Task: 1
Demand and Supply is the most fundamental factors of economics and it’s the strength of the market where the demand factors refers to the goods magnitude sought after by consumers and the quantity demanded is the total volumes of a good required by people at a giving or certain price. (www.businessdirectory.com. Accessed 13/12/2015)
Supply signifies exactly how far the marketplace can offer. Where the amount of goods/products producers are willing to supply in the market refers to the amount manufacturers are willing to supply when receiving a certain price. (www.businessdirectory.com. Accessed 13/12/2015).
Mankiw, Taylor and Ashwin (2013) state that supply and demand “refer to the behaviour of businesses and people as they interact with one another in markets”.
Mankiw (1998) state supply as the “amount of something that firms, consumers, laborers, providers of financial assets, or other economic agents are willing to provide to the marketplace”.
Mankiw (1998) acknowledge that “In the goods market, supply is the amount of a product per unit of time that producers are willing to sell at various given prices when all other factors are held constant. In the labor market, the supply of labor is the amount of time per week, month, or year that individuals are willing to spend working, as a function of the wage rate. In the financial markets, the money supply is the amount of highly liquid assets available in the money market, which is either determined or influenced by a country’s monetary authority”.
Factors affecting Shift in Supply;
Price: Melvin & Boyes (2002) specified that “The basic supply relationship is between the price of a good and the quantity supplied. Although there is “Law of Supply”, generally, the relationship is positive, meaning that an increase in price will induce an increase in the quantity supplied”.
Price of other goods: As capitals have substitute, the quantity supplied of a commodity depends not only on its prices, but also on the prices of its substitutes, and an increase in prices of other goods makes them more profitable compared to the given commodity consequently, the firm shifts its limited resources from production of the commodity to other goods, i.e. price increase of other good (wheat) will induce the farmer to use the land for cultivation of wheat in place of the given commodity (rice). (www.businessdirectory.com. Accessed 15/12/2015)
Price increase in Factors of Production: Any price increases to factors of production (Land, Labour, Capital and Enterprise) escalate the cost of production and bring profit down and reduce supply. Also a decrease in prices of these factors increases demand due to fall in production cost and subsequently aid the rise in margin of profit.
Technology: Advancement in technology influences supply of goods i.e. reduces cost of production, and raises profit margin; and also encourages increased in supply. However, deprived technologies will increases production cost and sometimes leads to low supply.
Taxes: Government policies (tax increment and levy) on organisations raise production cost, thus, decreases supply, and reduce revenue to manufactures. However, tax concessions and subsidies by Government increases supply and brings more revenue for organisations and increase goods supply.
Natural/Social Factors: Climate change, disasters, epidemic and infection of crops, behaviour and social expectations on (production of organic food, waste, carbon emissions, moral and sourcing) can influences supply of produce and sometimes on the cost of inputs into production.
Mankiw, Taylor and Ashwin (2013) state that “The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase”.
With human’s needs insatiable and resources at their disposal imperfect which brings necessity of needs, thereby affecting production of goods, services and pricing process, and all these determined the forces of demand and supply in the market.
Demand factor are related to consumer’s economic activities whereby the process of purchasing the goods and services he/she wants to consume is recognised as demand which it’s an effective desire to be fulfilled and it’s implies on desire, ability to pay and willingness to pay. (www.businessdirectory.com. Accessed 16/12/2015).
Factors affecting shift in Demand; otherwise known as ‘determinants of demand’ are;
Revenue/ Income: Demands for goods are influenced by consumer’s earnings or wages, helping consumption of goods and services to rise and in turn aid consumer buying power. For most goods, the earnings end product is positive. However, for substandard goods, the income effect is negative meaning that with a rise in income, request for inferior goods may reduce?
Price: An important factor in economy, with its importuning influencing the demand for goods, services and commodity. Generally, a demand for goods increases when it has a downturn price and otherwise if it has an upturn in price. Similarly it must be noted that this changes in demand might not happen, if all other things do not stay constant.
