Demand And Supply Shocks On Global Economy Essay

Question:

Discuss about the Demand and Supply Shocks on Global Economy.

Answer:

Introduction:

The supply of products and services depend on several exogenous and endogenous factors like price of the product, cost of production, taste and preferences, government policies and others. When other things remaining same, the price of a normal commodity increases, the supply of the same tends to increase and vice versa (Baumol and Blinder 2015). This induces movement along same supply curve which is known as the change in quantity supplied:

On the other hand, if keeping price unchanged, other factors like cost of production, government policies, technologies and similar attributes change, then it leads to a shift in the supply curve as a whole:

The above figure shows effect of a reduction in input costs, which increases the supply, which keeping demand same, shifts the supply curve rightwards (Pindyck and Rubinfeld 2014).

Middle Eastern countries being the primary source of crude oil and petrol for the economy of Australia, an outbreak of hostilities in the Middle East can lead to a fall in the supply of oil in Australia, which leads to a decrease the supply in the petrol industry of the country. The result is as follows:

The reduction in supply is expected to increase the price of petrol in the economy of Australia (Cashin et al. 2014). This in turn is expected to reduce the demand for small passenger cars in the country as most of them are driven by petrol:

This in turn is expected to reduce the price of cars if the supply remains the same in the Australian markets.

In the coming years, the petrol cars in the market of Australia are expected to be replaced by electric cars, which are driven by batteries. The cost of maintenance of these cars being expected to be low, many new customers are expected to buy the same, which in turn is expected to decrease the demand of battery driven cycles in the economy (Varian 2014).

Subsidy is defined as the money or financial aid granted by the government of a country to help the businesses or industries decrease the price of the commodities or services at a low level. In this context, a unit sales subsidy can be defined as the amount which is paid or granted by the government of a country to the producers of the concerned commodity or service for selling each unit of the same (Friedman 2017). This in turn decreases the price paid by the customer as well as the cost of production borne by the producers. Imposition of subsidy increases supply, thereby decreasing the price of the commodities.

The price elasticity of demand for a service or a commodity shows the degree of change in the demand for the same for one-unit change in price. The effects of imposition of unit sales subsidy vary according to the magnitude of the elasticity of demand of the commodity, which can be shown as follows:

In case of goods with inelastic demand, when a subsidy is imposed, most of the benefits of the same is transferred to the consumers in the form of much lower price as is evident from the left figure of Figure 6. While in case of goods with highly elastic demand, producers only pass a little benefit of the subsidy to the customers in the form of a nominal price decrease as they know that little decrease in price will increase the demand for their commodities or services considerably (Cato and Matsumura 2013). Thus, the effects of subsidies on the producers and consumers vary according to the elasticity of demand of the same.

Milk is a necessary commodity and a normal non-luxury good, the demand for the same is not highly elastic. Thus, the imposition of sales subsidy on is not expected to decrease the price considerably. However, if subsidy is imposed on all the brands then the brands may compete with each other to get greater market share, which in turn may lead to a price reduction competition among them, thereby benefiting the customers (Rios, McConnell and Brue 2013).

In economics, abnormal profit or super-normal profit shows the amount accrued to the producers after deducing total cost of production from total revenue from sales of the same. In this context, in a market of perfectly competitive structure, in the long run, there always remains a normal profit (no profit no loss situation) for the producers. Any abnormal profit situation can only exist in the short run.

As perfectly competitive market is characterised by many buyers and many sellers selling homogenous commodities in the absence of any entry or exit barriers in the market, presence of abnormal or excess profit in the short run is expected to attract more producers in the market, which in turn increases the number of sellers and the supply of commodity in the market, thereby decreasing the prices and profit to the sellers to normal level in the long run (Kagel and Roth 2016). Thus, abnormal profit in the short run acts as an indicator to attract more sellers in the perfectly competitive market.


In the short run, with the increase in the number of units of commodities or services by the producers, the average fixed cost of production decreases as AFC = (TFC/Q). The average variable cost also decreases due to the economies of scale enjoyed by the company. This in turn decreases the total average cost of production of commodities in the short run (Hall and Lieberman 2012).

Car washing services if availed from markets, will lead to the charge of GST over the normal market rates existing for the same. Therefore, qualified accountants, who can calculate the value of GST to be paid for availing car wash services will prefer to wash their cars on their own.

The price elasticity of demand varies for different commodities and services. In general, for commodities of addiction, the demand is highly inelastic to the prices as people tend to keep their demand intact even when prices are increased. Alcohol and tobacco both fall under the category of commodities of addiction and both of them usually experience a relatively less elasticity in their demand (Rader 2014).

