Hey guys its like more than 1.5 terms since we started learning economics, and we are almost nearing the end of lecture 8 market failure. How much economic jargon have you chalked up?
Here is our version of A-Z on economics we have learnt so far!
Allocative efficiency
Benefits
Choice
Demand
Equilibrium
Factors of production
Government intervention
How much to produce
Income
Joint supply
Knowledge-based economy
Land
Market
Non-excludability
Opportunity Cost
Price
Quantity
Revenue
Scarcity
Taxation
Underproduction
ad Valorem tax
Welfare loss
X-elasticity
Yield
ZERONINESSIXSIX LOVES ECONS!!!!!
Yay!
Sign off,
Kenneth, Jun Xian, Aik Hwee, Wai Chew, Yi Sheng
Tuesday, April 28, 2009
THE SWINE INFLUZENA!!! O:
OUTBREAK OF THE SWINE INFLUENZA
- A new strain of flu: combination of bird, pig and human flu viruses.
- Epicenter of the influenza outbreak: Mexico City
- Spread through contact with infected PIGS
Tamiflu is a price inelastic. It has a very small number of substitutes, and in this influenza situation, its only closest substitute is Relenza, a similar drug which prevents infection with Swine flu viruses. Therefore, any change in price brings about a less than proportionate change in quantity demanded.
The Demand curve shifts to the right with a magnitude larger than that to the shifting of the Supply curve to the right. As the influenza situation worsens, with the publishing of more reports on the severity of the condition, rising death tolls and increasing worry among the public, governments will take immediate action to stock up its supply of Tamiflu. There is imminent fear than the 2009 swine flu outbreak will plunge the world into a serious pandemic as feared like the SARS incident back in 2003. In this short period of time, the demand for Tamiflu will rise significantly due to the change in consumers’ expectations.
To meet the high demand of Tamiflu, pharmaceutical industries will start to produce more of the good to cater to a higher number of needs. But due to patented laws on the drug, there are not many companies that are legalised to produce it. The supply of Tamiflu is price inelastic. When the demand for Tamiflu increases, price increases significantly while the output increases less than proportionately in response. (P2-P1 > Q2 –Q1)(sorry, the diagram is not clear enough!)
Leny <3 ECONS!
This IMPENDING CRISIS (or already is?) gripping our society.
- A new strain of flu: combination of bird, pig and human flu viruses.
- Epicenter of the influenza outbreak: Mexico City
- Spread through contact with infected PIGS
Tamiflu is a price inelastic. It has a very small number of substitutes, and in this influenza situation, its only closest substitute is Relenza, a similar drug which prevents infection with Swine flu viruses. Therefore, any change in price brings about a less than proportionate change in quantity demanded.
The Demand curve shifts to the right with a magnitude larger than that to the shifting of the Supply curve to the right. As the influenza situation worsens, with the publishing of more reports on the severity of the condition, rising death tolls and increasing worry among the public, governments will take immediate action to stock up its supply of Tamiflu. There is imminent fear than the 2009 swine flu outbreak will plunge the world into a serious pandemic as feared like the SARS incident back in 2003. In this short period of time, the demand for Tamiflu will rise significantly due to the change in consumers’ expectations.
To meet the high demand of Tamiflu, pharmaceutical industries will start to produce more of the good to cater to a higher number of needs. But due to patented laws on the drug, there are not many companies that are legalised to produce it. The supply of Tamiflu is price inelastic. When the demand for Tamiflu increases, price increases significantly while the output increases less than proportionately in response. (P2-P1 > Q2 –Q1)(sorry, the diagram is not clear enough!)
Leny <3 ECONS!
Consumer&Producer Surplus
Here is an interesting question on surplus:
Find the equilibrium price Po and the equilibrium demand Xo, and evaluate the consumer's surplus and producer's surplus.
