Economic Principles Essay Example

Deakin College/Deakin University MAE101 Economic Principles

Trimester 3.2015

Question 1

a) The concept of scarcity

The concept of scarcity is an economic understanding in which the world has limited resources compared with the unlimited human wants. It refers to the insufficient productive resources that limit fulfilment of human needs and wants. Scarcity involves the requirement of tradeoffs so that an individual obtain more of a given scarce resource. The aspect of scarcity results in competition and pricing is one of the strategies use to control scarcity. The concept of scarcity also affects the billions because of tradeoffs. For example, if a billionaire wants to undermine an economy, the individual will target specific investment resulting in the dollar appreciating by 10% and even though an individual is a billionaire, the individual will not have enough resources to undermine the dollar. Billionaires also participate in numerous charity organisations and activities, buy their contribution to the charity cannot accomplish the worthy causes. The third example is time constraints. The opportunity cost for a billionaire is higher compared with a normal individual. For example, the hourly rate for a billionaire maybe $20 million, which results in a high opportunity cost when it comes to leisure related functions.

b) Fundamental concepts that define the economic way of thinking

In economics, numerous fundamental concepts define the way humans think. The aspect of scarcity and choice are common because of trade-off. For example, resources are scarce, but an individual has to make a choice in allocating the resources. Money and time are an example of scare resources that an individual has to make choices in determining the appropriate strategy. For example, an individual may decide to allocate money to address to a problem arising from time constraints. The achievement of the goal involves some cost, and an individual should not consider costs only from the perspective of money but other valuable components. In thinking in economic terms, understanding the different variables is important in ensuring the right decision is made.

Question 2

  1. The following section presents data for oil, corn and wheat

Table and Graph for Oil Prices

Oil Prices

Economic Principles

Data retrieved from (US Energy Information Administration (EIA), 2016)

Table for Corn and Wheat Prices

Table for Corn and Wheat

1990-01-01

1991-01-01

1992-01-01

1993-01-01

1994-01-01

1995-01-01

1996-01-01

1997-01-01

1998-01-01

1999-01-01

2000-01-01

2001-01-01

2002-01-01

2003-01-01

2004-01-01

2005-01-01

2006-01-01

2007-01-01

2008-01-01

2009-01-01

2010-01-01

2011-01-01

2012-01-01

2013-01-01

2014-01-01

2015-01-01

Source Economic Research (2016)

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b) Comment on the Graphs: Oil, Corn and Wheat

Since 1990, the price of oil has been charging and may be attributed to international policies and happenings. Since 1998, the price of oil has increased considerably and is attributed to the economic development. Oil is an important source of energy resulting in an increase in price because of increase in demand. However, around 2008, the financial-economic crisis occurred resulting in economic development across the world. The lack of economic development resulted in a decrease in demand for oil. The price of oil dropped considerably but when the economic started growing again, the demand increase. The demand for oil changed in 2014 and may be attributed to the numerous happenings across the world. Numerous countries started supplying the world with oil including Nigeria and some Latin countries. The political crisis affected the production of oil and the lack of regulations resulting in oversupply. Due to these numerous processes, the price of oil has continued falling across the world to the current $48 as of 2015.

The movement of corn and wheat, according to Adeyanju (2014), are numerous, but the important component is climate. Changes in climate affect the amount of corn and wheat produced because of speculation and expected demand-supply requirements. Wheat and corn are to some extent, substitute products but the requirements of corn are influenced by an energy source. For example, corn is used as an alternative source of energy meaning that the demand increases forcing the price to increase (Quiggin 2010). The economy also influences the prices because of availability of disposal income and the economic divergent needs of grains especially wheat and corn. When there is economic development, the price of corn and white increases while when there are economic challenges, the prices of these commodities also deeps. Hence, economic situation influences both the demand for corn/wheat and oil.

  1. What is ethanol? Why the demand for ethanol has influenced the price of corn

Ethanol is a product produced through the formation of sugars by yeasts. Ethanol has become an important source of renewal energy and is currently used to power different devices including cars. Ethanol is also produced from different biomass products, such as corns.

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The demand for ethanol affects the quantity supplied and associated price. In a normal situation, the demand is indicated by D1 and increase in demand shifts the demand to D2. The D2 results in an increase in both quantity and price. The price would increase and also the demand would increase. The same scenario is evident in the following graph.

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In a normal situation without the aspect of ethanol, the price and quantity are indicated by curve D1. However, the increase in demand through the use of corn in the production of ethanol forces the demand curve to shift to D2. The shift is attributed to the increase in demand, and economic dynamics has to balance the equation.

  1. Increases in price of corn on price of milk and cheese

Effect on Price of Milk

Corn is used as a raw material for the production of animal feeds. The increase in demand for animal feed made from corn results in an increase in prices. The increase in the price of corn results in an increase in the price of milk because they are directly related.

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Effect on Price of Cheese

In the production of cheese, milk is an important ingredient. Therefore, the increase in the price of milk translates to increase in the price of cheese. Therefore, the increase in prices of corn creates a chain effect in which the prices of both milk and cheese increase.

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Question 3

  1. Australian food going to China would increase the price of food in Australia

In the current Australia market, the demand and supply requirements may balance, but the increase in population increases the demand for a commodity. Exporting the food commodity to China would increase the price of the food because the available stock would decrease. In the local market, the demand will increase because the business individuals target the international market. Hence, an increase in demand results in an increase in the price of the commodity.

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  1. Australian market for beef: with international trade and without international trade

The following graph illustrates the local demand through the initials PA and QA while the international trade is indicated by PT and QT for price and quantity. From the analysis of the curve, the curve shifts to the right where there is international trade while it shifts from right to left when there is no international trade. It is attributed to the increase in demand in the local marketing forcing the prices and quantity to increase.

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Evaluation of welfare effects from moving from “no trade” to “free trade.”

No trade in economic terms is an efficient equilibrium marketer, without noise traders and the structure is premised on common knowledge. Therefore, no business individual has any advantage. On the other hand, free trade business is allowing economic activities to occur across the border without restrictions.

Quantity

The chart illustrates a scenario of surplus in the local market because of variables associated with free trade. Part C of the chart indicates the situation of Australian consumers where there is no trade while Parts (a+b+c+d) indicates the welfare of the consumers with free trade. In the case of Australia producers, Part (a+e) is surplus with no trade while Part e is surplus with free trade. Incorporating the consumers and producers (Australia as a whole), surplus with no trade is illustrated by Parts (c+a+e) while Parts (a+b+c+d+e) illustrates surplus with free trade. Therefore, some of the products and consumers will benefit while other stakeholders will be disadvantaged when it comes to welfare fundamentals.

References

Adeyanju, C 2014, The Top Factors that Move the Price of Corn, Retrieved from http://www.futuresknowledge.com/news-and-analysis/grains/the-top-factors-that-move-the-price-of-corn/

Biofuels Association of Australia, What are biofuels? http://biofuelsassociation.com.au/biofuels/

Economic Research 2016, Primary Commodity Prices, Retrieved from https://research.stlouisfed.org/fred2/release?rid=365

Quiggin,J, 2010, Droughts, Climate Change and Food Prices in Australia, https://www.acfonline.org.au/sites/default/files/resources/Climate_change_and_food_ in_Australia.pdf

US Energy Information Administration (EIA), (2016), The prices of oil, Retrieved from http://www.eia.gov/petroleum/data.cfm#prices