seventeen 1 | -
Apr 28, 2009 | #1
Introduction to Economics
The aim of this report is to answer three interrelated questions based on researcher's understanding of the economics concepts and their underlying assumptions. Drawing upon Laszlo (1997, 1993), it should be noted that discipline of economics has developed a range of principles, frameworks and models that highlight the important determinants of economic events. It should be noted that this report answers questions in the light of economic theory and practice, along with the researcher's own opinion regarding the question.
The economics has been defined by conventional theorists as a science that "is all about how people make choices" (John, 1996; p. 121). Drawing upon the popular economics literature that evaluates the underlying assumptions to this discipline has highlighted that the basic premise of economics is that the valuable resources are finite and therefore their allocation between competing alternatives should be done in the light of their best use (Bruce & Lester, 1997). Moreover, it has also been highlighted that these choices at country level are conscious efforts, which are quantified and weighed against each other in economics. It has therefore been argued in the literature that countries that require effective and efficient use of their scarce and finite valuable sources adopt some form of the market capitalist economy.
It has been found out that in order to create a solution for the allocation of valuable and scarce resources countries, according to Angelo (2004), can adopt either centralized or decentralized way of organizing their markets. It should be noted that both the solutions have evolved over the years to become economic disciplines in their own rights. Priyatosh (1997) have highlighted that decentralized organization of the country is market oriented, where individuals are seen as free agents in the markets making and seeking rationale choices. Moreover, it should also be noted that this free decision making of individuals is only controlled and guided by price, which is also free to move depending upon the dynamics of demand and supply. On the other hand, it is highlighted that the central organization of country and its resources are directed by political goals, where allocation of resources become a political priority (Martin, 1998). It is the instrumentality of planning and processes that facilitate the process of control in allocation of resources under this method.
The former resource allocation is more common in contemporary world and is highlighted as the market capitalist economy (Leonard, 1991). It should be noted that market capitalist economy has a range of characteristics that include: (a) market price is the controlling factor; (b) money and contracts are prerequisites for dealing in the market; (c) resources are the locus of power; and lastly (d) government has a supervisory role. If one looks at the modern economies around the world, it can be seen that each country follows a degree of this decentralized way of organizing markets, which range from pure free markets to welfare states to managed economies.
The reason for many countries to have adopted the decentralized way of organizing markets i.e. capitalist economy in allocation of valuable sources is the independent movement of price and rationale decision making of individuals. Drawing upon John and Thomas (1999), the allocation, distribution and trading of resources between individuals at different levels of economy are regulated by price only in pure capitalist economy. The price, on the other hand is the function of scarcity and value of the resource, as free individuals bargain with each other in the marketplace. It should therefore be highlighted that any changes in availability of resource i.e. supply, and the valuation of resource by individuals i.e. supply is reflected in the price of that resource.
The topic has also received some criticism from other school of thoughts that have highlighted that scarcity and finiteness of resources does not hold true in a number of instances. Leonard (1991) has for example highlighted that economy is a subset of the overall ecosystem, which though also has its limitations yet the resources in relative to economic terms can be abundant, which are not handled by the economics discipline. Another criticism has been highlighted by Priyatosh (1993) and Giuseppe and Edward (2003) that has highlighted allocation of resources is not always an independent choice for a country, for example welfare states. Although the criticisms hold for pure capitalist market orientation, however it should be noted that partial form of market capitalist economy does hold in allocation of valuable resources for their best use.
In researcher's opinion every country has an aim and philosophy of distributing and allocating valuable resources across the society in a way that produces the best results. The mechanism adopted by countries has ranged from decentralized market based capitalist economies to centralized government based communist economies. The reason that most countries have adopted some form of market capitalist economy is due to the fact that in such form of social organization, government plays a supervisory role, while inherent market dynamics steer the allocation of resources and corrects itself whenever there are changes in supply and demand.
The case study has highlighted the effect of globalization in integrating national markets across the globe to create on large global market, where demand and supply structures from one part of the world can distort the price and quantity in other parts of the world. However, it has also been argued that this distortion in price and quantity can also be due to protectionist policies of countries. The following discussion has been undertaken in the light of information provided in the mini cases study titled, "Impact of global events: Chinese consumers and the EU milk prices".
