Blog Challenge #3

Q: In the 1970s, OPEC caused a dramatic increase in the price of oil. What could have prevented it from maintaining the high price through the 1980s?

Ans:

Oil supply in the 1970s/1980s was used mainly for transportation and the operation of machines.

In the 1970s, since there is an oil embargo proclaimed by the OAPEC (Organisation of Arab Petroleum Exporting Countries), the price of oil therefore increases.

In the 1970s, there is also an energy crisis, hence issues related to petroleum supply was escalating which in turn led to the increase in prices of oil as the production (input) of oil increases lead to the increase in quantity demanded of oil and when supply of oil cannot match up with the demand, price of oil therefore increases.

Price elasticity of demand (PED) measures the degree of responsiveness of quantity demanded of a good to a change in the price of a good itself, ceteris paribus.

On the other hand, since there is an economic recession in the 1980s, there will be an expectation of decrease in income for the people which makes people to spend less proportion of their income. This in turn, will lead to a decrease in demand of petrol since people who are driving will switch to other cheaper alternatives (means of transport) as they would not be willing to spend a large portion of their incomes on petrol as the price of oil was soaring at that point of time.

Price elasticity of supply (PES) measures the degree of responsiveness of quantity supplied of a good to a change in the price of a good itself, ceteris paribus.

When there is an increase in prices of oil, it will be difficult to raise outputs immediately, and with the economic recession going on, it is not feasible to get people to spend their money on petrol in the long run.


However, the high price of oil didn't maintain through the 1980s because the 1970 energy crisis causes the production to slow down and people to practice energy conservation due to high fuel prices.

Figure 1: Equilibrium Price and Quantity of Oil

At Figure 1, initial equilibrium of E0, equilibrium price is P0 and equilibrium quantity is Q0. Supply curve shifts to the right from S0 to S1 due to a decrease in supply. At P0, quantity supplied exceeds quantity demanded, hence there is a surplus leading to a downward pressure on price. As price decreases, there will be a downward movement along the demand curve (D0) as quantity demanded increases to meet the excess supply and quantity supplied to fall to remove excess supply.

Since there is a surplus of oil due to the decrease of demand for oil, the price of oil has to drop in the long run in order to reduce the surplus of oil.



Income elasticity of demand (YED) measures the degree of responsiveness of demand for a good to a change in income, ceteris paribus.

Oil is considered as a luxury good but demand for luxury good during an economic recession (lower income for an individual) will not be high which in turn results in the loss of revenue if oil prices continue to soar, hence, prices of oil has to decrease in order to reduce the loss of revenue.


Cross elasticity of demand (XED) measures the degree of responsiveness of demand for a good A to a change in the price of another good B, ceteris paribus.

Since there is no close substitute for oil back then, producing oil as the only source for petrol will be very expensive since it is a raw material, thus, industry for producing oil will have to reduce its production in order to continue on its production. Hence, as petrol and cars are complements of each other, prices of oil has to drop in order to increase the demand for oil, as people will then be willing and able to afford the petrol for cars. Also, with the drop in prices of oil, the loss of revenue will then be reduced in an economic recession.




As a result, the high prices of oil cannot be maintained through the 1980s.




Credits to sources from the Internet:
http://en.wikipedia.org/wiki/1970s_energy_crisis
http://en.wikipedia.org/wiki/Early_1980s_recession

Reflection - Elasticity Concepts

	What I Know	What I Want to Know	What I learned
Shi Yi	Understand how and when to apply the concepts of PED and PES, the factors involved & how it affects revenue during different economic situations.	Still not sure about how to apply XED and YED in essay question.	People’s preferences for goods during economic boom/recession. Factors that affect the change in the market and shift in the graph shows the revenue affected (increase/decrease). Elasticity concepts are important in examining the market change.
Wei Yuan	Understanding of 4 concepts of elasticity helps firms to devise strategies to increase their revenue/profits. Nevertheless, due to the dynamic market conditions, the various values are only estimates, therefore we need to take in other factors into consideration.	What other external factors affect the elasticity of certain goods?	Price elasticity is important and plays a huge role in the economy as it determines the profit of what we earn and affects our choice making while taking into consideration of the marginal benefits and cost.
Arfa	The factors that affect the extent/magnitude of change. Types of goods people prefer when income change. What happen to the market when changes are made.	Still not sure about XED	Elasticity concepts to explain why and how changes in price of a product, income & prices of related products affect business sales and revenue. Elasticity is important to examine the extent/magnitude of the change involved in quantity demanded/supplied due to the change in price or non-price factors.
Shun Yong	How to apply PED, PES and YED in essay question.	Still unclear of how to apply XED in essay question.	Degree of necessity, taste & preference of goods and factors that influence YED
Yuan Yan	Elasticity concepts can affect the market	Nothing about it since I know what I have to know	Strategies to increase the total revenue/profits

