Supply And Demand Analysis, Determinants Of Diamond Prices And Excessive Tobacco Consumption

Basic Economic Concepts

The subject economics has been categorised under social science which deals with the daily needs of human life and living. The way in which human being interacts in making up the basic decisions of consumption, production and distribution along with resource allocation is the crux of this subject. The basis of any system is the want of the people backed by their power to afford the same. Along with this wants there is another vital concept that is allocation of the available scare resources optimally to maximize the production. Demand and Supply are the two terms which if understood properly and utilized optimally can make any layman a pro in the subject economics.

This report has been divided into three major sections for answering the given assignment with ease. The first part describes the basic concepts of economics followed by the second part where the interaction of demand and supply in determining the price of diamonds has been discussed. This part has been further sub-divided into 4 sub-parts for elaborately presenting the view. The third part deals with the tobacco consumption and its impact on the society. It also describes the way in which the government tries to curb this problem. This report has been concluded with a brief description about the findings of this two major topic with direct relation to the UK economy.

Basic Economic Concepts

Demand:

Demand in economics has always been described as the consumer’s willingness to buy and consume any goods and services. This demand is valid only when the consumer has the capability to pay the price for the goods.

People always wants to pay lesser amount for purchasing huge volume of goods while they are ready to pay more price per unit when they by less amount of goods. Hence in economics the demand curve is always sloped negatively and drawn with price on one axis and quantity of goods on other (Rios, McConnell and Brue 2013). However demand may also vary depending upon whether it is a luxury good, necessary good or inferior good.

The demand of any commodity depends upon several factors like the price of that commodity, the possible availability of substitutes of that commodity, the income of the people, advertisement of the product and the utility associated with the same. The amalgamated outcome of all these factors generates the demand of any product or services by the consumers. Alteration of any one of them will have impact on demand of the commodity.

Supply:

Supply is the availability of any goods and services in the market at different level of prices as decided by the producers. It depends upon the producer’s willingness to sell any commodity (Lynch, Spiller and Zauberman 2014). If the producer gets more prices per unit of any commodity, he will be willing to sell more and vice-versa. Hence, supply curve is positively sloped with price and quantity in two axes.

Like demand, supply of any goods also depends on amalgamated influence of factors like price of the commodity, cost of producing the same, cost of transport, availability of substitutes, factor prices and policy of the government in that region.

Demand

Externality:

Externality is one of the most important concepts of economics which has been defined as the scenario where any third person other than producer or consumer gets affected by the process of consumption and production of any particular goods and services (Lin 2014). The concept of externality was introduced by Pigou in 1920 through his book The Economies of Welfare. It has been observed that in any production process, especially in business there is a mismatch between the marginal private benefit and cost of producer with that of marginal social cost and benefit. This difference has been termed as externality. Most of the time externality is of negative nature; however positive externality occurs within the economy as well. Here the negative externality on production and consumption has been discussed through the following diagram:

Figure 3: Negative Externality in Production

Source: Created by the Author

The ideal situation in terms of society is production at point Q2 at price P2. But given the scope any producer will produce at point Q1 where his demand and supply schedule matches. The production process causes negative externality as third party is being affected through it due to over production above socially desired level (Lynch, Spiller and Zauberman 2014).

Here the ideal situation would be at Q2 where SMB= SMC. But individual guided by their own interest continues to keep their consumption level up till the point Q1 where their PMB = PMC. In this stage due to externality the SMB is lesser than the PMB.

Factors determining Diamond price 

Diamond is one of the most precious stones available in our world. As a good it can be categorized under luxury product. This gem has been very highly priced in the market and consumption of these stones is done mainly to flaunt own status. Often it is said that diamond is girl’s best friend. This precious gem has given the economist to come up with their famous theory of water diamond paradox. The physical characteristics of diamond help in quoting the price of the same. Along with it the price of this one of its kind gem has always been quoted by the interaction of the market demand and supply of the goods.

Physical characteristics

The price of any diamond depends largely on the five major physical features that it possesses. They are carat weight, cut of diamond, shape, colour and clarity of the gem (Yeomans 2017).  These are explained below:

• Carat Weight: The most important determining factor of the price of loose diamond is the carat weight of the gem. The more the carat weight, the higher the price of the good. The carat size varies mainly from 1 to 3. Below 1 carat diamond are not much preferred and hence the price is comparatively lower.
• Cut of diamond: The cut of the diamond give it the required brightness and spark and hence the more facets and clean cut a diamond has the higher is its price in the market.
• Shape of diamond: Diamond comes in different shapes like round, emerald, oval, cushion, radiant, etc. Amongst them the round shape being highly preferable by the consumers cost more than any other shaped diamond.
• Colour: The shade card of diamond varies from colourless to light yellow. Colourless diamonds are easily available than the light yellow coloured diamond and hence costs lesser than the coloured ones.
• Clarity: Clarity implies perfection. Whenever a diamond has more clarity it means that there is less chances of gas bubbles and spots present in the stone and thereby costlier it becomes.