In the light of the case study, the global demand and supply of milk before the decision of Chinese government to provide all Chinese children with half litre milk a day can be illustrated with the help of following demand and supply curve:
Where:
'D1' = Demand Curve before Announcement
'S1' = Supply Curve before Announcement
'QM1' = Quantity Produced by the Market before Change
'PM1' = Price of Milk before Change
A: Why the price of EU milk rose by over 25% in 2007
It should be noted in the diagram produced for the milk industry supply and demand before the Chinese announcement of 2007 is that demand is relatively elastic than supply of milk. This is due to the fact that increasing or decreasing overall global supply is a steady process and can not be done in short period of time unlike demand, which can be dramatically changed. In the light of this elasticity of supply and demand curve, it should be noted that when the global demand of milk would increase by dramatic 25% due to the Chinese announcement, that will shift the demand curve to the right by 25%, however due to the relative inelastic nature of the supply curve there would be more than 25% increase in the market price of the milk across the globe and the EU. This change of demand curve and its impact on the quantity and price of the market can be illustrated as follows:
Where:
'D2' = Demand Curve after Announcement
'QM2' = Quantity Produced by the Market after Change
'PM2' = Price of Milk after Change
It is apparent from the illustration that due to the inelastic supply of milk, the difference between QM1 and QM2 of 25% has produced a change of more than 25% between PM1 and PM2.
B: Why the price of EU milk may rise less rapidly in the future
It should be highlighted that the sudden rise in demand of the milk from China has caused the increase in prices of milk in the EU. However, any such increase in demand is not suspected in the coming future, therefore the demand curve would shift steadily towards right as the overall demand of milk globally increases generically. However, at the same time, it is also highlighted that market correction mechanism has started to play i.e. EU dairy farmers are breeding high performance milk cows and exporting them to China to meet the local demand, where there is no tradition of dairy farming. Moreover, Chinese government has been providing subsides to its farmers to establish dairy farms to meet the increased demand. This increased supply of milk from China will result in moving supply curve to the right, therefore making the rise of price less rapid in the future. It can be highlighted in the illustration as follows:
Where:
'S2' = Supply Curve after Increased Output
'QM3' = Quantity Produced by the Market after Increased Output
'PM3' = Price of Milk after Increased Output
Therefore, it can be highlighted that with the increase in the supply of milk in China, the prices in the EU will rise less rapidly and can even decrease from the current raised prices due to sudden change in demand and slow reaction in change of supply.
C: Why Kraft raised the price of its cheese-based products by 12% in 2007
It should be noted that the price per litre of the milk rose in the EU by more than 25% which was more than the rise in demand due to inelastic supplies. As milk is one of the key ingredients in all the diary based products like cheese, butter, and yogurt, therefore raising the average fixed cost (AFC) of these products. The same is the case with the Kraft that has raised the price of their cheese based products by 12% in 2007 due to these changes. It should be noted that the rise of AFC of the cheese making would have led to the rise of average cost (AC) of cheese. It should be noted that a more than 27% rise in milk prices in the EU must have raised the AC curve for cheese manufacturers raising their prices higher at similar proportions. This scenario of rising cheese prices can be illustrated as follows:
Cheese Firm Milk Industry
Where:
'MR' = Marginal Revenue 'D1' =Demand before the announcement
'AR' = Average Revenue 'D2' = Demand after the announcement
'MC' = Marginal Cost 'S' = Supply of Milk
'MR' = Marginal Revenue 'Q1' = Quantity of Cheese Produced 'AC1'= Average Cost of Cheese before Announcement / Milk Price Change
'AC2'= Average Cost of Cheese after Announcement / Milk Price Change
'P1' = Price of Cheese before Announcement / Milk Price Change
'P2' = Price of firm after Announcement / Milk Price Change
It should therefore be highlighted that such sharp increase in price of cheese would have an impact on the price of cheese based products. The rise in price of cheese based products has been 12% showing the fact that cheese is not the only ingredient in these products, as other ingredients have remained unchanged in price, hence the overall 12% impact on price of Kraft's products.
It is argued by some analysts that it is due to the overregulation and protectionist policy of EU that has led to the sharp rise of milk prices in 2007. If it is assumed that the rise of milk prices across the globe after the Chinese announcement were not as sharp as in the EU, then this argument provides a plausible explanation towards highlighting the fact that how protectionist policy of the EU since 1984 must have back fired. It should be noted that the EU has excessive quotas imposed on the milk in 1984 that are due to last until 2015. Drawing upon Martin (1998), it can be highlighted that quotas are imposed to minimize the dumping of foreign produce into domestic market, where domestic market is unable to compete. It is therefore highlighted that this quota system provides a limit to the foreign supplies of milk in the region, making the supply of milk in the EU to have certain limit. This limit, according to analysts has been the main reason of the sharp rise of prices and the supply would also have increased to some degree in comparison with stiff supply curve in current scenario. The hypothetical situation of increased supply without quota can be compared with current stiff supply in the following illustration:
Where:
'S4' = Supply Curve without Quota System
'QM4' = Quantity available in Market without Quota System
'PM4' = Price of Milk without the Quota System
Therefore, it can be highlighted in the light of above supply and demand that in case that there were no quota systems the supply would have increased from foreign countries to the EU compensating to some degree the sudden rise in demand, therefore making the rise in price less sharp than now.
