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Principles of Economics

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Components | Page | Question 11.1 The Causes of Global Food Crisis i. Rising of Population Growth Rate ii. Increased oil price iii. Increase Demand for Biofuel iv. The Exchange Rate of US Dollar v. Weather Disruption & Natural Disaster vi. Low Global Stocks of Grains vii. Tariffs and policies 1.2 The Effects of Global Food Crisis i. Effects at the national level ii. Effects at the household level | 1-11 | | 11-13 | Question 2 i. How the governments intervene ii. Why the governments intervene | 13-20 | References and Appendices | 21-23 |

Question 1: Causes and effects of global food price rises. 1.1 The Causes of Global Food Crisis

Figure 1: Sources of Food Price Increases, January 2007–February 2011
(percentage points, year-on-year)

Source : FAO

The Food and Agriculture Organization of the United Nations (FAO)Food Price Index is a measure of the monthly change in international prices of a basket of food commodities. According to the data of FAO, FAO Food Price Index (FFPI) reached an average of 234 points in June 2011, which is approximately 1 percent higher than in May and 39 percent higher than in June 2010. It reaches its peak that is 238 points in February. A high rise in international sugar prices was behind much of the increase in the June value of the index. International dairy prices rose slightly in June, while meat prices are stable. Among the major cereals, prices of wheat fell most and rice increased. Among the oils and fats, prices of soybean oil are steady but palm oil weakened (Appendix 1). Global food price crisis does not caused by one or two factors. Several factors were contributed to this matter. Basically, the factors can be categorized into demand-side and supply-side. Demand-side factors include growth of population, rising of oil price, the increase usage of biofuel exchange rate of the US dollar. On the other hand, supply-side factors are weather disruptions and natural disasters and finally, tariff and policies.

Figure 2: Total population and annual increments

Source: FAO Figure 2 showing the total population and annual increments. A strong global economic growth combined with rising of population growth rate is increasing the demand for food. Although the world's population growth rate has been trending downwards since before the 1970s, the number of people on earth is still rising by about 75 million (1.1 percent) per year. This rising population adds to the global demand for agricultural products and energy. South-East Asia's real gross domestic product (GDP) increased by more than 9 percent a year between year 2005 and 2007. The World Bank estimates that food production will need to grow by another 50 percent by year 2030 and meat production by 85 percent to fulfill projected demand (Wiggins, Blas 2007). As a result, this drives to temporary excess demand for food, cattle feed, dairy, poultry and other foods therefore food prices increase.

Figure 3: Prices of oil and food commodities

Source: International Monetary Fund: International Financial Statistics.

The rise in the price of oil is affecting the production cost. For instance, fuels is used in tractors and transports. As well as fertilizers and pesticides, both is used in agriculture. The sharp increase in energy prices began in 2003 which is 15 percent compared to2002 and is now at an all-time high, more than 125 US dollar a barrel in June 2008 (ADB 2011). An increases of 37 percent in 2004, that is about two years before the hike in grains prices which is 20 percent increase in 2006 as compared to 2005, and 43 and 60 percent in the following two years (ADB 2011). The associated increase in petroleum use in developing countries has contributed gradually rising of oil prices since 1999 and the oil imports of China alone grew 20 percent per year from 166 million barrels in 1996 to 1.06 billion barrels in 2006 (ADB 2011). The cost of fertilizer, fuel and pesticides began to rise already in 2004 (USDA 2008). Fertilizer, irrigation and transport costs have increased by 30 to50 percent and the cost of urea has almost tripled since 2003 (ADB 2008). The US dollar prices of some fertilizers increased by more than 160 percent in the first months of 2008 compared to the same period of 2007 (FAO 2008). Also, freight costs increased on the basis of soaring fossil fuel prices, increasing by about 100 percent from 2006 to 2007 (FAO 2008).

