Instructions
1. EXPLAIN, WITH THE HELP OF A DIAGRAM, THE EFFECT ON PRICE AND QUANTITY DEMANDED OF A SUCCESSFUL MARKETING CAMPAIGN FOR A PRODUCT DURING A PERIOD OF TIME IN WHICH SUPPLY DOES NOT CHANGE. (75 words + Diagram)
In this question, supply is constant meaning they are testing the law of demand and its effects on prIce and quantity demanded. When it states a period of successful marketing campaign , it means the product is not in the introduction stage but has already penetrated the market and is well known by the consumers so the demand is constantly rising. Rise in demand results while supply is constant results in a rise in price of the particular good.
The result is that due to limiting factors eg income, initially, peolple will demand less of the good due to increased prices so there will be a CHNAGE IN QUANTITY DEMANDED. This is a change along the demand curve n.b ALONG THE DEMAND CURVE.
When the situation continues, there shall be emergence of substitute products in form of competition (competitive products) these will make the consumer have a change of preference for the competitor product. This there fore will mean a change in demand which is a shit of the demand curve.
SHIFT OF THE DEMAND CURVE.
THE DIAGRAM EXPECTED IS A COMBINATION OF A SHIFT IN DEMAND CURVE(Going for alternatives) AND ALONG THE DEMAND CURVE(going for lower quantity of the product to cut on costs).
N.B ONE DIAGRAM SHOWING BOTH EFFECTS.
kindly draw rather than picking from the net. check out: http://www.wadsworthmedia.com/
There is a topic on CHANGE IN DEMAND VERSUS CHANGE IN QUANTITY DEMANDED.
ANSWER
Section A
Question One
A successful market campaign serves to influence the preferences of consumers. Due to the changes in consumer preferences, demand of the said product will go up but since the supply does not change, the increase in demand coupled with no change in supply in the short run, will lead to an increase in the price of the product.
Fig 1: Effects of marketing on the price and quantity demanded of a product.
Source: Gregory N.W. (2011)
P0 is the original price while P1 is the new price. D0 is the original demand and D1 is the new demand. Q0 is the original quantity while Q1 depicts the change in quantity demanded. In this case there is a change in the quantity supplied but no change in supply, since the change in preferences will not alter a firms desire to sell at any given price but only alters the consumers desire to buy at any given price.
Question Two
Fig 2: Effect of decrease in supply on price.
Source: Bromley R (2006)
A strike by workers affect the supply of a product negatively and thus the supply curve shifts to the left, this influences the equilibrium price to move up from P1 to P2 , the demand curve does not shift but the quantity demanded decreases from Q1 to Q2 . A firm thus sells less but at a higher price, (Bromley, 2006)
Question Three
Fig 3: Simultenous increase in demand and supply.
price S
S1
P
D D1
Q Q1 quantity
Source: Self
In this case the rise in supply instigates the rise in demand. The demand curve shifts to the right and so does the supply curve. Price however remains the same but the quantity of tickets sold increases. When the sports event is moved to a bigger venue the supply of seats and space increases thus the supply curve shifts from S to S 1. The demand curve shifts from D to D 1 denoting an increase in demand, The Price P1 does not change but the quantity of tickets bought shift from Q to Q 1 .
Question Four
Price elasticity of demand measures the responsiveness of demanded quantity to the price and is denoted by a percentage change in quantity demanded divided by percentage change in price. Demand is perfectly inelastic when the figure computed is zero (0), inelastic if between zero and negative 1, unitary elastic if equal to -1 and elastic if between -1 and –n, . Necessities have perfectly inelastic demand since consumers cannot do without them , where the provider of a certain product is a monopoly thus no close substitute leads to even more perfect inelasticity on the price of demand since quantity demanded is not influenced by price.
Fig 4: Perfect inelastic demand
Source: U. S Supreme Court, (n.d) retrieved on 27, May, 2012 from
http://admin.wadsworth.com/resource_uploads/static_resources/0324221150/8690/0324335733_06_lr.pdf
Question Five
Table 1: Cost of operating a firm
Source: http://www.fatih.edu.tr/~ahmetcaliskan/econ%20101/costs_productionMankiw.ppt
Cost MC
AVC
ATC
AFC
Source: Self Output.
While at low output, the average output cost will be higher due to the fact that fixed cost will be spread over few units. The firms ATC declines with increase in output since fixed costs are spread over more units. More increase in output sees the ATC rise since the rise in AVC is faster than decline in AFC. On the other hand Marginal cost increases with increase in production due to the principle of diminishing marginal product which denotes that if all other inputs are fixed, marginal product of one input goes down as the quantity of the input goes up.