The physical factors do play an important role in determining the price of diamonds but nevertheless the economic factors of demand and supply cannot be ignored. In fact they play more crucial role in quoting the price of this precious gems in the market. Following the general rule of economics the interaction between the demand and the supply of diamond determines its price (www.thegazettenews.com 2017). This has been shown in the figure below:

From the figure above it can be seen that the demand and supply curve intersects and gives the equilibrium price and quantity P* and Q* respectively. As already mentioned that diamond falls under goods belonging to luxurious category, it is observed that people are always ready to pay high price for it. Paying a higher price often gives them psychological satisfaction of owning something worthy of flaunting. At the same time the number of people who are able to pay such a high price being less creates less demand of this gem. Thereby it can be stated that diamond the price of diamond is always high as compared to other gemstones.

Supply

Water diamond paradox

Water diamond paradox as forwarded by by Adam Smith gives us the idea behind the high pricing of diamond and other luxury products even though they are not necessary and people can survive without using them. In order to discuss the pricing of luxury commodities with respect to basic necessary goods, diamond as a luxury item and water as the necessary goods has been chosen by him (Choi 2013).

According to observation it has been seen that the total utility derive from water is much higher when compared to the total utility derived from diamond. People cannot survive without the initial but can easily do without the later goods. In contrary people are not willing to pay high amount of money for water but for diamond. This contradiction has been explained by the concept of marginal utility. Water which is available in abundance might have higher level of total utility but the marginal utility gained from consumption of one unit of water is negligible as compared to that of diamond. The MU of diamond is relatively much higher.

This phenomenon helps us in understanding the high price associated with not so necessary commodity which are available in scarce quantity but still in demand among consumers. The fact that diamond has been valued more by the consumer helps the supplier in quoting the price so high and this is true for any type of luxury goods.

Present scenario of global diamond market 

The global market for diamond has been into a hay way situation for the past few years. The crises in the market can be perfectly justified with the help of basic economic concepts.

According to an article published in Financial Times in March 16, 2016, De Beers, one of the largest diamond companies was forced to shut down their mine at Snap Lake, Canada. The company had spent roughly around $2.2 bn in developing and operating its mine at Snap Lake but at present it has been temporarily closed causing 400 people to go jobless. Renowned analysts over the world comes to the conclusion that this chaotic situation in the market of precious gems has been due to its declined and limited demand from the end-users that is consumers. Along with it, the banks denied to continue financing for operation in diamond mines and de-stocking of inventory diamonds has added fuel in worsening the situation (Goldhill 2017).

Another article published on June 2, 2017, states that global sales of diamond bolstered and De Beers started regaining their position with the increasing demand from US consumers (www.scmp.com 2016). Though demand from India and China slumped down but the demand for diamond in the US market helped in reviving the global demand. India is engaged into the diamond market and responsible for almost 90% cutting and polishing of diamond (Yeomans 2017). Due to de-monetization initially there was a cut in this industry but soon India revived back and this industry is expecting good future.  

On other hand, the problem of excess supply of diamond still exists in the market (www.thegazette.news.com 2017). This causes a downward pressure in the price of the valuable gem. Hence it can be said that high demand leads to quoting of higher prices whereas high volume of supply leads to slumping of price and thereby profit of diamond (Goldhill 2017).

Externality

Tobacco consumption and its associated impact on society

Tobacco and other drugs have always been discouraged by the governments of different countries in the world. In the fast pace of globalization it has been found that more youths are getting involved into smoking and drinking habits (Oliver 2015). Recently over the last few decade consumption of tobacco and drugs by the females have increased substantially. The trend continues to persist amongst the youths who feel that adopting these habits makes them more acceptable among their peer group. Since they start of at an early age, as early as 13-14 years, they are unable to keep control of themselves and get addicted to these things (Smith 2017). Over use of tobacco and any other drugs have significant ill effect on the individuals as well as on the overall society. The impact has been classified as direct and indirect impact and role that government might play to control this problem.

Direct impact

The direct impact of smoking tobacco is felt on the health of the person. There are several diseases caused as a result of excessive smoking. Along with it it creates pollution and accidents due to addiction and hallucination.

• Impact on Health: Individuals who are into smoking are more susceptible to diseases like asthma, heart problems, liver problems, kidney problems and even cancer (Lin 2014). According to a study conducted by WHO, it has been estimated that at present roughly 6 million people die out of excessive smoking problem and it is expected to rise to 7 million deaths by 2020.
• Increased expenditure:Excessive smoking not only causes health hazards but also creates a hole in one’s pocket. The first expenditure comes in the form of buying the tobacco which seems to be small. But if we accumulate the total cost of purchasing tobacco per year, it would be quite large. The other expenditure that the consumers have to bear is the cost of paying doctors’ visit and purchasing medicines thereafter (Ekpu and Brown 2015).
• Other impacts: The other costs of smoking are lack of productivity due to addiction, absenteeism in the job due to illness and also second hand costs borne by passive smokers specially children.