Figure 4 : Ethanol production - Mostly from grain feedstock except for Brazil

Source: Organization for Economic Co-operation and Development (OECD)

Figure 5: Biodiesel production

Source: Organization for Economic Co-operation and Development (OECD 2008)

Increase of demand for biofuel production has resulted in crops diverted. Biofuel production had generally grew slowly until after the turn of the century. As you can see from the graphs above, US ethanol production began to rise more rapidly from 2004. Similarly in European Union, biodiesel production began to increase more rapidly in 2005. About 7 percent of global vegetable oil supplies were used for biodiesel production in 2007 (OECD 2008). Currently about 84 percent of total biofuel production in the world is ethanol and 16 percent biodiesel (OECD 2008). According to FAO, demand for cereals for industrial purpose, including biofuels, rose by 25 percent from 2000, against an increase of 5 percent in global food consumption (OECD 2008). Farmers in many industrialized nations such as the United States, have been encouraged by their governments to switch to growing fuel crops, such as corn and soy for corn ethanol. In 2007 one-fourth of corn harvest was diverted towards biofuel production to meet the proposed target of 36 billion gallons of renewable fuel by 2022 (OECD 2008) . In Europe projects to increase the production capacity of biodiesel from rapeseed are underway and China is currently focusing on cassava and sweet potatoes as feedstock for bioethanol production (OECD 2008) . Other major players in the bioenergy market are Canada that is expanding its biodiesel production from rapeseed as well as Russia and Ukraine, who may play a significant part in helping the European Union to meet its envisaged minimum blending target of 10 percent by the year 2020 (OECD 2008). Furthermore, Brazil and Argentina are currently planning to expand their biodiesel production capacity in the future (OECD 2008) . Increased biofuel production contributed to increasing the price of vegetable oils (these increased by 97 percent in the first three months of 2008 compared to the same period in 2007) , wheat, and corn, which registered the highest increase in the last 3 years, ranging from 130 to 200 percent (FAO 2008). The price boom has also been accompanied by higher price volatility for these feedstocks. Therefore, biofuels do appear t o have an impact on global commodity price in the light of the current contingencies in the agricultural market.

Figure 6: Value of US dollar declines after 2002

Source: ERS International Macroeconomics Dataset

The next factor that influencing the global food price is the exchange rate of the US dollar. US dollar ($) that has been following a negative trend start from October 2006 against the other currencies especially Euro (€) .Commodities priced in dollars have become cheaper for many import countries. This has caused a strong increase in demand for US production by import countries which twisting the trade flows. Furthermore, since US dollar is thedenomination of many commodities, the depreciation of the dollar also raises prices (USDA 2008). As an example, in the 1973 boom, commodity prices were pushed up by the combination of strong global growth and US dollar depreciation. (IMF 2008). Based on a recent draft paper of the World Bank, the recent decline of the dollar contributed alone about 20 percentage points to the rise in food prices. Higher food prices also mean higher global inflation. The international rising of agricultural raw material prices, reflected later on consumption inflation in the Euro area, rose sharply in the last months of 2007, due to the rise of processed food products prices. In this area, in spite of the delay, consumption price reactivity for a number of food products like dairy products and cereals is currently increasing (World Bank 2008).

On the supply side, weather disruptions (including serious droughts, flood and climate change) and natural disaster have affected output in several key producing countries in the mid-2000s (ADB 2008) . According to FAO estimates, the production of cereals in major exporting countries declined by 4 percent in 2005 and 7 percent in 2006 due to adverse climate conditions (ADB 2011). For example, the extended drought in Australia, in Murray-Darling Basin, which produces large amounts of wheat and rice has caused the annual rice harvest to fall by as much as 98% from pre-drought levels during the year 2006 that alone translated to a decrease of 4 percent in the global grain export (ADB 2008). Other events that have caused the rising of food price include the 2006 heat wave in California's San Joaquin Valley that killed large numbers of farm animals caused fell of yields in Canada by about one fifth in aggregate, unseasonable rains in Kerala and India in 2008 which destroyed swathes of grain (ADB 2011) . An example of producing country being affected by natural disaster is Burma, historically been a rice exporter was being affected by the cyclone in May 2008 which caused landfall, inundated rice paddies up to 30 miles (48 km) inland in the Irrawaddy Delta. These series of crop failures in major crop-producing countries causing shortfalls in crops supply. (ADB 2011)

Low global stocks of grains is also a contributing factor in global food crisis. There has been a decline in the level of global stocks of cereals since the mid-1990s (ADB 2008). The last period of high prices occurred in 1995, after which stock levels have slowly fallen at a steady rate of 3.4 percent annually (ADB 2008). This, added to the recent and rapid decline in production, has led to elevated prices. The level of global stocks is expected this year to fall to their lowest levels in 30 years, and stocks in the United States to their lowest in 50 years (ADB 2008). Such a decline could easily be further expedited through the combination of such natural factors as climate change, water scarcity, decreasing amounts of land suitable for agriculture, as well as decreased supplies of energy. A cause for concern is that global demand has outpaced supply in recent years, especially given these potential problems in the future (ADB 2008).