Blog Challenge #2

KOLKATA|KOCHI: There is a preference for orange among the south Indian households this season. With apple and grape prices ruling high coupled with a loss of banana crop in Kerala, orange is the favourite fruit on the breakfast table among south Indians. Orange is selling at Rs40 per kg whereas banana, the commoner's fruit, is selling at Rs50-60 per kg, while apple is priced double that of orange.Talking to ET, Orange Growers Association of India working president Amol M Totey said, "Production of oranges in Nagpur has been very good and it has almost doubled this year. Huge demand has emerged from the southern part of the country."The sudden surge in demand from south India has been triggered by the rising prices of apples and grapes in southern part of the country. Demands for oranges are coming from places like Kerala, Hyderabad, Vizag, Bangalore and Chennai. In Kerala, banana plantations were damaged in the heavy rains during June and July, causing a shortage and rise in prices. Bananas which used to sell at Rs30-40 per kg in the past year are now retailing at Rs50 - 60 per kg.Arrivals of oranges have started in the southern markets. Usually the flow begins in October- November period and extends into the summer season. Nagpur and Amaravati in Maharashtra are the chief sources for Kerala, Chennai and Bangalore."The supply is definitely high this year but it hasn't been reflected on the prices as transport charges have gone up due to a hike in diesel prices,'' says Liaqat Ali, owner of AB Vegetables and Fruits in Chennai. Wholesale prices are around Rs35 per kg, almost the same as in the previous year.But Liaqat Ali feels it is still too early to predict supply and demand. "We have to wait till January-February when the demand goes up.'' The main market in Chennai gets about 150 tonne daily. The supply is likely to increase in the coming weeks. The boom in orange production is quite evident in Kerala. The supply points have increased. The retail prices are around Rs40 per kg. "The quality is good and there is a robust demand for oranges. Kochi main market gets 100 tonne daily,'' says wholesale trader K A Ashraf in Kochi.Apples sell at double the price of oranges with the prices of imported varieties going further up.Nazar Mohammed, a fruit wholesaler in Maharashtra's Kalamna market said "Till a few days ago, wholesale price of oranges were hovering around Rs14 -15 per kg but now it has gone up to Rs18 -22 per kg. Prices will again fall in January when fresh crop will arrive. Currently, harvesting is going on."(http://articles.economictimes.indiatimes.com/2013-12-19/news/45377538_1_oranges-diesel-prices-supply-and-demand)

1. 3 products (oranges, apples and grapes, bananas)
2. Factors (taste and preference = affecting the demand curve, weather= affecting the supply curve)

Figure 1: increase in price of Apples and Grapes

When the price of Apples and Grapes doubled, the quantity demanded of apples and grapes will decrease, ceteris paribus, leading to an upward movement along the demand curve. In conclusion, a change in the price leading to a change in the quantity demanded is shown by the movement along the demand curve, assuming ceteris paribus.

However, this increase in price of apples and grapes would lead to an increase in the demand of orange since orange is a substitute which can satisfy the same wants. This is because, assuming that the price of oranges remains unchanged, the price of apples and grapes has become relatively more expensive. Thus consumers would want to switch from eating apples and grapes to oranges. 

Figure 2: Increase in Demand of Oranges

When a consumer's taste and preference changes, the demand for the product which in this case is oranges, will increase.As shown in figure 2, at the initial equilibrium of E0, equilibrium price of P0 and equilibrium quantity is Q0.
As the quantity demand of oranges increases, the demand curve will shifts to the right from D0 to D1. At the initial price of P0, quantity demanded exceeds quantity supplied.  There would be a shortage leading to an upward pressure on price.
There would be an upward movement along the supply curve (S0) as quantity supplied increases to satisfy the quantity demanded and this will eventually cause the price to increase from P0 to P1.

Figure 3: Decrease in Supply of Bananas

The banana plantations on the other hand were damaged in the heavy rains during June and July, there'll be a drastic decrease of bananas being harvested, hence leading to much lesser amount of distribution of bananas to the different cities, where prices for bananas will increase due to the low supply.
As shown in figure 3, at the initial equilibrium of E0, equilibrium price is P0 and equilibrium quantity is Q0.
When the supply curve shifts to the left from S0 to S1 due to the decrease in supply. At the initial equilibrium price of P0, quantity demanded exceeds quantity supplied. There would be a shortage leading to a upward pressure on price.
As price increases, there would be an upward movement on demand curve D0 as quantity demanded decreases.

Hence,with oranges as the substitution of bananas, apples and grapes, and since oranges are more relatively cheaper, commoners are most likely to change to oranges as their commoner fruit for now.