Price Changes of Substitute goods: Occasionally demand for goods can also be influenced by change in price of related goods. There are two categories of related goods (Substitutes and Complements) i.e. Coca-Cola and Pepsi Cola drinks are good substitutes of one another whereby price increase of one can affect the other and also its demand. Additionally another example is bread and butter where one complements another. A fall in the price of one will increase the demand for the other and vice versa.
Consumers Preferences and Tastes: Goods demand depends on public’s perceptions, favourites, customs and social imposts. A slight change in any of these will bring about a change in demand.
Unequal distribution and change in wages: An unparalleled distribution of incomes will spring an upturn of many deprived people and a few opulent ones in the society culminating in demand of goods being low, however, an equal distribution also will increase the demand for necessity goods consumed by the deprived and luxurious goods of the opulent reduced. However, the gross outcome of an impartial income distribution will increase in the demand level.
Expectations of Price: An upcoming anticipation of goods prices can also influences demand. Society’s expectation of a future rise in prices of goods due to reasons unknown will shift increase in demand to rise to avoid future occurrences. Contrarily, if the opposite happens, the demand for the goods will drop.
Economic activity: An important factor in determining goods/services demands. With a booming economy; employment rises, investment and revenue rises and increase the demand for both capital and consumer goods. However, in period of recession demand degenerates due to lower investment and income.
Similarly demand can be influenced by; population, size/structure of population, government policies, advertisement/commercial, natural disasters, discoveries and innovations, war occurrences, weather, methodological development etc. (www.businessdirectory.com. Accessed 19/12/2015).
Analysis of Gold
Gold an earth mineral mined in 94 countries worldwide with South Africa and United States of America the two leading largest producers, and both accounting for 13% global production in 2001. Butterman, Amey III. (2005)
To ascertain the importance of gold we must recognised the theory of Scarcity, Supply and Demand and its effect value in the market.
Scarcity arose when supply cannot match up with demand for goods, and to counter these a resolution is needed to proficiently allocate resources which sometimes happen naturally or handmade when an organisations or individuals decrease the amount of resource supply so as to push up demand and prices or rather when panic crept into the market which occasionally lead to demand to out stripe supply which culminate to the factors that tend to affect the supply and demand of gold in the world.
As choice helps us to recognise our needs, we then allocate our needs to the theory of demand and supply, however our insatiable taste and limited supply help push up price commodity and reducing its demand among the numbers of people who can afford it, which also is applicable to different nations of the world i.e. needs of many nations cannot be met with the available resource. Hence, many nations of the world use gold as an extra revenue income to aid their economy subsequently leading to its limitation in demand and supply.
Though gold, unlike other resources, have many usages and makes it a rare and scarce commodity.
The demand and supply of gold makes it the world most dependable commodities with about 90% of it supplied in the market mainly used for industrial purposes and the rest either for investors or reserved as money. Its effectiveness is momentous based on loftier goods created of it i.e. gold comportments can be turn into electricity, does not blot, easily workable and drawn into wire, can be pounded into thin sheets, compounds with numerous other metals, and can be liquefied and moulded into many meticulous forms, and possess a wonderful colour and a dazzling lustre and an extraordinary metal that have a special place in the human mind. (www.geology.com. Accessed 15/12/2015).
Gold has always been in great demand for its stability as an investment instrument as well as its cultural significance, it is an essential commodity that has been treasured since ancient times, and it’s valued highly for its beauty and permanence and remains the decorative metal par excellence while retaining a high standing among all commodities as a long-term store of value. (World Gold Council. 2015. Accessed 16/12/2015).
In the second half of the 19th century, gold mining boom which was sustained by its strong demand explains the consumer side of buying decisions. Gold processed to jewellery accounted for 54% of its purchases, making jewellery the biggest contributor to its demand, and a rise of 17% from 2009 to 2010. Butterman, Amey III. (2005).
If gold price’s goes up due to oversupply, then demand falls, and if the price falls due to lack of supply then demand rises.
Meanwhile its supply is the exact opposite relationship of its price demand and as prices rise so does supply, and as prices fall so will supply; the two correlate directly, which might appear strange at first glance, but if we stop to think it does make sense and if the market can only support a low price, then only the most efficient suppliers will compete, but as prices rise, more suppliers enter the market as even the inefficient producers are able to make a profit. Hence as prices rise, so does supply coming onto the market. If we add these two effects together then the fluctuations in prices tend to occur due to changes in demand and supply.
