Silver & alcohol essay: supply

Supply and demand analysis allows us to investigate and understand the operation of markets or sometimes the failure of markets.

(i) Using supply and demand analysis identify which you believe to be the main factors in determining the price of silver.

(ii) Identify the negative externalities that may arise from excessive alcohol consumption by some individuals. What can governments do to try to reduce this type of consumption?

Overview of the Supply and Demand

This report aims to analyze the supply and demand of the components of silver which determines the price of the silver in an international market. Moreover, it also explains the negative consequences which may arise from the excessive alcohol consumption of individuals. In this report, it explains the concept of supply and demand factors of the both the cases which influence positively and negatively. It depicts that how various components like industrial goods, currency, and large institutional investors impact the price of the silver significantly. Moreover, shift in demand curve and the equilibrium price is influenced by these factors. Lastly, it explains that the government taken the significant measures to reduce the consumption of alcohol in the long term.

The law of the supply and demand indicates the coordination between the supply of the resource and the demand for that particular resource. The law of supply and demand influences the effect of availability (supply) of a particular product and the desire (demand) for that particular product at agreed prices. General rule of the law of demand and supply trends that low supply and a high demand increases the price of the products. Similarly, high supply of the product tends to lower the demand of the products into the market (Byrne, Fazio and Fiess, 2013). Similarly, in the law of demand theory, there is a point which is called market clearing price or equilibrium price, where the producer and consumers are satisfied. In particular point producer wants to produce the goods and sell all the units as they produced and the buyer wants to buy all the units they want.

Silver is one of the most valuable metals, valued both in form of currency and physical value. The major components of the silver demand are Industrial goods (54%), Photography (15%), Jewellery and artificial ornaments (26%) and coins (5%) (Byrne, Fazio and Fiess, 2013).According to the Bhar and Malliaris, (2011) twenty countries together produced the 96% of the silver at the global level. The main consumers of the silvers are US, India, Canada, Mexico, UK, France and Germany. It is identified from the research of the author the main reason of the price volatility in silver are big private institutional investors, large concentrated short position, fluctuating industrial demands, uncertainties at geopolitical level, rise in crude oil prices, decrease in the value of the dollar, government policies on export and import locations, prices of gold and other commodity prices.

Factors that Determine Silver Prices

As per the views of the Ehrenberg, and Smith, (2016), stated that price is derived by the interaction of supply and demand factors. The market price depends upon the movements of activities in the above-given components of the silver which determines the price of the silver in positive and negative manner. According to the general law of demand and supply, it is identified that the position of the silver passes through the three market conditions i.e. the law of equilibrium price, change in equilibrium price and a shift in demand curve of the silver. In below figures, figure 1 indicated that position of the silver at equilibrium level in the year 2006 and 2007 (Courtemanche, 2011).

(Source: Rios, et al., 2013)

In this point buyers and sellers are willing to exchange the quantity “Q” at price “P”. The supply and demand are in balance at this point. As per the analysis of the Elyasiani, Mansur, and Odusami, (2011), expressed that the growth of the silver in some countries like US, Europe, and China at the rate of 58% in 2006.The demand is increased due to introduction of the Exchange Traded Funds (ETF’s) by Barclays bank (Sverdrup, Koca, and Ragnarsdottir, 2014). This trend is also towards in upward position due to strong demand in the industrial goods and investors. In this position, it reveals that the producers produce the units at a certain point and it also consumed due to increase demand. Similarly, the shift in equilibrium price in the year 2008 results negatively on the prices due to the crisis in the US. This impacts the outlook of the world economies in an extremely negative manner. Changes in supply and demand of the components of the silver, the equilibrium price will change. For example increase in the purchase of large private investors which impact the prices of the silver significantly. According to Hübner, Kuhn and Sternbeck, (2013) Warren Buffet purchased 130 million troy ounces (4000 metric tons) of silver at the rate of $4.50 per troy ounce (estimated value $585 million) in 2014.Similarly, the electronic traded fund (ETF) called the I shares silver trust held 180 million Oz silver in reserves. From this activity, it depicts that the large investors have the power to influence market prices. Below given figure indicated the shift in equilibrium prices due to international movements in the components of silver (Dwyer, et al., 2012).

Part 1: Identifying Silver Prices through Supply and Demand Analysis

(Source: Hildenbrand, 2014)

In this figure, it is indicated that the prices of the silver are affected by the large investors purchased in the bulk quantities which results in the shortage of supply in the market that increased the price of the silver. Moreover, it is also identified from the research of the author it expressed that shortage of production and supply of the silver contracts due to hold by the largest traders through ETF to acquired 90% of all silver contracts. It will around the shortage of 245 million troy ounces (as of April 2011), which is equals to 140 days of production. These effects change the demand and supply of the silver in the short and long run. New applications for silver are being used in the batteries, superconductors, and microcircuits which may increase the demand in the non-investment portion. Moreover, the other factor also impacts the price of the silver like the expansion of the middle-class population towards western lifestyles and products contribute the long term rise in industrial consumption. Furthermore, retail investors have shown more interest in the silver through exchange-traded funds (ETF’s) which increase the demand for this commodity in the economy. Apart from these components of the silver, gold is considered as the primary driver of the silver prices. In bullish environment, investors tend to be interested in the precious metals more. Thus it increases the demand for the investment of the silver metals more (Byrne, Fazio, and Fiess, 2011).

