Implications Of Demand Supply Dynamics And Policy Frameworks On Markets And Industries: An Economic Analysis

Events analyzed in the assignment

Using the demand supply dynamics, the implications of the following events can be explained which are shown in the following sections:

The employees, in any economy, generally fall under the domain of labor supply of that economy (Rader, 2014). Therefore, with the increase in the number of retirements of the existing employees, the supply of labor decreases in the economy, the effects of which can be shown with the help of the following diagram:

Figure 1: Decrease in supply of labor

(Source: As created by the author)

As can be seen from the above diagram, with the decrease in the labor supply, the demand remaining the same, the price of labor increases and the amount of labor demanded decreases due to the increase in the price of the same.

The decrease in the cost of materials leads to increase in the productivity of the car manufacturing industry due to increased cost effectiveness, which reflects in the increase in the supply:

Figure 2: Increase in supply of cars

(Source: As created by the author)

With the fall in the price of the materials, the supply of cars increases, which leads to a fall in the price as well an increase in the demand for cars as, can be seen from the above diagram (Ekelund Jr & Hébert, 2013).

With the incidence of tax, both the producers and the consumers become worse off and both the demand and the supply decreases which can be shown as follows:

Figure 3: Incidence of Tax

(Source: As created by the author)

With the imposition of tax, the price paid by the consumers increases from P1 to P2, whereas the price received by the sellers decreases from P1 to P3. This in turn leads to a fall in the supply. The demand for the same also decreases from Q1 to Q2 (Landsburg, 2013).

As designer clothes are mainly luxury goods, therefore their demands are of highly elastic in nature. With the fall in income, the demand falls significantly:

Figure 4: Fall in demand for designer clothes

(Source: As created by the author)

Due to the fall in income, the demand for luxury designer clothes fall significantly, which leads to a fall in the price if supply remains the same.

With the increase in income, the demand for holidaying increases which is shown as follows:

Figure 5: Increase in demand for holidaying

(Source: As created by the author)

With the increase in income, people have more money to spend for leisure and entertainment, which increases the demand for holidaying, as seen in the above diagram.

With the invention of coffee bean resistant to disease, the demand for the same is expected to increase substantially, as shown below:

Figure 6: Increase in demand for coffee beans

(Source: As created by the author)

With the innovation of disease resistant coffee beans, the demand for the same increases significantly. However, the supply cannot increase at the same pace, which results in increase in demand and a following increase in price of the same (Baumol & Blinder, 2015).

Explanation of the demand supply dynamics for each event

In terms of economics, a market is defined to be the forum of interaction of the demand side and the supply side players, where the equilibrium is reached by the mutual agreement of the demand supply dynamics. In this context, the policy frameworks of the government of a country and the rules and regulations imposed by the same on the markets of an economy, have considerable implications on the demand, supply and prospect of the industry and the firms in the market a s a whole (Nicholson & Snyder, 2014).

Taking this into consideration, the assignment tries to analyze the impacts of the rules and regulatory limitations imposed by the governing authorities on specific markets, taking into account the economy of one of the most developed countries in the global economic framework, that is the economy of Australia.

The governing authorities of Australia, in the recent years, have imposed travel warnings on the citizens of the country, thereby restricting them to travel to any of the countries which are registered in the smart traveler’s list.

Due to the imposition of the restriction, the demand for the international air tickets are expected to fall significantly in the country, the effects of which can be shown as follows:

Figure 7: Fall in demand of international air tickets

(Source: As created by the author)

Due to the imposition of restrictions, the Australian residents are expected to decrease their demand for international air tickets considerably. This is expected to decrease the price of the same and in long run the supply of the same is also expected to decrease (Friedman, 2017).

Due to the imposition of travel restrictions on the Australian residents in other countries, as has been advised by the government of the country, many of the residents are likely to substitute foreign holiday destinations with that of the domestic holiday spots. This in turn is expected to increase the demand in the domestic holiday market in the country, which can be showed as follows:

Figure 8: Increase in demand in the domestic holiday market in Australia

(Source: As created by the author)

Due to the increase in the domestic demand for holidaying, the price of the same is also expected to increase, which in turn is expected to increase the number of sellers or supply side providers in long run in the Australian domestic holiday market (Hall & Lieberman, 2012).