However the price of gold is on the rise continually due to its high demand and finite supply and aside its investment instrument, it is also used widely for industrial purposes because of gold high resistance to corrosion and thermal conductivity. In essence, the persistent increase in demand and supply causes the price of gold to skyrocket.
Meanwhile, the supply of gold is limited because it cannot be artificially produced, and it’s a lucrative option. The biggest buyer of gold for jewellery is India, with 745 tonnes, followed by China (400 tonnes) and the United States (128 tonnes). (www.geology.com. Accessed 15/12/2015)
Fig.1
The above diagram illustrates equilibrium point of gold, with vertical line as price and the horizontal being the quantity and with the two meeting point as the equilibrium point which is dictated by the force of the market, which required no pressure on the market for the price going up or down, meaning market stability.
Fig.2
The above diagram highlights a shift in supply and demand of gold as it affected by price changes and other features, showing that if price changes supply and demand too shift and it will create a new equilibrium point and reverse is the case when prices falls or supply drop. Also a shift in demand equally affects the point of equilibrium.
Medical: Gold is used as a medication to treat a small number of health conditions where the Injections of small fragile solutions of sodium aurothiomalate or aurothioglucose are occasionally used to treat rheumatoid arthritis, and small amount of a radioactive gold isotope are imbedded in tissues to serve as a radiation source in the treatment of cancer patient.
Also small amounts of gold are used to remedy a condition known as Lagophthalmos, an inability of one to shut their eyes completely. This illness is treated by placing minor amounts of gold in the upper eyelid and this implanted gold “weights” the eyelid and the force of gravity helps the eyelid close fully.
Also numerous clinical instruments, microelectronic equipment and major life-support devices are made using slight quantities of gold. Gold is a nonreactive in all these instruments and very highly reliable in the electronic equipment and life-support devices. (www.geology.com. Accessed 17/12/2015).
Dentistry: Because of its higher performances and beauty Gold are used for tooth fillings, tooth crowns and mouth brazes by Dentist and on orthodontic machines.
Dentist used Gold because of its chemically inert slow reaction, and its non-allergenic reaction to patients and easy usage for the dentist to work with.
This comes because of the concern of metals having an inactive reaction on patient’s long term health. (www.geology.com. Accessed 18/12/2015).
Jewelry: The Most important factor of Gold is the ability to turn it to attractive objects and jewelry since ages by manufacturer. Nuggets of gold mined or recycle today are easily used in the manufacture of jewelry. And about 78% of the gold consumed yearly is used in jewelry manufacturing.
Monetary and Gold bars: Because of its high valuation and very limited in supply, Gold has long been used as a medium of exchange for money. The first business gold transactions known dated back to over 6,000 years and this were done using pieces of gold or silver. The scarcity, worth and prestige of gold make it a substance of long term status. Gold it’s very important in business transactions because of its high value, durability, moveable and it’s easily divisible.
In the early 1900 gold coins were generally used in transactions before the advent of paper currency became a form of exchange, and were issued in two kinds of units, such as dollars, and others were in standard weights, such as ounces or grams.
Gold is sometimes used as a financial backing for exchange and was most often held in the form of bars, sometimes known as “gold bars”, and kept trading expenses to lowest and convenient handling and storage. Many individuals, governments, and establishments hold reserves of gold in the convenient form of gold bars which always yield dividends.. However, its prices do fluctuate. And this as a result, always make investors in gold to keep watch on prices and issues causing this fluctuation.
Factors leading to shift in Gold;
Demand and supply
The prices of Gold prices are usually set due to its high demand and supply which makes it to be always on the rise. Aside from being an asset metal, its utility for industrial purposes due to its high resistance to corrosion and thermal conductivity makes it more appealing and persistently in high which makes causes its prices to go up and down intermittently.