References:
Angelo Fusari (2004), A reconsideration on the method of economic and social sciences: Procedure, rules, classifications, International Journal of Social Economics; Volume: 31 Issue: 5/6; 2004
Bruce Lloyd, Lester Thurow (1997), The future of capitalism, Leadership & Organization Development Journal; Volume: 18 Issue: 2; 1997
Giuseppe Gaburro, Edward J. O'Boyle (2003), Norms for evaluating economic globalization, International Journal of Social Economics; Volume: 30 Issue: 1/2; 2003
John Peters (1996), Capitalism and concern, The TQM Magazine; Volume: 8 Issue: 6; 1996
John E. Elliott, Thomas Hall (1999), Boris Yeltsin and Russia's rocky road to capitalism: the early years, International Journal of Social Economics; Volume: 26 Issue: 12; 1999
Laszlo Zsolnai (1997), Moral responsibility and economic choice, International Journal of Social Economics; Volume: 24 Issue: 4; 1997
Laszlo Zsolnai (1993), A Framework of Alternative Economics, International Journal of Social Economics; Volume: 20 Issue: 2; 1993
Leonard Pluta (1991), WEALTH, VIRTUE AND ECONOMIC THEORY: A FEW OBSERVATIONS, Humanomics; Volume: 7 Issue: 4; 1991
Martin Francis Parnell (1998), Globalisation, "organised capitalism" and German labour, European Business Review; Volume: 98 Issue: 2; 1998
Priyatosh Maitra (1993), Internationalization of Production and Capitalism's Dilemma, International Journal of Social Economics; Volume: 20 Issue: 9; 1993
Priyatosh Maitra (1997), Globalization of capitalism, agriculture and the negation of nation states, International Journal of Social Economics; Volume: 24 Issue: 1/2/3; 1997
The aim of this report is to answer three interrelated questions based on researcher's understanding of the economics concepts and their underlying assumptions. Drawing upon Laszlo (1997, 1993), it should be noted that discipline of economics has developed a range of principles, frameworks and models that highlight the important determinants of economic events. It should be noted that this report answers questions in the light of economic theory and practice, along with the researcher's own opinion regarding the question.
Question 1: Why Most Countries Adopt Some Form of the Market Capitalist Economy in Allocating Resources
The economics has been defined by conventional theorists as a science that "is all about how people make choices" (John, 1996; p. 121). Drawing upon the popular economics literature that evaluates the underlying assumptions to this discipline has highlighted that the basic premise of economics is that the valuable resources are finite and therefore their allocation between competing alternatives should be done in the light of their best use (Bruce & Lester, 1997). Moreover, it has also been highlighted that these choices at country level are conscious efforts, which are quantified and weighed against each other in economics. It has therefore been argued in the literature that countries that require effective and efficient use of their scarce and finite valuable sources adopt some form of the market capitalist economy.It has been found out that in order to create a solution for the allocation of valuable and scarce resources countries, according to Angelo (2004), can adopt either centralized or decentralized way of organizing their markets. It should be noted that both the solutions have evolved over the years to become economic disciplines in their own rights. Priyatosh (1997) have highlighted that decentralized organization of the country is market oriented, where individuals are seen as free agents in the markets making and seeking rationale choices. Moreover, it should also be noted that this free decision making of individuals is only controlled and guided by price, which is also free to move depending upon the dynamics of demand and supply. On the other hand, it is highlighted that the central organization of country and its resources are directed by political goals, where allocation of resources become a political priority (Martin, 1998). It is the instrumentality of planning and processes that facilitate the process of control in allocation of resources under this method.
The former resource allocation is more common in contemporary world and is highlighted as the market capitalist economy (Leonard, 1991). It should be noted that market capitalist economy has a range of characteristics that include: (a) market price is the controlling factor; (b) money and contracts are prerequisites for dealing in the market; (c) resources are the locus of power; and lastly (d) government has a supervisory role. If one looks at the modern economies around the world, it can be seen that each country follows a degree of this decentralized way of organizing markets, which range from pure free markets to welfare states to managed economies.