Tariff and policies is another supply-side factor. Increases in commodity export prices have historically been associated with increased trade barriers (IMF 2008). A growing number of market-oriented policies such as export restrictions and increased export taxes are used by governments to either assure food self-sufficiency, to foster bioenergy development or to protect domestic consumers. For the last decade, countries such as India and Brazil have been trying to get higher food prices as the subsidies to food in their countries reduce the price of food to the point where their farmers cannot stay in business (ADB 2008). Besides, export restrictions and price controls imposed by the government of some countries like China, Vietnam, India and Pakistan have reduced supplies in the world rice markets and increased uncertainty about future supplies, contributing significantly to the surge especially of rice since the end of year 2007 (ADB 2008).

1.2 The Effects of Global Food Crisis Global food price increase has effects at the national level and household level. At national level there are two elements contributed to the aggregate national impact which is local labor markets and fiscal balance (IFPRI 2008). In labor markets, higher prices for commodities, particularly food, will put upward pressure on wage rates. In the face of higher food prices, employees will seek to renegotiate the wages they receive from employers in order to reestablish their previous purchasing power. However the wages are “sticky” and upward adjustments lag behind price increases. Because labor is often an important source of income for the urban poor, the rural landless, and small part-time farmers, it is important to monitor changes in wage rates, particularly for unskilled labor, to assess the impact of a global food crisis (IFPRI 2008). In fiscal balance, global food crises can affect government revenue and expenditure in several ways. First, changes in the volume and value of trade due to a food crisis will influence tariff revenue, an important source of revenue for many developing countries. Second, changes in the price of food, fuel, and fertilizer will affect government spending on subsidies, particularly if the after-subsidy price, rather than the size of the subsidy, is fixed—a situation that can result in a rapid ballooning of subsidy costs. Third, government spending on social assistance programs will be affected to the extent that a food crisis causes more (or fewer) people to participate in the program or increases the cost per beneficiary, as would be the case if program benefits are defined in terms of a quantity of goods (IFPRI 2008). At household level, household welfare is directly influenced by the price of food and other commodities the household buys and sells, as well as prevailing wage rates. Similarly, the fiscal balance of government affects households through changes in taxes and in the provision of government services from which households might benefit. The impact of a food crisis will vary across different types of households in a country. Net food-selling households are likely to benefit from rising food prices. These generally better-off farming households will see an increase in income that will more than compensate for the rise in the price of any foods they purchase. Net food-buying households, however, which generally make up the majority of the population in most developing countries, are likely to be adversely affected by the global food crisis (IFPRI 2008). The hardships that individuals and communities face have striking similarities across disparate groups and settings, these include inability to afford food, related lack of adequate caloric intake, distress sales of productive assets, migration of household members in search of work, reduced household spending on healthcare, education and other necessities. For example, they may withdraw children from school to reduce costs or to generate income from their labor, reduce expenditures on preventative health care, and change the household diet away from protein- and micronutrient-rich foods (meat and vegetables) to less expensive staples. Through such pathways, the negative impact of a global food crisis on vulnerable households may extend into the next generation (IFPRI 2008).

Question 2:How and Why governments intervene in the food market.

2.1 How the governments intervene. There are several ways in which the governments can intervene in the food market. First is setting the price ceiling, which means the highest price for a good or service permitted by the government. Government may impose a price ceiling to protect consumers. If the price ceiling is above the market price, then there is no direct effect. If the price ceiling is set below the market price, then a shortage is created, the quantity demanded will exceed the quantity supplied.
Figure 7: Example of price ceiling.