Excessive smoking of tobacco causes a great negative externality on the society. The problems of externality can be divided into two parts, one borne by the other people and second the impact on environment.

• Impact on other’s health: Statistical data as given by NHS, U.K., states that as many as 100,000 people die due to smoking out of which 11% can be traced to be passive smoker. The cost of life cannot easily be calculated by numeric data and converted into monetary costs but the huge number clearly states that not only those who smoke but also other people often has to bear the cost of smoking (Sassi, Merkur and McDaid 2015).
• Impact on environment:Along with the health hazards faced by non-smokers, the excessive habit of smoking also has huge impact on environment. Hue volume of carbon-monoxide, carbon dioxide and other harmful gases are emitted in the atmosphere whereas similar volume of oxygen is reduced due to combustion of cigarettes. This disrupts the balance of the environment. On other hand, consuming tobacco and throwing the butts here and there also degrades the environment. Careless disposal of cigarette butts many a times leads fire in public places. Data suggests that China alone shares 35% of world’s total tobacco consumption. Report by WHO states that $500 billion are spent globally every year in health care, managing fire damages and due to productivity loss as a result of tobacco consumption.

Government of any nation plays an important role in curbing the addiction of its people in consuming drugs, alcohol and cigarettes. The government has various tools in their hands for curbing the problem of excessive use of tobacco in the country. Few such measures that U.K. government took has been discussed below:

The government can increase the tax on cigarettes, forcefully put a limit on the volume of cigarettes sold by the companies, restrict on import of the same. Along with this regular campaigns at different public places and high-schools can prove to be beneficial in reducing the consumption of tobacco, especially amongst youths (Sassi, Merkur and McDaid 2015). In addition to it, introduction and encouragement in use of e-cigarettes by leaving the tobacco contained ones should be carefully done by the government.

One of the leading daily states that U.K. government plans to cut the rate of tobacco consumption to 12% from the existing 15% within 2022 (Oliver 2015). Data reveals that U.K. has been able to reduce the smoking rate from 20% in 2011 to 15% at present and strives towards lowering it (Siddique 2017). Another leading daily suggests that as many as 9500 children faces negative externality and are being admitted each year in the hospitals of U.K. as a result of being passive smoker. Hence few of the steps taken by the government in reducing the over consumption of tobacco and thereby the negative externalities it possesses are:

• Advertisement ban:Companies often use advertisement and catchy hoarding to visually attract customers and thereby create a psychological want for the products. Catchy advertisement and sales promotion of tobacco have been banned all over U.K. since 2015.
• Taxes: The habit of smoking often starts at early age and by putting high taxes and thereby increasing the price of tobacco in the market leads to many youth being incapable of purchasing it. Many low-income families also tend to leave their smoking habit due to high price of the good (Fuchs and Meneses 2017).
• Introduction of E-cigarettes: The government is against smoking but as it is impossible to completely ban this product hence they try to shift their consumer to e-cigarettes and carry on their research on the same. As not much is known about the ill-effect of e-cigarettes, hence no action is being taken against it but the government always encourages people to leave their habit of smoking (Oliver 2015).
• Successful Campaigns:As nothing can be better than teaching the people and eliminating the problem from the root, hence the government of U.K. stresses in holding anti-smoking campaign whereby they spread awareness of the ill-effect of smoking. Presenting the facts on deaths and other costs in front of the people might be helpful in this case (www.ons.gov.uk 2015).
• Ban in public places:Smoking in public places should be banned by the government so that the non-smokers are not adversely affected. Along with it there are no-smoking days in U.K.

Figure 6: Quitters over last 40 years, U.K.

The graph presented above clearly shows how the government of U.K. has been successful in curbing this menace of smoking (Meikle 2014). It is expected that they can curb this problem further and make the nation a healthy, happy and cleaner one in the near future.

References:

Choi, H., 2013. Resolving the Water-Diamond Paradox. Browser Download This Paper.

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Fuchs, A. and Meneses, F.J., 2017. Are Tobacco Taxes Really Regressive? Evidence from Chile.

Goldhill, O. (2017). Shortage of supply means diamond prices won’t be staying at today’s levels forever. [online] Telegraph.co.uk. Available at: https://www.telegraph.co.uk/finance/commodities/10772835/Shortage-of-supply-means-diamond-prices-wont-be-staying-at-todays-levels-forever.html [Accessed 27 Jul. 2017].

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