Solution
Demand:p=-3x+21
Supply:p=9x^2/16, x>=0
Since at equilibrium, the curves intersect
=>-3x+21=9x^2/16
<->3x^2+16x-(16)(7)=0
<->(3x+28)(x-4)=0
As x>=0,
Hence equilibrium occurs when x=Xo=4,and the corresponding equilibrium price is p=(-3)(4)+(21)=9
Consumer surplus=Area A=(21-9)/2*(4)=24
Demand and Supply Curves Done by: Harrison
Recalled this when Mrs Toh said that the situation whereby many guys like a girl can be explained by the theory of demand and supply. Given that the girl is a good in the eyes of the guys, the price of getting her as a girlfriend would always be increasing as the quantity supplied is always stagnant, as the girl cannot split herself up to suit the demand of the other guys. This can be explained by Fig 1.0
As seen in the curve there is a rightward shift on the demand curve. This can be largely due to the non-price factor of consumer preference. Like how consumers demand for fashionable goods, the girl maybe the eye candy of all guys, thus causing an outward shift of the demand curve due to the increase in demand, causing the price of getting to know the girl to increase from P1 to P2.
Fig 1.0
As seen in the curve there is a rightward shift on the demand curve. This can be largely due to the non-price factor of consumer preference. Like how consumers demand for fashionable goods, the girl maybe the eye candy of all guys, thus causing an outward shift of the demand curve due to the increase in demand, causing the price of getting to know the girl to increase from P1 to P2.
Fig 1.0
DD/SS changes!
Metal Gear Solid 4 is a game that was released in mid-2008. It is a highly popular game because it is freaking cool XD! Anyway, there were a lot of magazine articles published about it, anticipating the release of this game and how everyone expected it to be a great hit due to the excellent sales for Metal Gear Solid, Metal Gear Solid 2 and Metal Gear Solid 3. They also provided a lot of screenshots of the game, raising expectations for the game and making everyone excited about this new game!Hence, people thought that this game would really ROCK and that it would make an excellent game to add to their PS3 games collection, so they decided that they would buy it when it was released. So, with the help of publicity, demand for the game was raised.
Because suppliers foresaw the increase in demand for the game, they decided to produce more of the game! And so, both the demand and supply curve shift to the right, causing the equilibrium price and quantity to change। The quantity of the game produced increases, while price remains indeterminate. तदाह!
Marketable Permit (Carbon Credit) - by Tze Liang
Carbon Credit
Idea mooted as part of Kyoto Protocol
Aim: Meet the goal of reducing the world's greenhouse gas emissions by an average 5.2% relative to 1990 levels by 2012
Costs for each carbon credit are around $10 to $40 (so low!)
In 2007, trade market for carbon credits is around $63 billion worldwide in 2007, nearly double that of 2006.
- Money from sale of carbon credit can be used to support carbon saving schemes. E.g. New Zealand has sold some carbon credits to fund some wind generation projects (clean energy).
- This scheme creates an incentive for companies/countries to research for green technology and tree planting projects. At the same time, it discourages companies/countries from polluting the atmosphere.
- Explain using the price mechanism (Demand and Supply).
Over time, more energy is required to support the growing population (e.g. China & India), and hence the demand for carbon credits would increase. The demand curve would shift right, while assuming supply is around the same, equilibrium price would increase.
This would then create a greater disincentive for companies to pollute.
Limitations
1. Some companies are just buying carbon credit as a form of commodity, and selling it off for a quick profit when the price rises. (Abuse of system)
2. The price of each carbon credit must set to be higher than what it takes to clean up
3. It may be hard to evaluate the net emission of CO2 by each company / country
4. Enforcement may not be effective in certain countries that are corrupted / inefficient.
5. It is hard to determine the total number of permits to be sold / circulated in the whole market.
All currencies are in USD, not SGD.
Cabbies in Singapore by Wai Chew (05)
I would like to analyze the market for taxies in Singapore using elasticity concepts.
Firstly, price elasticity of demand for taxies in general. Since taxi services are usually consumed by middle-upper income group, they tend to be price inelastic, where a change in price will bring about a less than proportionate change in quantity demanded. i.e. |Ep| < 1.