The figure shows the shortage that arises when price ceiling is imposed on suppliers. Consumers demand is shown by the black line D while Suppliers are only willing to supply S shown by the green line. If the price ceiling is set above the equilibrium, consumers would demand a smaller quantity than suppliers are producing. Second way is bysetting the price floor, which means the lowest legal price for a commodity that can be sold at permitted by the government. A price floor can either be above or below the equilibrium price. With a price floor suppliers can no longer charge the price the market demands but are forced to raise minimum price set by the government. If the price floor is below the market price there is no effect. If the price floor is set above the market price, then a surplus is created, the quantity supplied will exceed the quantity demanded
Figure 8: Example of Price Floor.

The figure shows the excess supply that arises when price floor is imposed on suppliers. A high price floor forces consumers to pay a higher price decreasing the demand and even eliminating some consumers from the market. Producers on the other hand now charge more for the product and increase supply. The decrease in demand and increase in supply due to the new imposed higher price creates a surplus of the product. The government in order to maintain the price floor over a period of time must eliminate the surplus. However price ceiling and price floor cause black market. It is the buying and selling of goods in a way which is not allowed by law, as when a government imposes price controls. It is a way for buyers and sellers to conduct transactions “under the table”. For example with price ceiling when there is a shortage, the consumers would be willing to pay more for the goods than the price set by the government. Furthermore with price floor when there is a surplus, the producers would be willing to sell the goods at a lower price to the consumers than the price set by the government. The third way governments can intervene in the food market is by placing quotas. In the markets for food, governments have from time to time, imposed production quotas. A production quota is an upper limit to the quantity of a good that may be produced in a specific period. The effect of the quota depends whether it is set below or above the equilibrium quantity. If the governments introduce a production quota above the equilibrium quantity, nothing would change because the producers would already be producing less than the quota. But a production quota set below the equilibrium quantity has big effects like decrease in supply, rise in price, decrease in marginal cost, inefficient underproduction, incentive to cheat and overproduce.

Figure 9 : Example of a production quota.

The figure illustrates the effects when the production quota is set below the equilibrium quantity. With no quota, 40 billions of bushels are produced at $40 per year. A production quota of 30 billions of bushels is imposed by the government. Thus there is a decrease in supply. Consequently price rises from $40 to $50 and marginal costs decreases to $30. As marginal social cost is less than the marginal social benefit, a deadweight loss arises from the underproduction. Moreover, by introducing taxation, the government can intervene into the food market. It is a means by which governments finance their expenditure by imposing charges on a product, income or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. Governments use taxation to encourage or discourage certain economic decisions. One of the most important uses of taxes is to finance public goods and services.

Figure 10 : Example of taxation

The figure shows the introduction of a very simple tax. The tax charges a fee whenever a consumer wishes to purchase the good. The price thus rises to P with tax, and since fewer consumers wish to purchase the good at the higher price, the quantity produced falls to Q with tax. The government receives the amount of the tax for each unit sold, and this amounts to the region shown in grey (incidence on consumers). This is the amount of revenue the government receives. Furthermore, another way of intervention in the food market by the government can be by giving subsidies. In many countries, producers receive subsidies. A subsidy is a payment made by the government to a producer. The effects of a subsidy are similar to the effects of a tax but they go in the opposite directions. The effects are increase in supply, fall in price and an increase in quantity produced, increase in marginal cost, payments by governments to producers and inefficient overproduction.

Figure 11:Example of a subsidy.

The figure shows a subsidy set by the government on bread. With a subsidy consumer price falls and quantity demanded increases. Marginal social cost exceeds marginal social benefit and the subsidy results in inefficient overproduction.

2.1 Why the governments intervene. First and foremost the governments intervene in the food market due to market failure. Markets do not always achieve an efficient outcome and this situation is called as market failure. It is where the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium. In other words, there is an inefficient allocation of resources. Market Failure can occur because of too little of an item is produced. It is the production of less than enough to satisfy the demand or of less than the usual amount. This situation is called as underproduction.