May Reflection

	What I know	What I want to know	What I’ve learn
Shi yi	Understanding of demand and supply curves and the factors that are involved	How do I apply the concepts of the demand and supply into case studies in terms of the drawing of the curves, mainly simultaneous shift.	Understanding that different factors affect the demand supply curves, and for case studies, we need to grasp the factors involved to roughly know the outline of what we will have to write
Wei Yuan	Its correlated and dependent on each other as both will affect the other. I know the non-determinant price factors that determine the curve of the demand (EGYPT POP) and supply (WET PIGS)	The tough part is the drawing and explaining the demand and supply curve as there are many things to explain such as price adjustment process and the change, shift of the graph and how it will turn into data form	I have learn how to use the demand and supply curve to further explain in detail of the shift and change in demand and supply
Shun yong	Demand quantity is the quantity that is demanded by the consumers. The supply quantity is the quantity that is produced by suppliers	I’m still not clear about the equilibrium prices.	I learnt that the supply quantity must be planned accurately if not there will be a shortage or surplus of quantity.
Yuan Yan	Demand/ supply decrease, curve move to the left. If increase, it shift to the right. Can happen simultaneously The increase/decrease of demand and supply curve won’t be to the same extent	Drawing and explaining the simultaneous shift in demand and supply curve/ price adjustment process	The consequences of an increase/decrease in demand/supply
Noor arfa	-          Demand is always related to consumers. -          Supply always related to suppliers/producers -          The non-determinant price factors that affects demand/supply curve	-          How to translate essay question to become a demand/supply graph -          Still not sure about the market equilibrium prices and how to see shortage or surplus	-          The technique of using concept maps -          The drawing of different curves after shifting due to the factors affecting the curve -

Blog Challenge #1

Investing in consumer goods will only bring current satisfaction, it does not bring us wealth in the future. Scarcity has unlimited wants and needs but limited resources which unable to satisfy consumer needs. With more production of capital goods is like a basic act of investment. However this requires sacrificing current satisfaction but it enables more production later. This makes scarcity less of a problem later which also will help boost the economy in the long run.

For Singapore, as Singapore's main strength lies within its manpower resources, Singpore have to improve its manpower to stay competitive.
However, because manpower falls under both categories of labour and human capital, the singapore government feels the need to improve the the capabilities of the manpower, in a way investing in capital rather than focusing on producing goods. As Singapore has limited land (scare resource is Land), and it has to rely on entrepreneurship and capital and labour to survive. Producing consumer goods is not a good strategy for Singapore's economy. With an improvement in capital the PPC graph of the the production will increase.

We must shift to achieving GDP growth by expanding productivity rather than the labour force. We must boost productivity in order to stay competitive, upgrade the quality of jobs, and raise our people’s incomes. A slower growing workforce makes it all the more important for every enterprise to innovate to create more value, and to maximise the potential and performance of every worker. This shift to productivity-driven growth will require major new investments in the skills, expertise and innovative capabilities of our people and businesses over the next decade. We have significant room to improve productivity in every sector of our economy. 

In absolute levels, Singapore’s productivity in manufacturing and services are only 55 to 65 percent of those in the US and Japan (see Figure 1).

                            Fig. 1 Comparisons of Services & Manufacturing between different countries


- REPORT OF THE ECONOMIC STRATEGIES COMMITTEE (http://app.mof.gov.sg/data/cmsresource/ESC%20Report/ESC%20Main%20Report.pdf)


For United States, there is a need to maximise the potential of the resources of Factors of Production in which this case would cover all four factors (Capital, Entrepreneur, Land, Labour) where the examples below will show how US plan to do it to boost the economy in the long run

Invest in the Building Blocks of American Innovation

-       Spurring the innovations that will drive America’s future economic growth and competitiveness requires critical investments in basic foundations: workforce, scientific research, and infrastructure.

·         Educate the next generation with 21^st century skills and create a world-class workforce

·         Build a leading 21^st century infrastructure

·         Develop an advanced information technology ecosystem

Promote Market-Based Innovation

- New ideas are proven, commercialized, and diffused. It is imperative to promote a national environment ripe for innovation and entrepreneurship that allows U.S. companies to drive future economic growth and continue to lead on the global stage.

·         Support innovative entrepreneurs

·         Promote innovative, open, and competitive markets

Catalyze Breakthroughs for National Priorities

- Priorities include developing alternative energy sources, reducing costs and improving care with health IT, catalyzing advances in educational technologies, and ensuring that the U.S. remains on the leading edge of the bio- and nanotechnology revolutions.

·         Drive breakthroughs in health care technology

·         Create a quantum leap in educational technologies

(http://www.whitehouse.gov/innovation/strategy/executive-summary)