Question Six
The four major and key economic objectives of any nation is to achieve stable growth in Gross National Product (GDP), stabilized or equal Balance of payments, control Inflation by achieving stable prices while at the same time achieving high or full employment of its citizens. This is usually done through the use of macroeconomics policies and policies such as monetary policy, fiscal policy, and international policies such as policies on imports and exports and income and price policies such price regulation of certain goods in an economy. Were this conditions to be achieved there would be an ideal economic condition since an equilibrium would have been achieved between the domestic economy and the international economy, however this only exists in theory, reason being that conflicts between domestic policies and external policies and also conflict amongst domestic policies especially between development and stabilization goals. A nation may pursue rapid economic growth unfortunately this kind of growth is mostly followed by inflation and deficits in balance of payments. While pursuing external equilibrium, there exist the consequences of less production and less use of existing production capacities which would in turn lead to unemployment. Nations must therefore learn to do “trade offs” between different policies (Delic & Kragulj, 2005)
Question Seven
Fig 6: Flow of income
Source: http://chris-terry.com/Macro/03%20The%20Circular%20Flow%20of%20Income.pdf
There are two major entities in an economy, the households and the firms. The households provide the firms with factors of production such as labor, land, capital and enterprise which the firm uses to come up with products otherwise known as output. In return the households receive factor income such as wages, rent e.t.c. The households provide a market for the products of the firm by consuming the firms’ products and services; they use some of their factor income on the firms’ products and save the rest. Should households cut on their consumption meaning they save more, firms’ experiences low sales and they respond by lower production thus making factors of production such as labor redundant, thus leading to a fall in income, employment, and national output. However, investments by firms on capital equipment increase production capacity thus offsetting the effects of savings leading to increase in output, income and employment (Boyes & Melvin, 2008)
Question 1
Keynes argued that demand is the driving factor of an economy and government policies should be put into place so as to enhance demand at the macro level and thus fight inflation and unemployment. Keynesian theories argue that it is not real wages that are set between employers but Nominal wages since real wages are affected by inflation. The theory argues that nominal wages are difficult to cut due to laws and contracts. Therefore in order to boost employment the theory advocates that real wages should go down. The theory is also used to restrain excessive saving since it leads to low investments thus leading to lower interest rates due to availability of funds for loans. The multiplier effect shows the effect on demand by government spending or injection of cash into the economic system. The government is able to influence and stimulate new production by injecting monies into the economic system which in turn influences spending by individuals. Extra expenditure means firms sell more and are thus able to employ more workers and pay their wages.
Monetary policies on the other hand emphasize monetary neutrality in the long run and non neutrality in the short run and establishing a clear distinction between real and nominal interest rates. Monetary policy involves changes in the rates of interest so as to influence growth of demand, supply of money and inflation. Supply side policies which were advocated for by Freidman induce the economy by increasing the number of services and goods, thus inducing the need for factors of production which in turn reduce market prices. This leads to more goods and services being availed for export. Monetary policy vary the interest rates charged by central banks for lending money to the other banks and may be used to reduce inflation by increasing the lending rates while at the same time it may be used during recessions to enhance demand and boost employment through a reduction in rates, thus pushing up prices and rising consumption of imported goods, (McCallum, 2008)
Question 2
Unmanageable Sovereign Debt
One of the major cause of the current Euro crisis is the inability some of the governments in the euro zone to manage debt. The problem which has been compounded by excessive government expenditure with low growth has seen countries such as Greece and Italy experiencing an unmanageable debt which is now threatening the whole euro zone, ( Massa, Keane & Kennan, 2011).
Loose Monetary Policies before the crisis
According to John Taylor, loose monetary policies are to be blamed for the euro crises especially in the U.S between 2001and 2006. Loose interest rates and poor monetary policy led to the rise in house prices which in turn led to fewer mortgage defects. This led to over pricing of the mortgage backed securities, (Taylor 2008, 2008a). Loose financial regulation saw a quick growth in risk and more organizations invested in financial products they did not understand, this led to deterioration in financial markets at the onset of the crises, (Borio, 2008).
Politics
Politics has also been in the midst of the crisis evidenced by lack of political strategy and vision and poor relations between members with the big countries ignoring the smaller members. Politics have also seen members prioritize markets over their people, (Kirsty Hughes, n.d)
Global imbalances
Account surpluses in developing economies such as China led to great financial flows which forced down US interest rates and those of other developed countries. This together with low savings rates in the UK and the US caused an innovation shock wave that saw complex products attempt to provide high returns and at the same time maintain asset value.
Question 3
Planned economies were found in earlier communist countries such as Russia and Northern Korea. A planned economy is characterized with the government making all the decisions. Production is dependent on government directives. The government provides employment in a planned economy and most of the citizens enjoy a comparable lifestyle. In a planned economy there is little or no capacity for development, growth or investment. Government spending is mostly on defense with little or no infrastructure development. Since wages are government controlled workers lack motivation while the control on prices leads to citizens only being able to afford basics and not luxuries. On the other hand in free enterprise (market economy) the role of the government is tied down to providing laws and policies that protect businesses and consumers so as to make sure that competition is not restricted by any party. In a free market economy, the laws of demand and supply are usually at play and businesses are driven by profits and the consumers demand for products and services determines the supply and pricing structures. Should demand fall in a free market, businesses are forced to increase efficiency come up with alternatives or make less profits. Mixed market economies cropped up due to the inequities of the free and planned market economies such as inequality, in a free market some individuals would be able to afford essential services such as healthcare and others would not be able to. Intervention also becomes essential in times economic crises since without governmental intervention many businesses would fail. The government also provides infrastructure such as roads, to aid enterprise. Wages are determined by the demand and supply forces of labour and even personal bargaining in the private sector. In a mixed economy, some resources are under the control of the government while others are under the market forces, (Vodafone, n.d)