Figure 12 : Example of underproduction

In the figure:
Q1 = 5000 pizzas
At point A, Cost price= $20
At point B, Consumer price= $50
Point C is the Equilibrium
At Equilibrium quantity produced= 10,000 pizzas at $35 each Thus, quantity of pizzas produced per day equals to 5000 and consumers are willing to pay $50 for a pizza that costs only $20 to produce. By producing only 5000 pizzas per day, total surplus is smaller than its maximum possible level (the equilibrium). Therefore, the quantity produced is inefficient creating an underproduction (deadweight loss). Moreover, market failure can occur because too much of a product is produced. It refers to excess of supply over demand of a product or the production of a commodity of more than the usual amount. This situation is called as overproduction.
Figure 13 : Example of overproduction

In the figure:
Qp= 15000 pizzas
Consumer price= $30
Cost price= $50
At equilibrium point, quantity produced= 10000 pizzas and price= $40 for a pizza Thus, quantity of pizzas produced per day equals to 15000 and consumers are willing to pay only $30 for a pizza that costs $50 to produce. By producing 15000 pizzas per day, $20 of resources are wasted as consumer demand is smaller than quantity supplied by suppliers. Therefore, the quantity produced is excessive creating an overproduction (deadweight loss). When there is underproduction, the governments intervene in the food market by giving Subsidies to producers in order to increase production to its maximum level. And when there is overproduction, the governments intervene in the food market by imposing quotas in order to control production. The governments help to balance the forces in the marketplace which determines the outcome of all the public choices that people make. They intervene to improve the market position and consequently the market will achieve allocative efficiency and serve the social interest.
References and Appendices
Asian Development Bank (ADB) 2011, Global Food Price Inflation And Developing Asia, viewed on 17 July 2011,
< >

Asian Development Bank (ADB) 2008, Response to the food crisis, viewed on 18 July 2011,

BIDPA 2008, Rising global food prices :causes and implications for Botswana ,viewed on 17 July 2011,

Center For Strategic & International Studies (CSIS) 2008, Global food crisis, viewed on 17 July 201,

Flammini, A 2008, Biofuels and the underlying causes of high\ food prices, viewed 20 July 2011, <>

Food And Agriculture Organisation (FAO) 2011, Food Price Index, viewed 18 July 2011,

International Food Policy Research Institute ( IFPRI) 2008, Global food crisis, viewed on 18 July 2011,

(OECD) 2008, The food crisis, viewed on 19 July 2011,

United States Department of Agriculture (USDA) 2008, Agricultural Projections to 2017, viewed on 20 July 2011,

World Bank 2011, Food Crisis, view on 19 July 2011,

Appendix 1 : Food Price Index MONTHLY FOOD PRICE INDICES (2002-2004=100) | Date | Food Price Index | Meat Price Index | Dairy Price Index | Cereals Price Index | Oils Price Index | Sugar Price Index |