Strength of the Dollar: A contributing factor which continuously influences gold prices worldwide its strength of American currency ‘Dollar’. The weakening of this popular currency makes investors around the world to put it in the market and purchase gold for security. This notion causes a rise in gold demand and as a result, a rise in its prices. Albeit, the other way happens if Dollar regains its strength and it will increases demand for gold?
Central banks and excavating companies: The apex (central) banks which control most countries banks and excavating establishments usually hold gold in large reserves. These two organisations control its buying and selling according to its availability and their countries currency, and the global economic consequence. Any changes in gold prices are more pertinent to its transactions by these two establishments.
Economy: The global economic factor is a crucial point in gold prices. A stricken economy hinder good returns for investors, and this prompt investors to place their money in gold, which it’s known to thrive well during calamitous situations.
Although above issues may be a major issues affecting gold prices others issues are; trading and speculation, national disaster, rise in per capita income and government rules.
Task: ii
Externality: Arises when manufactured goods or an outlays on services in the society is more than its conventional cost; sometimes regarded as market failure because production and consumption of the goods are more than what it’s required in the society. (www.businessdictionary.com. Accessed 17/12/2015).
Buchanan, Stubblebine (2006) considered “Externality has been, and is, central to the neo-classical critique of market organisation. In its various forms external economies and diseconomies, divergences between marginal social and marginal private cost or product, spillover and neighbourhood effects, collective or public goods; externality dominates theoretical welfare economics, and, in one sense, the theory of economic policy generally”.
Buchanan and Stubblebine (1962) point out that “externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit”.
Mankiw, Taylor and Ashwin (2013) identified “negative externality occurs in many varieties i.e. “the exhaust from cars is a negative externality because it creates smog that other people have to breathe”.
The known common negatives externality in car is carbon emissions (CO2), owners or drivers do not account for polluted air their car emit but the society. Drivers do not put consideration into the extent of pollution they caused in the society driving around on roads, but the polluted atmosphere are bore by other road users (pedestrian) or some business activities.
According to a recent article published (2334915.ece on news independence/environment. Accessed on 19/12/2015), “the high production and use of automobiles in England are actually producing more negative externalities than just pollution”. The high demand by the population for cars is matched by a high supply of automobiles by numerous firms in the market. Cars are known for the amounts of pollution they produce, however, only recently was another negative externality discovered, that the cars increase chances of urban flooding.
This externality is caused by the high demand of land used for roads or parking lots and other car related structures due to the rising numbers of cars. This leads to the earth around these areas to be unable to soak up the majority of the rainfalls causing frequent flooding”.
Market failure happens when the goods allocation in a free market are not efficiently spread and below are some factors or many different reasons for market failure.
Factors that cause Market Failure;
Rules: Flat Price Constraints or price capping prevent the price working efficiently for resource allocation.
Controlling Market: Big organizations because of their monopolistic power might collude up to the detriment of smaller firms and fix prices for their own profit making or creating barriers or start-up costs for the smaller business in become its competitor.
Operational costs: For a perfect functioning market the trade cost for potential organization for engagement should not be set high.
Inadequate information: Adequate information is needed for all (consumers and producers) trading so as to set perfect pricing systems and aid future productivity.
Immobility of Factors of production: An essential ingredient in economy which sometimes cannot be moved or be substituted for and some resource items are limited in usage.
Private Cost: This is the total cost of organization set up; payment for business machinery are endured by the proprietors or hiring of equipment and staff wages are paid.
Social cost: This can be equated as the cost total acquired by the society owed through an organisation’s activities. It is the sum total of external and private cost which are sometimes regulated by the government.
Private benefit: The financial benefits or profits of the business are the rewards gained.
Social benefit: The overall benefit acquired due goods production and services by an organisation, which equates to total of private and external benefits.
Ways to Curb Externalities:
Tax/Regulation: Government introduction of high duties on pollutant cars in order to increase the cost of vehicles and decrease its supply in market or regulatory measure to manufactures/ owners of this vehicle to create choice or usage is another point in reducing and accommodating these externalities.
Prohibition: The introduction of embargo or issuing strict permits in a particular region area for cars emitting CO2 pollution can be enacted and help reducing of this externalities in the area.