The reason for many countries to have adopted the decentralized way of organizing markets i.e. capitalist economy in allocation of valuable sources is the independent movement of price and rationale decision making of individuals. Drawing upon John and Thomas (1999), the allocation, distribution and trading of resources between individuals at different levels of economy are regulated by price only in pure capitalist economy. The price, on the other hand is the function of scarcity and value of the resource, as free individuals bargain with each other in the marketplace. It should therefore be highlighted that any changes in availability of resource i.e. supply, and the valuation of resource by individuals i.e. supply is reflected in the price of that resource.
The topic has also received some criticism from other school of thoughts that have highlighted that scarcity and finiteness of resources does not hold true in a number of instances. Leonard (1991) has for example highlighted that economy is a subset of the overall ecosystem, which though also has its limitations yet the resources in relative to economic terms can be abundant, which are not handled by the economics discipline. Another criticism has been highlighted by Priyatosh (1993) and Giuseppe and Edward (2003) that has highlighted allocation of resources is not always an independent choice for a country, for example welfare states. Although the criticisms hold for pure capitalist market orientation, however it should be noted that partial form of market capitalist economy does hold in allocation of valuable resources for their best use.
In researcher's opinion every country has an aim and philosophy of distributing and allocating valuable resources across the society in a way that produces the best results. The mechanism adopted by countries has ranged from decentralized market based capitalist economies to centralized government based communist economies. The reason that most countries have adopted some form of market capitalist economy is due to the fact that in such form of social organization, government plays a supervisory role, while inherent market dynamics steer the allocation of resources and corrects itself whenever there are changes in supply and demand.
Question 2: Chinese Consumers and EU Milk Prices - Case Study: Use Demand and Supply Diagram to Explain
The case study has highlighted the effect of globalization in integrating national markets across the globe to create on large global market, where demand and supply structures from one part of the world can distort the price and quantity in other parts of the world. However, it has also been argued that this distortion in price and quantity can also be due to protectionist policies of countries. The following discussion has been undertaken in the light of information provided in the mini cases study titled, "Impact of global events: Chinese consumers and the EU milk prices".
In the light of the case study, the global demand and supply of milk before the decision of Chinese government to provide all Chinese children with half litre milk a day can be illustrated with the help of following demand and supply curve:
Where:
'D1' = Demand Curve before Announcement
'S1' = Supply Curve before Announcement
'QM1' = Quantity Produced by the Market before Change
'PM1' = Price of Milk before Change
A: Why the price of EU milk rose by over 25% in 2007
It should be noted in the diagram produced for the milk industry supply and demand before the Chinese announcement of 2007 is that demand is relatively elastic than supply of milk. This is due to the fact that increasing or decreasing overall global supply is a steady process and can not be done in short period of time unlike demand, which can be dramatically changed. In the light of this elasticity of supply and demand curve, it should be noted that when the global demand of milk would increase by dramatic 25% due to the Chinese announcement, that will shift the demand curve to the right by 25%, however due to the relative inelastic nature of the supply curve there would be more than 25% increase in the market price of the milk across the globe and the EU. This change of demand curve and its impact on the quantity and price of the market can be illustrated as follows:
Where:
'D2' = Demand Curve after Announcement
'QM2' = Quantity Produced by the Market after Change
'PM2' = Price of Milk after Change
It is apparent from the illustration that due to the inelastic supply of milk, the difference between QM1 and QM2 of 25% has produced a change of more than 25% between PM1 and PM2.
B: Why the price of EU milk may rise less rapidly in the future
It should be highlighted that the sudden rise in demand of the milk from China has caused the increase in prices of milk in the EU. However, any such increase in demand is not suspected in the coming future, therefore the demand curve would shift steadily towards right as the overall demand of milk globally increases generically. However, at the same time, it is also highlighted that market correction mechanism has started to play i.e. EU dairy farmers are breeding high performance milk cows and exporting them to China to meet the local demand, where there is no tradition of dairy farming. Moreover, Chinese government has been providing subsides to its farmers to establish dairy farms to meet the increased demand. This increased supply of milk from China will result in moving supply curve to the right, therefore making the rise of price less rapid in the future. It can be highlighted in the illustration as follows:
Where:
'S2' = Supply Curve after Increased Output
'QM3' = Quantity Produced by the Market after Increased Output
'PM3' = Price of Milk after Increased Output
Therefore, it can be highlighted that with the increase in the supply of milk in China, the prices in the EU will rise less rapidly and can even decrease from the current raised prices due to sudden change in demand and slow reaction in change of supply.