The reason behind the fluctuation in silver prices as it has the smaller market as compared to the gold; it does not take more time to rise of the price. At the same time, when the economy is bearish the investors easily lose confidence in the silver and it results in the decrease in price. As per the analysis, it finds that silver has the tendency to follow the prices of gold. At the time of crisis, it can identify that the gold prices are fall silver prices are also reduced and vice versa. It can be recommended by the trading experts to buy the silver during the recession and to sell during the boom. According to Toraman, et al., (2011) there is an inverse relationship between the silver prices and international currency (USD). During the crisis, it is indicated that US dollar currency is the best source of investment for people. They tend to disinvestment in silver and invest into currencies like US Dollar (FSP, 2017). It can find that the prices of the commodities like silver, titanium, and copper are fall down in recession periods. The above trend finds that the silver can be used only has a long-term hedge against inflation. Below given figure indicated that increase in money supply, silver, and gold from 2008-2012 (FSP, 2017).

Part 2: Negative Externalities of Excessive Alcohol Consumption

(Source: Agiboo, 2017)

In the above-given figure, it indicates that the metals appreciated until 2011 with rising money supply and inflation in emerging markets. The major portion of food and energy in the CPI bracket of emerging markets, the influence of high commodity prices on inflation is stronger than developed nations. In 2011, the global inflation figures fell and it reduces the gold and silver prices. In the year 2016, silver has outperformed its precious metal as compared to its peers. Silver has risen about 19.6% on year to date basis while gold has increased at 18% (Woodford, 2011).

(Source: SNBCHF, 2017)

Above given figure indicated that the growth of the silver market is expected to 1005- ton deficit in the year 2016.This figure is higher than the year 2015 deficit of 793 tons (Tejas, 2017). This difference in the deficit is due to the increased demand and tightening of supply in the silver prices. As per the latest research of the experts in the metal segment, the overall physical market is in a small deficit. If we exclude the retail investments in coins and bars, supply is increased as compared to demand. It means that the silver’s performance in the overall year is tied to investment. The global silver demand was balanced due to fall in prices of the silver in the year 2015 (FTC, 2017).Moreover, due to the economic slowdown in the electronics, brazing alloys, solders and photography which use the silver extensively, are the main reason for the weakness in the price of silver. The demand for the silver is increased in the year 2016 due to consumption of solar panels at the global level. It can be forecast that the China alone contributes about 50% to the expansion of the solar industry, which generates significant demand for silver (MarketRealist, 2017).

The costs which affect the third parties due to the vital economic transactions are generally termed as the negative externalities. The consumers and producers are first as well as second parties during the economic transactions whereas, resources, organization, property owner or individual which are affected indirectly referred as the third parties (Stevens and Childs, 2016). This is also called as external cost or spill over impacts. There are several negative externalities which have been identified from the consumption of alcohol that generally includes death, litter, absenteeism, crime, diseases, vehicle accidents, production losses, public spending and NHS costs.

Measures to Reduce Excessive Alcohol Consumption

Social costs for any activity referred to the overall costs associated with different activities which includes both costs which are borne by the society as well as costs which are borne from economic agents (Alexander and Neil, 2017). These costs are also reflected by the prices or changes within the organizations that also includes effective usage of different resources like natural resources, risks or labour capital. If the social costs are more than the purchase or private costs, then the negative externality will be present.

It is also evident that the consumption of alcohol is considered as the negative externality because the purchase benefits for the customers are larger than the different social benefits from the alcohol consumption. The over consumption of the alcohol is resulted in the spill over costs at any location across the globe which are borne by the entire society. The consumption of alcohol is a joyful moment for most of the people who are addicted to alcohol consumption which also resulted in spill over costs for the communities which are generally found at local conditions have certainly enhanced the alcohol consumption (Zhang, 2015). It is also analysed from the current conditions across the globe that consumption of alcohol is affecting the economy of countries which resulted in the failures of market. When the output for equilibrium quantity of the free market is less or more than the output level for socially optimum then the condition for the market failure will occur. The market failure will be resulted to produce more or less number of goods or products and for this case, it is the alcohol.

The negative externality factor can also be defined with the help of graph. Here, the benefits for marginal private are represented by the demand whereas, social costs marginally for the consumption of alcohol is represented by the supply (Johansson et al, 2014). The benefits for social costs are less than the value of MPB as represented in the curve of MSB.