1/2007 | 133.8 | 116.8 | 146.3 | 143.8 | 130.8 | 155.4 | 2/2007 | 136.4 | 117.2 | 153.1 | 149.4 | 132.1 | 150.0 | 3/2007 | 137.4 | 117.2 | 159.3 | 148.3 | 134.5 | 148.1 | 4/2007 | 140.6 | 118.8 | 175.7 | 144.4 | 146.8 | 137.9 | 5/2007 | 144.7 | 122.7 | 181.1 | 146.4 | 158.1 | 133.8 | 6/2007 | 154.0 | 126.3 | 209.0 | 155.2 | 165.9 | 131.8 | 7/2007 | 160.1 | 127.0 | 234.1 | 155.2 | 171.4 | 144.3 | 8/2007 | 166.4 | 130.1 | 245.7 | 165.7 | 176.7 | 139.1 | 9/2007 | 175.3 | 132.2 | 252.4 | 187.6 | 184.7 | 138.4 | 10/2007 | 178.2 | 128.3 | 257.1 | 193.9 | 196.0 | 141.9 | 11/2007 | 185.1 | 132.8 | 268.6 | 196.4 | 214.1 | 143.3 | 12/2007 | 190.8 | 131.7 | 266.2 | 215.8 | 218.0 | 152.0 | 1/2008 | 199.6 | 136.6 | 255.7 | 231.4 | 241.6 | 170.0 | 2/2008 | 215.2 | 137.8 | 252.1 | 271.5 | 265.1 | 191.7 | 3/2008 | 218.1 | 143.5 | 248.7 | 271.7 | 277.4 | 187.3 | 4/2008 | 217.1 | 148.1 | 241.7 | 274.3 | 267.6 | 178.2 | 5/2008 | 218.3 | 157.8 | 239.9 | 267.0 | 271.5 | 171.3 | 6/2008 | 224.1 | 164.4 | 240.6 | 273.7 | 282.7 | 172.1 | 7/2008 | 220.2 | 168.2 | 238.9 | 256.6 | 264.8 | 201.9 | 8/2008 | 208.6 | 170.4 | 227.2 | 239.5 | 221.6 | 207.3 | 9/2008 | 196.5 | 169.8 | 203.2 | 225.8 | 199.9 | 192.0 | 10/2008 | 172.4 | 160.9 | 185.0 | 190.5 | 152.8 | 168.9 | 11/2008 | 157.1 | 146.0 | 159.6 | 178.2 | 133.5 | 171.7 | 12/2008 | 148.0 | 135.3 | 142.0 | 174.3 | 126.4 | 166.7 | 1/2009 | 146.2 | 126.4 | 122.2 | 184.6 | 133.6 | 177.5 | 2/2009 | 141.2 | 120.4 | 114.3 | 177.4 | 131.0 | 187.7 | 3/2009 | 143.0 | 124.1 | 117.7 | 177.8 | 128.8 | 190.2 | 4/2009 | 147.4 | 127.6 | 117.4 | 179.0 | 147.1 | 193.7 | 5/2009 | 157.5 | 133.4 | 123.7 | 185.5 | 166.9 | 227.8 | 6/2009 | 158.0 | 137.3 | 122.8 | 185.4 | 159.6 | 233.1 | 7/2009 | 154.1 | 139.5 | 125.9 | 167.1 | 143.7 | 261.5 | 8/2009 | 159.4 | 140.0 | 129.3 | 162.1 | 156.3 | 318.4 | 9/2009 | 159.8 | 138.4 | 144.0 | 157.7 | 149.6 | 326.9 | 10/2009 | 162.8 | 134.4 | 157.5 | 166.1 | 151.7 | 321.3 | 11/2009 | 174.7 | 137.5 | 208.1 | 171.0 | 161.7 | 315.9 | 12/2009 | 177.9 | 136.1 | 215.6 | 171.1 | 169.3 | 334.0 | 1/2010 | 179.8 | 140.5 | 202.0 | 170.3 | 168.8 | 375.5 | 2/2010 | 175.9 | 142.0 | 191.4 | 164.2 | 169.2 | 360.8 | 3/2010 | 168.4 | 144.8 | 187.4 | 157.8 | 174.8 | 264.8 | 4/2010 | 170.0 | 150.8 | 204.3 | 154.8 | 173.5 | 233.4 | 5/2010 | 169.5 | 151.7 | 209.2 | 155.1 | 170.4 | 215.7 | 6/2010 | 168.1 | 152.4 | 203.1 | 151.2 | 168.4 | 224.9 | 7/2010 | 172.5 | 151.0 | 197.8 | 163.3 | 174.4 | 247.4 | 8/2010 | 182.8 | 155.5 | 192.9 | 185.3 | 192.4 | 262.7 | 9/2010 | 194.0 | 153.4 | 198.4 | 208.3 | 197.6 | 318.1 | 10/2010 | 204.8 | 157.8 | 202.6 | 219.9 | 220.0 | 349.3 | 11/2010 | 212.7 | 160.8 | 207.8 | 223.3 | 243.3 | 373.4 | 12/2010 | 223.1 | 166.1 | 208.4 | 237.8 | 263.0 | 398.4 | 1/2011 | 231.1 | 166.8 | 221.3 | 244.8 | 277.7 | 420.2 | 2/2011 | 237.7 | 170.5 | 230.0 | 258.6 | 279.3 | 418.2 | 3/2011 | 231.7 | 174.5 | 234.4 | 251.2 | 259.9 | 372.3 | 4/2011 | 234.6 | 180.4 | 228.7 | 265.4 | 259.1 | 345.7 | 5/2011 | 231.4 | 180.0 | 231.1 | 261.3 | 259.1 | 312.2 | 6/2011 | 233.8 | 180.4 | 231.6 | 258.5 | 257.2 | 357.7 |
(Source : Food and Agriculture Organization of the United Nations)…...

