Basic Problems of Demand and Supply

Question: Discuss about the Basic Problems of Demand and Supply. Answer: Introduction: Economics deals with the basic problems of demand and supply. Any country has always been concerned with the total production and the consumption of the economy and the way in which minute changes in the economy has a huge impact on the total demand and supply system (Rios, McConnell and Brue 2013). This report deals with business economics and market research of the firms. There are several factors that a company takes into consideration while deciding upon the firms demand, supply, elasticity and effect of external shock and governments policy on supply-demand chain of the economy (Mankiw 2016). This report consists of three parts that needs to be analyzed. The first part deals with Ex Hoon Pty Ltd Company. The second part deals with Fords close down of two centers and the third part highlights the effect of government action in the auto mobile industry in Australia. Ex Hoon Pty Ltd is the company dealing with the production of parts of automobiles. Recently it has got a patent in a high tech system that is expected to create a radical impact in the automation industry. This implies that using this new technology ensures a car to give better performance (Rios, McConnell and Brue 2013). Under this condition the economic impact of the firm has been highlighted below: Factors influencing Market Demand: Cost: It is the most imperative factor. If implementing the new technology results in havoc escalation of production cost of cars, then the producers will be reluctant in using the parts of Ex Hoon Pty Ltd. Financing option: The demand is always generated from buyers side. If the buyers get an easy loan, then it may induce them to buy a current model of car that uses the advanced technology, thereby increasing the demand of the product of the given company (Mankiw 2016). Advertisement and Marketing: People should be motivated by making them aware of the safety that the new technology can provide and henceforth generate the demand from peoples side only. Factors influencing Market Supply: Financing option: Easy access to loan with low interest rate will help the foresaid company to invest on their production thereby increasing the supply (Canto, Joines and Laffer 2014). Alternatives available: The supply of Ex Hoon Pty Ltd is also influenced by the available alternatives in the market. The greater the number manufacturer, the lesser the scope of unhindered supply in the market (Commission 2014). End market: The supply of the company also depends on the end market that is the automobile industry in this case. A downfall in the automobile industry will force the producer to constrict the supply of the parts. Concept of Elasticity: Price elasticity shows sensitive response of the demand due to a variation in the price. Car is a luxurious good and its demand increases in greater proportion with respect to the increase in price. In the short run due to unavailability of equivalent alternatives at cheaper rate, the production of the new technology is expected to increase as a result of inelastic demand (Canto, Joines and Laffer 2014). In long run, there can be several impacts on the production depending on the available alternatives, changes in price of raw materials and other changes and this leads to the demand to become elastic in nature. Ford announces to close the plants at Geelong and Broadmeadows. Ex Hoon Pty Ltd has been the major supplier of raw materials to Ford (Hawthorne 2015).The diagram below tries to highlight the effect of the shut-down of Ford on the Ex Hoon Pty Ltd. Comparative-Static Analysis: This analysis highlights the existing scenario of an economy and the changes that occurs after any economic distortion. Here, the closure of the Fords outlet is the economic distortion which has been analyzed to understand the impact on Ex Hoons production level (Brown 2015). Initial demand and supply has been shown by the line D1 and S1 and its intersection gave the equilibrium outcome. Equilibrium output was Q1 and price was P1. Ex-Post Fords closure: The demand for goods of Ex Hoon Pty Ltd decreased as shown by the backward shift of the curve to D2. At the immediate level the supply cannot change (Reugg and Marshall 2013). After sometime, the supply decreases too, shown by the upward shift of the curve to S2. The new equilibrium price is P2 and the quantity available in the market is Q2. Here it can be seen that price of the automobile parts will increase and the supply will get reduce as an effect of closure of the Ford at two different places. This section tries to highlight the effect that may occur if the government imposes strict policies. If the government puts a baseline for safety measures that the companies needs to follow, then the effect of such policy on the market of products of Ex Hoon Pty Ltd has been discussed below with the diagram: As government has announced that the automobile industry should adopt high quality safety measures, there has been some impact of this announcement. The company with the expectation of having increase in their products demand starts producing more goods. As a result the supply curve S1 expands outward to S2. As the Ford has already produced the cars for this period hence there is no change in the demand for automobile parts in the immediate scenario (Davison 2013). The scenario is expected to change in the next period. Hence, it can be seen from the graph that price decreases to P2 and quantity supplied increases to Q2. Conclusion: The effects of demand and supply of the parts of automobiles as a result of change in the supply of automobile cars has been highlighted here. Also the impact of government intervention to influence and ensure high level of safety measures has been discussed in the simplest way (Davison 2013).. However the whole report has been constructed with the concept of ceteris parebus. In reality existence of ceteris parebus is a Eutopian situation and hence the impacts are far more complicated are beyond the purview of this report. References: Rios, M.C., McConnell, C.R. and Brue, S.L., 2013.Economics: Principles, problems, and policies. McGraw-Hill. Mankiw, N.G., 2016. Economics-Microeconomics-Principles of Microeconomics. Hawthorne, J. (2015). Australia's car industry one year from closing its doors. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/australias-car-industry-one-year-from-closing-its-doors-20151012-gk7ip0.html [Accessed 9 Dec. 2016]. Productivity Commission, 2014. Australias automotive manufacturing industry. Canto, V.A., Joines, D.H. and Laffer, A.B., 2014.Foundations of supply-side economics: Theory and evidence. Academic Press. Brown, R., 2015. Reviewing the effectiveness of electronic vehicle immobilisation: evidence from four countries.Security Journal,28(4), pp.329-351. Ruegg, R. and Marshall, H., 2013.Building economics: theory and practice. Springer Science Business Media. Davison, R. (2013). Why Ford's exit spells end for manufacturing in Australia. [online] Mackay Daily Mercury. Available at: https://www.dailymercury.com.au/news/why-fords-exit-spells-end-manufacturing-australia/1881073/#/0 [Accessed 9 Dec. 2016].