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Economics For Principles, Problems, And Policies

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Question:

Discuss about the Economics for Principles, Problems, and Policies.
 
 

Answer:

Introduction:

Penalty rate is the amount of money that any hospitality or retail workers receive for giving extra service especially on the weekends. The Fair Work Commission in Australia decided upon reducing the percentage of penalty rates paid to the workers. This decision is going to bring a change in the level of output produced in Australia on weekends. The diagram below helps in understanding the impact of slashed penalty rate on restaurant’s output at Sydney.

Due to decrease in the penalty rate, the workers now no longer get any incentive to exchange their leisure for work on Sundays. Hence, the workers start reducing their service hours and thereby supply of restaurant output decreases (as shown by shift in supply curve from 1 to 2). Considering the demand for food remaining constant, there is going to be less output produced at Sydney’s restaurant and thereby price of food supplied on weekends is going to increase.

Negative externality has been termed as the situation where the marginal social cost transcends the marginal private costs in an economy. As a result people socially optimum level of output is not produced and lack of optimal production results in reduction of social welfare. It is said that negative externality is the cause and market failure is the effect. The diagram below helps to discuss the same.

A quintessential example of negative externality is the excessive amount of pollution caused an effect of excessive cars running in any country. As everyone is the sufferer, no individual takes the initiative to change their lifestyle so that pollution is reduced. Hence those who reaps the benefit of using private cars and those who do not own a car faces equal problems. In the figure above the optimal quantity of cars that should be running is shown by Qopt but the cost is higher in this case and hence Q1 quantity is produced. As a result the volume of pollution continues to increase and the whole world is facing its consequence at present.

Market economies are the situation where the demand and supply of any goods and services interacts amongst themselves in an unfettered way bringing in equilibrium within the economy. Under market economy the producers tries to maximize their profit by quoting the maximum possible price and the consumer tries to consume things at the lowest possible price. Hence, none of the economic agent is really bothered about the environment and market economies are seldom environment friendly.  This is because in order to be environment friendly an outcome has its social cost greater than the private cost and hence remains unattainable under market economy.

The world has been always trying to cope up with substituting the non-renewable energy with renewable energy. The government of Australia has planned to set up a renewable energy plant in the region of New South Wales. The expected result in this regard is increase in the supply of energy in the economy. The effect of establishment of this energy plant has been depicted below through the figure below:

Pre entry of new energy firm: The total volume of energy supplied in the economy was Q0 at a high level of price P0. Moreover there was a scope of further increase in price of energy due to the depleting nature and scarcity of the non-renewable one.

Post entry of new energy firm: The volume of energy supplied in the economy was Q1 at price P1. Q1 is more than Q0. That is more energy is expected to be produced at lesser cost. On other hand, the scarcity of resources in producing energy could be tackled thereby reducing the chance of sudden increase in the cost of energy supply.

The demand of any rationale consumer decreases with the escalation in the price of the goods and services. As stated in the question, higher education has become costly in Australia and as a result the universities have increased their fees. Hence, going by the normal rationale theory it was expected that the demand for university education would decline. Since education is a special service through which human capital is generated leading to the scope of earning future income, hence the currently enrolled student would not change their demand. It is expected that though they are going to get agitated with the increased fees but would prefer to continue and complete their education. Those students who were planning to get enrolled should try to wrap up their degree in the least possible units.

The rise in fees took place in all the universities of Australia. In addition, there are no substitutes available for education. Hence the rationale decision of any consumer is to continue their education. If possible the new students might check out the scopes available outside Australia and compare if it is beneficial to shift there.

 

The main motive behind the government while imposing taxes is either to control the supply of any goods or to generate revenue. The Australian government has planned to impose a per unit tax on the mining products. The impact of this per unit taxation in the consumption and production of iron-ore has been discussed as follows:

Prior to taxation, the equilibrium volume of iron ore produced were much greater in size and the price of iron ore was much less as dictated by the supply and the demand curve. After taxation, the price of the product got increased. The buyer now has to pay more price for the same quantity of goods than they had to before taxation. Again the seller receives lower price for each unit sold. The red triangle highlights the dead-weight loss within the economy and the blue rectangle shows the revenue collected by the government of the nation. Hence, the quantity produced and sold is less and it is sold at much higher price due to taxation.

In order to reduce the time taken for sowing, ploughing and reaping the agricultural product, robotic technology can be used. This technology can increase the efficiency in the production of output. The impact of this technology in the consumption and production of agricultural crops has been shown by the following diagram.

Technological up-gradation has always led to a change in the supply level within an economy. As the time taken by robotics is much lesser than a human worker, hence the supply of food production is going to increase as shown by the outward shift in the supply curve from 1 to 2. Assuming that there is no change of demand or any other factor, the quantity produced changes from Q0 to Q1 and the price gets slashed to P1.

Generally the change in technology does not have any direct impact on the demand of the commodity. But with the increase in supply the price of goods in the market gets decreased and thereby people want more of the same. But in case of agricultural production, there is a limitation in the demand as people cannot consume more goods if its price is less. In such a case they might export it to other nations. Hence the demand curve may shift outward as shown by the dashed line marked as demand 2.

Police service has been provided by the government of Australia without charging any money from the citizen. Henceforth, the actual demand for this service goes unnoticed and the government provides the service at a fixed price. Therefore, the supply curve is horizontal in this regard. With the implementation of privatization within the economy, there is going to be heavy impact in the short run with regards to the total volume of output produced and consumed. This has been shown through the following figure.

As supply has been initially supervised by the government at some pre-defined cost hence the supply curve was vertical to the x-axis that is it was inelastic. On other hand after privatization the consumer wanted to pay as much less possible for this service and hence the demand curve is flatter. On other hand, the supplier or producer remains strict in their production process and hence the supply curve is strongly inelastic in nature. This is because though people were not charged before for this service but to maintain law and order they are ready to pay and receive the service.

Price elasticity of demand is the measurement of the percentage change in the responsiveness of demand due to the percentage change in the price of the goods. Mathematically it has been denoted as:

Since demand has a negative relation with price and supply has a positive relation with price and both demand supply moves in opposite direction, hence Ed is always negative. Therefore in deciding upon the elasticity of any goods and services the absolute value is considered. Whenever the value lies within zero (0) and one (1), it is said that it is an inelastic good or services. In contrary whenever the absolute value exceeds one, it is said that it is elastic goods. Again the elasticity also depends on two other factors that is the nature of goods and the extent of substitute available. The demand for luxury gods and those which have easy substitutes available are elastic in nature. On other hand, goods without substitutes and which are of basic needs are inelastic in nature.

In calculating elasticity two things are taken into consideration that is the change in quantity of goods whose elasticity is being measured and the change in the price. Sometimes the changes in the price of other commodities are taken into consideration depending on the type of elasticity that is being measured. In addition to it the responsiveness in the quantity supplied is also measured by elasticity concept. Henceforth it can be state as the reason as to why the concept of elasticity has never been confined to the demand curve only.

 

References:

Engel, E., Fischer, R.D. and Galetovic, A., 2014. The economics of public-private partnerships: a basic guide. Cambridge University Press.

Kates, S., 2014. Free market economics: An introduction for the general reader. Edward Elgar Publishing.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Pigou, A.C., 2013. The economics of welfare. Palgrave Macmillan.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Sowell, T., 2014. Basic economics. Basic Books.

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

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