Figure 9: Long run increase in the supply in the domestic holiday market

(Source: As created by the author)

The production possibility curve can be defined as the locus of all the possible combinations of two commodities, which can be produced by fully utilizing a given amount of input, in a two-commodity economy. The production possibility curve in the concerned case is as follows:

Figure 10: Production Possibility Curve

(Source: As has been given in the question)

Here, the commodities in concern are consumption goods ad capital goods, both of which are normal goods in nature. This implies that for both the commodities more is better (Ethier, 2014). However, given that the resources are scarce, there lies a scope of trade off between the productions of these two goods. The production possibility curve shows the possible combinations of both the commodities, which can be produced by utilizing the inputs fully (Feenstra, 2015). Taking this into consideration, the following assumptions are analyzed and their feasibility or non-feasibility are explained in the following sections:

Figures illustrating the effect of each event on the market

As the production possibility curve itself shows the commodity bundles, to produce which the entire input amount is efficiently utilized, any point under the curve shows inefficient and under-utilization of the inputs to produce the commodities of interest. In this context, D is such a point within the area under the curve, where the resources are not efficiently utilized. There are scopes of increasing consumption goods keeping the capital goods same or of increasing the capital goods keeping the consumer goods same. There also remains scope of increasing both the commodities by efficiently using the inputs present, which can be seen to be done in the pint C on the PPC. Thus, it can be concluded that C is a more preferable point than that of  D as both the commodities are produced more in the former than in the latter (Gopinath, Helpman & Rogoff, 2014).

Point H shows a combination of both the consumption goods as well as capital goods, which is higher than the points, which are present on the production-possibility curve. However, given the amount of resources, the point H cannot e reached as the inputs are fully utilized on the production possibility curve itself. Therefore, even though H is a higher point than point C, the former is unattainable while the latter is attainable.

a) Using the data table given in the question, the demand and the supply curves can be plotted against the given levels of prices,

which is as follows:

Figure 11: Demand and Supply at the given levels of prices

(Source: As created by the author)

As can be seen from the above figure, the equilibrium occurs at the price level $3 where the supply and the demand curves intersect each other. The equilibrium quantity demanded as well as supplied is 3000 units.

b) At the price level of $1, the quantity supplied is 1400 units, whereas the quantity demanded is as high as 5400 units. This indicates that the demand for the commodity is higher than the supply of the same at a price level of $1. As the demand exceeds the supply by 4000 units, therefore, there exceeds an excess demand in the concerned market at the given price level (Rios, McConnell & Brue, 2013).

c) If the supply increases at each price level by 1800 units, then the new supply curve shifts upwards, which can be shown with the help of the following diagram:

Figure 12: Increase in the supply of the commodity

(Source: As created by the author)

1. d) With the increase in the supply of the commodity, the demand curve remaining the same, both the quantity supplied as well as the quantity demanded increases from 3000 units to 4000 units. The price also decreases from $3 to $2 due to the increase in the supply of the commodity. The new equilibrium occurs at the point where the new supply curve intersects the existing demand curve, with the equilibrium price being $2 and the equilibrium quantity being 4000 units (Canto, Joines & Laffer, 2014).

References

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Canto, V. A., Joines, D. H., & Laffer, A. B. (2014). Foundations of supply-side economics: Theory and evidence. Academic Press.

Ekelund Jr, R. B., & Hébert, R. F. (2013). A history of economic theory and method. Waveland Press.

Ethier, W. (2014). Internationally decreasing costs and world trade. In THE FLOATING WORLD: Issues in International Trade Theory (pp. 53-76).

Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university press.

Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University Press.

Gopinath, G., Helpman, E., & Rogoff, K. (Eds.). (2014). Handbook of international economics (Vol. 4). Elsevier.

Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.

 Landsburg, S. (2013). Price theory and applications. Cengage Learning.

Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application. Cengage Learning.

Rader, T. (2014). Theory of microeconomics. Academic Press.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.