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...Introduction Economic principles are thought not to go hand in hand with natural science laws. These are laws or principles upon which the economy should be build. This is the discipline which economists use when applying economics. Basis, a text book written by Alfred Marshall (1890 Principles of Economics) who was born in 1842 in Bermondsey, London, England, died 13 July 1924 in Cambridge, England) who was a great economist in his days for a long time and his book dominated England for a considerably lengthy period of time. He is known to be one of the economics founders. His book brings to life the ideas mentioned below. Marshall saw the work of economics was to improve the living standards of the people and eliminate poverty. In his book Marshall had many original ideas however; he added an improved version of W.S Jevons ideas. Supply and Demand Supply and demand are thought to be some of the most primary ideas of economics and is surely the backbone of any market economy. Demand refers to the quantity (How much) of service or a product people are ready to buy at a given prize, supply refers to the quantity the market can offer. Marshall recognized that in the short run the value of the market depends on demand mainly, and that it is not possible to change supply. The relation between demand and supply, determine the forces behind the distribution of resources thus ensuring efficiency. The law of demand states that, if all other factors......

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...Principles of Economics Tommy R. Session Principles of Economics-ECO 100 Professor Dr. James Butikofer 11 Nov 10 1. You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both students and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy. First the groups must be divided according to their willingness to pay. The first group will be the students. Must students expect to receive some type of discount just because they are students. The average student does not work a full time job so their income is usually lower than the other local residents. Any student with a current student identification card will receive 10% off their purchases. The second group will be the non-student locals, most of this group will familiar with any competitors and they will have a choice to which business they will patronize. This group will receive a 10% discount on any combination meal after their first combo meal purchased on the same visit. This special pricing will be offered occasionally and will mainly be used when the college population is usually not in town (semester breaks, holidays & normally school closings). The third group will be the town visitors, this group will have no special pricing plan because they are usually not willing to drive around to look for competitors’ establishments.   2.     ......

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...Business Principles of Economics Final Project- A New House Decision Lisa Joe Faculty, University of Phoenix Probably the most important decision in your live is to buy a home and certainly there are many factors that need to be considered. The first step is to figure out how much you can afford to spend on a new home. In order to figure out how much you can spend in a home is to work on a personal budget that will reflect how much you're spending on everyday things. A good budget will help guide you to the right price range of homes as well as prevent you from spending more than you should on your house. This can happen when the bank says you can afford a certain price range of homes based on your income and debt, but they haven't taken into consideration all of your expensive hobbies, your monthly child care expenses, the fact that your car may need maintenance and emergency situations also you probably don't want to have to change your lifestyle in order to buy a more expensive home. By having control of your personal budget, you can compare your own numbers with what the bank is willing to lend you to come up with a very manageable mortgage payment that will let you continue the same lifestyle you currently have and avoid to enter in a debt that you may not able to fulfill and end up losing your saving. Part of coming up with a budget will be to consider the principles of economics, especially the “People Face Trade-Offs”; this particular principle......

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...Analysis: Propane shortage The Economic Principles of the Propane Shortage of 2013-14 Analysis: Propane shortage The Economic Principles of the Propane Shortage of 2013-14 During the winter months, propane is a necessary resource for many families and businesses. In an article written by Elisha Fieldstadt with NBC news, the details of the shortage, and the plans to ease the effects are detailed for the public. Propane is a versatile fuel sourced used in households and in a variety of businesses. In some households, propane is used as the major heat source for furnaces or fireplaces. It can also be used for stoves, clothes dryers and hot water heaters (Propane Education and Research Council, 2014). In fact, more than “14 million families across the U.S. use propane to fuel their furnaces,” (Fieldstadt, 2014) according to the Propane Education and Research Council. Due to extreme winter weather conditions this season, parts of the U.S. are experiencing a severe propane shortage. The supply of propane stock in many states have hit extreme lows this winter. As continued severe cold temperatures and accumulating winter storms blanket much of the northern half of the United States, supplies will continue to suffer and millions of Americans will be without heat. Government officials in 17 states have taken swift action to focus on getting much needed propane to homes and businesses. In Ohio, the governor declared an energy emergency that “permits propane......