This is especially so during peak periods (e.g. 7 am to 9.30 am and 5 pm to 8pm on weekdays), rainy days, midnights, festive seasons and for some locations like Changi airport, Singapore Expo etc, where demand for taxi services is obviously price inelastic as people are desperate or really in need of the services to the extent that they do not really mind paying extra for the services.
This can be illustrated by the diagram (Figure 1)
From Figure 1, assuming price increase is for the peak hour’s period etc, it is observed that the demand is price inelastic for taxi services (indicated by the steep gradient of DD). Thus, it is wise for the taxi companies to raise their prices during these periods to increase their total revenue, as the change in quantity demanded has less effect on total revenue than the change in price.
For example, an increase in price from $2 to $5 as shown in Figure 1. At the price of $2, total revenue is $30m, given by area 0CEG. When price increased to $5 (150% increase), quantity demanded falls less than proportionately from 15m to 12m consumers (20% decrease). Total revenue thus increase to $60m shown by area 0ABF.
Secondly, cross-elasticity of demand for taxies. These are the main taxi holding companies, namely Comfort Delgo Corporation, which owns City Cab and Comfort, Premier Taxis for SilverCab, SMART for SMART Cabs and SMRT Taxis and also TransCab.
In this respect, each of the companies’ services are close substitutes, hence they have positive cross elasticity in relative to one another, which means that a decrease in the price of one good will lead to a fall in the quantity demanded for the other and vice versa.
Thus, usually, the firm will slash price when the competitors lowers price t prevent consumers from turning to cheaper alternatives, which is a “follow-suit” response. However, they could also become oligopolists, colluding to raise price as they are the only producers of taxi services.
For example, in 2006, ComfortDelGro raised fares for all the operators under its umbrella, and SMRT Taxis and TransCab followed suit. On 11 July 2008, ComfortDelGro announced the implementation of a $0.30 fuel surcharge starting from 17 July. Other taxi companies except Prime Taxis followed suit with different implementation dates.
Firstly, price elasticity of demand for taxies in general. Since taxi services are usually consumed by middle-upper income group, they tend to be price inelastic, where a change in price will bring about a less than proportionate change in quantity demanded. i.e. |Ep| < 1.
This is especially so during peak periods (e.g. 7 am to 9.30 am and 5 pm to 8pm on weekdays), rainy days, midnights, festive seasons and for some locations like Changi airport, Singapore Expo etc, where demand for taxi services is obviously price inelastic as people are desperate or really in need of the services to the extent that they do not really mind paying extra for the services.
This can be illustrated by the diagram (Figure 1)
From Figure 1, assuming price increase is for the peak hour’s period etc, it is observed that the demand is price inelastic for taxi services (indicated by the steep gradient of DD). Thus, it is wise for the taxi companies to raise their prices during these periods to increase their total revenue, as the change in quantity demanded has less effect on total revenue than the change in price.
For example, an increase in price from $2 to $5 as shown in Figure 1. At the price of $2, total revenue is $30m, given by area 0CEG. When price increased to $5 (150% increase), quantity demanded falls less than proportionately from 15m to 12m consumers (20% decrease). Total revenue thus increase to $60m shown by area 0ABF.
Secondly, cross-elasticity of demand for taxies. These are the main taxi holding companies, namely Comfort Delgo Corporation, which owns City Cab and Comfort, Premier Taxis for SilverCab, SMART for SMART Cabs and SMRT Taxis and also TransCab.
In this respect, each of the companies’ services are close substitutes, hence they have positive cross elasticity in relative to one another, which means that a decrease in the price of one good will lead to a fall in the quantity demanded for the other and vice versa.
Thus, usually, the firm will slash price when the competitors lowers price t prevent consumers from turning to cheaper alternatives, which is a “follow-suit” response. However, they could also become oligopolists, colluding to raise price as they are the only producers of taxi services.
For example, in 2006, ComfortDelGro raised fares for all the operators under its umbrella, and SMRT Taxis and TransCab followed suit. On 11 July 2008, ComfortDelGro announced the implementation of a $0.30 fuel surcharge starting from 17 July. Other taxi companies except Prime Taxis followed suit with different implementation dates.
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