review, 107(9), pp.2784-2820.
Caliendo, L. and Parro, F., 2015. Estimates of the Trade and Welfare Effects of NAFTA. The Review of Economic Studies, 82(1), pp.1-44.
Ciaian, P. and Rajcaniova, M., 2018. Virtual relationships: Short-and long-run evidence from BitCoin and altcoin markets. Journal of International Financial Markets, Institutions and Money, 52, pp.173-195.
Ciaian, P., Rajcaniova, M. and Kancs, D.A., 2016. The economics of BitCoin price formation. Applied Economics, 48(19), pp.1799-1815.
Cúrdia, V. and Woodford, M., 2016. Credit frictions and optimal monetary policy. Journal of Monetary Economics, 84, pp.30-65.
Dix-Carneiro, R. and Kovak, B.K., 2015. Trade liberalization and the skill premium: A local labor markets approach. American Economic Review, 105(5), pp.551-57.
Dube, A., Lester, T.W. and Reich, M., 2016. Minimum wage shocks, employment flows, and labor market frictions. Journal of Labor Economics, 34(3), pp.663-704.
Felbermayr, G., Jung, B. and Larch, M., 2015. The welfare consequences of import tariffs: A quantitative perspective. Journal of International Economics, 97(2), pp.295-309.
Hakobyan, S. and McLaren, J., 2016. Looking for local labor market effects of NAFTA. Review of Economics and Statistics, 98(4), pp.728-741.
Hirsch, B.T., Kaufman, B.E. and Zelenska, T., 2015. Minimum wage channels of adjustment. Industrial Relations: A Journal of Economy and Society, 54(2), pp.199-239.
Hua, J., Schwartz, R.A. and Sipress, G., 2017. Using Simulation to Better Understand Price Determination in a Nonfrictionless Equity Market. The Journal of Portfolio Management, 44(1), pp.142-159.
Jang, H. and Lee, J., 2018. An empirical study on modeling and prediction of bitcoin prices with bayesian neural networks based on blockchain information. IEEE Access, 6, pp.5427-5437.
Leamer, E.E. and Stern, R.M., 2017. Quantitative international economics. Routledge.
Loi, H., 2017. The Liquidity of Bitcoin. International Journal of Economics and Finance, 10(1), p.13.
Meer, J. and West, J., 2015. Effects of the minimum wage on employment dynamics. Journal of Human Resources.
Peters, G.W. and Panayi, E., 2016. Understanding modern banking ledgers through blockchain technologies: Future of transaction processing and smart contracts on the internet of money. In Banking Beyond Banks and Money (pp. 239-278). Springer, Cham.
Siddig, K., Aguiar, A., Grethe, H., Minor, P. and Walmsley, T., 2014. Impacts of removing fuel import subsidies in Nigeria on poverty. Energy Policy, 69, pp.165-178.
Solaymani, S., Kardooni, R., Kari, F. and Yusoff, S.B., 2015. Economic and environmental impacts of energy subsidy reform and oil price shock on the Malaysian transport sector. Travel Behaviour and Society, 2(2), pp.65-77.
Yu, M., 2015. Processing trade, tariff reductions and firm productivity: evidence from Chinese firms. The Economic Journal, 125(585), pp.943-988.
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