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...Economic Principles Duane Sherry university of phoenix ECO 561 Karen Yancey September 16, 2013 Economic Principles This paper will apply the economic principles presented in weeks one through three. An economic analysis of a unit that projects what is on one’s laptop onto a television screen via wifi or blue tooth and allows the user to in effect use their television screen as their monitor will be proposed. Statements about market structure and the elasticity of demand for the product will be covered. Hypothetical data, based on similar real world products to estimate fixed and variable costs will be presented. According to Wang and Zheng (2012), the relationship between the market structure’s distinctions and production structure’s parameters can have a significant effect on an organization’s profit. Correctly identifying the market structure is an integral step in pricing and selling a product. The market structure for the unit described above is a purely competitive market structure. A purely competitive market structure’s characteristics include but are not limited to the following: perfectly elastic demand at the pre-determined price is dictated by market supply, members of this market structure are price takers, and any additional units sold above the constant product’s price will add profit to firm’s total revenue. Pricing will relate to the elasticity of the product due to the demand being dependent on price. According to Bolton (1989), price......

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...their risky behavior after they purchase insurance. Gregory, M. (2012). The Basic Tools of Finance. Principles of Economics (7 ed., pp. 573-574). Stanford: Cengage Learning. 2. What is diversification? Does a stockholder get a greater benefit from diversification going from 1 to 10 stocks or going from 100 to 120 stocks? Diversification is the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks. A stockholder will get more diversification going from 1 to 10 stocks than from 100 to 120 stocks. Gregory, M. (2012). The Basic Tools of Finance. Principles of Economics (7 ed., pp. 574-575). Stanford: Cengage Learning. 3. Comparing stocks and government bonds, which type of asset has more risk? Which pays a higher average return? Stocks have more risk because their value depends on the future value of the firm. So in return it will always have a higher risk; Stocks will have a higher return with the average of 8 percent a year and bond an average of 3 percent a year. Gregory, M. (2012). The Basic Tools of Finance. Principles of Economics (7 ed., pp. 575-576). Stanford: Cengage Learning 4. Is unemployment typically short term or long term? Explain. Unemployment is typically short term. Most Individuals who become unemployed are able to find them new jobs pretty quickly. Gregory, M. (2012). Unemployment. Principles of Economics (7 ed., pp. 586-591). Stanford: Cengage Learning 5. Are minimum wage laws a better......

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...National Institute of Business Management Chennai - 020 FIRST SEMESTER EMBA/ MBA Subject : Principles of Economics Attend any 4 questions. Each question carries 25 marks (Each answer should be of minimum 2 pages / of 300 words) 1. What are the vital functions of an Economy? Explain the price mechanism. 2. Explain measurement of Price Elasticity of Demand. 3. Describe the kinds of Economic Systems. 4. Price mechanism also known as the market mechanism, that helps to solve the central problems in Capitalist Economy. Explain. 5. What are the factors governing Price Elasticity of Demand? Explain. 6. Explain economic systems and resource allocation. 25 x 4=100 marks 2.Explain measurement of Price Elasticity of Demand. Ans) Price elasticity of demand is a measure used to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (i.e. holding constant all the other determinants of demand, such as income). Price Elasticity of Demand = (% Change in Quantity Demanded)/(% Change in Price) Three popular methods for measuring price elasticity of demand are discussed below: 1. Percentage method The percentage method measures price elasticity of demand by dividing the percentage change in......

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...PRINCIPLED OF ECONOMIC Principles of Economics Veronica Thibodeaux Dr. Chebe 2/3/2015 Introduction In this paper I will disuses 4 key point about this article. First are Laws and supplies it is a pattern of behavior. Second is price elasticity of supply it is a concept to measure of ways to get consumers to changes it price. Third we have Market equilibrium it demand equal quantity supplies at the market price then we have opportunity cost it about making choices to make good first we must compare benefit of something cost. I will be talking the prices of the oil. Two highlight price elasticity is one this article talks about how oil took its lowest hit for the second straight day the stock market took a big hit when market sank at its lowest in six years. This is hurting the energy companies. This is a price change in demand the banks are being patient about raising its interest rate to zero. Which was to be expected? It is said that nothing is to expand at a solid pace .and create job growth Market equilibrium plays a part in this. The market is happy that the fed are saying things are great meaning that market would get it hand at the first price rate. The energy depart U.S. oil rose to its highest. The high supplies drove crude prices to the lowest level since March of 2009.the crude fell $1.78 to close at $44.45. Article Highlights According ( Rothwell 2015) oil weakening global economy which this could put a scare for some people. I think......

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