C: Why Kraft raised the price of its cheese-based products by 12% in 2007
It should be noted that the price per litre of the milk rose in the EU by more than 25% which was more than the rise in demand due to inelastic supplies. As milk is one of the key ingredients in all the diary based products like cheese, butter, and yogurt, therefore raising the average fixed cost (AFC) of these products. The same is the case with the Kraft that has raised the price of their cheese based products by 12% in 2007 due to these changes. It should be noted that the rise of AFC of the cheese making would have led to the rise of average cost (AC) of cheese. It should be noted that a more than 27% rise in milk prices in the EU must have raised the AC curve for cheese manufacturers raising their prices higher at similar proportions. This scenario of rising cheese prices can be illustrated as follows:
Cheese Firm Milk Industry
Where:
'MR' = Marginal Revenue 'D1' =Demand before the announcement
'AR' = Average Revenue 'D2' = Demand after the announcement
'MC' = Marginal Cost 'S' = Supply of Milk
'MR' = Marginal Revenue 'Q1' = Quantity of Cheese Produced 'AC1'= Average Cost of Cheese before Announcement / Milk Price Change
'AC2'= Average Cost of Cheese after Announcement / Milk Price Change
'P1' = Price of Cheese before Announcement / Milk Price Change
'P2' = Price of firm after Announcement / Milk Price Change
It should therefore be highlighted that such sharp increase in price of cheese would have an impact on the price of cheese based products. The rise in price of cheese based products has been 12% showing the fact that cheese is not the only ingredient in these products, as other ingredients have remained unchanged in price, hence the overall 12% impact on price of Kraft's products.
Question 3: Explain Why Some Argue that It is not so much Globalization as Overregulation of the markets by the EU Governments that Caused the Sharp Rise in Milk Prices in 2007
It is argued by some analysts that it is due to the overregulation and protectionist policy of EU that has led to the sharp rise of milk prices in 2007. If it is assumed that the rise of milk prices across the globe after the Chinese announcement were not as sharp as in the EU, then this argument provides a plausible explanation towards highlighting the fact that how protectionist policy of the EU since 1984 must have back fired. It should be noted that the EU has excessive quotas imposed on the milk in 1984 that are due to last until 2015. Drawing upon Martin (1998), it can be highlighted that quotas are imposed to minimize the dumping of foreign produce into domestic market, where domestic market is unable to compete. It is therefore highlighted that this quota system provides a limit to the foreign supplies of milk in the region, making the supply of milk in the EU to have certain limit. This limit, according to analysts has been the main reason of the sharp rise of prices and the supply would also have increased to some degree in comparison with stiff supply curve in current scenario. The hypothetical situation of increased supply without quota can be compared with current stiff supply in the following illustration:
Where:
'S4' = Supply Curve without Quota System
'QM4' = Quantity available in Market without Quota System
'PM4' = Price of Milk without the Quota System
Therefore, it can be highlighted in the light of above supply and demand that in case that there were no quota systems the supply would have increased from foreign countries to the EU compensating to some degree the sudden rise in demand, therefore making the rise in price less sharp than now.
References:
Angelo Fusari (2004), A reconsideration on the method of economic and social sciences: Procedure, rules, classifications, International Journal of Social Economics; Volume: 31 Issue: 5/6; 2004
Bruce Lloyd, Lester Thurow (1997), The future of capitalism, Leadership & Organization Development Journal; Volume: 18 Issue: 2; 1997
Giuseppe Gaburro, Edward J. O'Boyle (2003), Norms for evaluating economic globalization, International Journal of Social Economics; Volume: 30 Issue: 1/2; 2003
John Peters (1996), Capitalism and concern, The TQM Magazine; Volume: 8 Issue: 6; 1996
John E. Elliott, Thomas Hall (1999), Boris Yeltsin and Russia's rocky road to capitalism: the early years, International Journal of Social Economics; Volume: 26 Issue: 12; 1999
Laszlo Zsolnai (1997), Moral responsibility and economic choice, International Journal of Social Economics; Volume: 24 Issue: 4; 1997
Laszlo Zsolnai (1993), A Framework of Alternative Economics, International Journal of Social Economics; Volume: 20 Issue: 2; 1993
Leonard Pluta (1991), WEALTH, VIRTUE AND ECONOMIC THEORY: A FEW OBSERVATIONS, Humanomics; Volume: 7 Issue: 4; 1991
Martin Francis Parnell (1998), Globalisation, "organised capitalism" and German labour, European Business Review; Volume: 98 Issue: 2; 1998
Priyatosh Maitra (1993), Internationalization of Production and Capitalism's Dilemma, International Journal of Social Economics; Volume: 20 Issue: 9; 1993
Priyatosh Maitra (1997), Globalization of capitalism, agriculture and the negation of nation states, International Journal of Social Economics; Volume: 24 Issue: 1/2/3; 1997