Keeping this into consideration, it can be asserted that the both alcohol and tobacco are most commonly consumed in Australian with relatively inelastic demand for both of them as compared to normal commodities. However, the demand for alcohol is observed to be more and increasing in all sectors of population, above 12 years of age in the country as compared to that of the demand for tobacco as the demand for the same is observed to be falling, by nearly one third, in the last few decades. In this scenario, the demand for tobacco is expected to be more elastic than that of the demand for alcohol as the population of the country tend to be more addicted to alcohol than tobacco and an increase in the price of tobacco may result to bigger decrease in its consumption than the increase in price of alcohol (Rader 2014).

There exists greater number of supply side providers in the tobacco market of Australia than that of the number of providers in alcohol market, the latter being more of an oligopoly in the country. There exist few big retail sellers in the alcohol market, the primary ones being Woolworths Group, Dan Murphy’s, BWS and the Coles Group, thereby giving the alcohol market of the country an oligopolistic structure. However, the supplier numbers in the tobacco market of country are larger than that of alcohol sellers (Bryden et al. 2012). Also, the tobacco market face far more government restrictions in the country. all these contribute towards greater level of competition among the supply side providers in the tobacco market than in the alcohol market of Australia.


The marginal revenue of a firm is the amount of revenue which the firm receives when they sell one extra unit of their product. The marginal revenue curve of a firm can thus be plotted by estimating the variation in the total revenue of the firm for each unit sell of the commodity or service of the firm (Varian 2014). The change in the total revenue being measured from the slope of the TR curve at each unit of commodity sold, the marginal revenue curve can be derived from the slope of the total revenue curve of the concerned firm.

The marginal revenue curve of a firm slopes downwards in the cases when the firm acts as a monopolist. This is because the monopolist producers face a downward sloping curve for demand, which implies than with additional output unit produced and sold, the price received by the monopolist reduces due to the downward sloping demand curve which indicates towards decline in willingness to pay with increase in output. If the monopolist cannot price discriminate, then the marginal revenue curve of the monopolist, thus slopes downwards (Varian 2014).

In case of perfectly competitive markets, the firms are price takers and operate in a scenario where the price for their products or services remains constant. This in turn imply that the firms gain equal amount of revenue from selling each additional unit of their products. Thus, the marginal revenue for selling each unit of product, in a perfectly competitive firm remains the same, which in turn implies that in a market with perfectly competitive construct, the marginal revenue curve is usually horizontal.

The successful application of Artificial Intelligence in Australia can be treated as a technological innovation in the country, which is expected to reduce the cost of production and increase cost efficiency and productive efficiency of autonomous cars in Australia, which may result in an increase in the supply of the same in the short run:

The rise in supply of autonomous cars in Australia in the short run tends to decrease the price of autonomous cars to some extent, which is expected to increase their demand in the short run (Goodwin et al. 2015).

Due to increase in supply as well as demand for the autonomous cars, the price of the same is expected to increase in the short run, the magnitude of increase depending on the relative extent of changes in the supply and the demand for the autonomous cars in the short run (Goodwin et al. 2015).

The increase in the price of autonomous cars in short run is expected to attract more sellers, which in turn is expected to increase the supply and lower the price, thereby bringing the market in an equilibrium state, which is shown below:


The banking sector of Australia primarily operates in an oligopolistic market, with four big banks, namely the Commonwealth Bank, the Westpac Corporation, the National Australia Bank and the ANZ Banking Group. In spite of the presence of many other small bank, these four banks enjoy immense market power together and poses as strict hurdle for the other small banks.

Although this situation is extremely profitable for the four big banks, the same is not applicable for the overall economy of the country. This is because due to the lack of competition in the banking sector, these four banks together enjoy huge autocratic sort of decision making and market influencing power, which in turn not only hampers the customers but also the other small banks (Sushko 2013). The big four banks have also been seen to be misusing their powers in many instances, which can be seen from the last few banking scandals which compromised the welfare and security of the clients of these banks. They also operate in a lobby-like situation which threatens any kind of competition in this industry. Thus, from these aspects it can be asserted that the collusive oligopolistic structure of the big four banks in the Australian banking sector is more of an economic weakness than economic strength in the country (Waldman and Jensen 2016).

References

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

Bryden, A., Roberts, B., McKee, M. and Petticrew, M., 2012. A systematic review of the influence on alcohol use of community level availability and marketing of alcohol. Health & place, 18(2), pp.349-357.

Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.

Cato, S. and Matsumura, T., 2013. Long-run effects of tax policies in a mixed market. FinanzArchiv: Public Finance Analysis, 69(2), pp.215-240.

Friedman, M., 2017. Price theory. Routledge.

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Microeconomics in context. Routledge.

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

Kagel, J.H. and Roth, A.E. eds., 2016. The Handbook of Experimental Economics, Volume 2: The Handbook of Experimental Economics. Princeton university press.

Pindyck, R.S. and Rubinfeld, D.L., 2014. Microeconomics.

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

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

Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business Media.

Varian, H.R., 2014. Intermediate microeconomics with calculus: a modern approach. WW Norton & Company.

Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.

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