Applying Economics to Current Issues

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Applying Economics to Current Issues

Part A Economic Systems and Government policy

Q# 1. Choose a recent example of a Government policy measure that has been introduced to influence the market’s outcome to the fundamental economic question: What to produce?

The law of demand and supply for a particular products has been inlay in almost all government activities, some of the main issues include the fact that the government relies on the market forces in determining what to produce and how much to produce. Fiscal policies and taxation are the main policy measures that the government uses to determine what to produce. The taxation policy is meant to reduce the level of reliance on gas and petrol. The government is concerned about the green house effect and has increased its taxation on oil and gas. The main problem that the government experienced while using this policy included the resistance from special interest parties and pressure from the OPEC.Q# 2. Choose a recent example of a Government policy measure that has been introduced to influence the market’s outcome to the fundamental economic question: How to produce?Explain the policy measure, and what it was intended to achieve. Comment on any problems that may arise.

The policy measures that the government uses to determine how to produce is the redistribution policy in which the government determines what how to produce with the public interest at heart. The US government uses the redistribution policy to determine which area is fit for producing a particular product. And which method is fit for this work. The government always relies on reviving industries to provide create employment tom its citizens. For example the federal government intervened when the three main out-manufacturers in the country needed bailout. General Motors, Ford and Chrysler have all been having financial problems and the employees were laid out to cut production cost. However, as time passed by, the government had to intervene by giving out load with some companies paying back .some paying and some plunging deep into debt. The federal government has however, failed to realize the amount as it is counting its bailout losses.

Part B Economic Analysis of Contemporary Events.

Oil and gas prices are the main news item that captured the headlines of newspapers and media in the last three years. This was caused by the escalating prices which have been on the increase for a number of reasons. However, the bottom line for news items was that the escalating prices of oil and gas was due to the environmental and economic factors which can only be related to the forces of demand and supply of oil and gas. It is also important to note that the prices of oil and gas have also defied most of the economic projections made by economic analysts.

Boardman, David & David, (1996) argue that some of the main projection about the 2012 is that the general demand for oil in the US will drop; this is based on the weakening economy. The EIA estimates that the volume of crude oil demanded will fall after the strong dollar value in the past two quarters; this is also assumed to affect the general rate of consumption of oil in the country. The modest economic growth projected by (Foster, 2000), the total demand for oil and gas in the US is likely to fall below a certain level upon which the country. These fall in demand s due to the increasing unemployment and the slow inflation that has been lurking over the past few months. With the rate of unemployment in the country, most households are cutting on their general expenses; this makes using family cars a luxury thereby reducing the demand for oil and gas.

The key influencers of the economic condition are likely to change in the final quarter of the year 2012 based on the data provided in the table 1. The demand for gas in the US is as shown in the table below:

Buyer Demand per Consumer

Price per liter Quantity (liters) demanded per week

$3.00 50

$2.75 60

$2.50 75

$2.25 95

$2.00 120

The schedule shows the correlation between the prices of gas in the country and the relative change in the quantity of gas demanded by an average family in the US. When the price of oil and gas in the US was low, the quantity of gas and oil demanded was very high; however, the sudden increase in the price of oil and gas in the country resulted into a decrease in the volume of oil and gas that the country uses. Government increased the price of oil and gas before that market forces came into play by increase the tax paid on oil and gas product, making oil and gas very expensive. The inverse relationship between the price of oil and demand for the same goods is the fundamental law behind oil and gas prices in the country (Foster, 2000).

The Law of Supply

The supply of good and service determines the price of the same good, for example, when the price of gas increased, the suppliers increased the volume the volume of oil and gas that they produced based on the various efficiency issues. However, these same metrics are also at play, when the government intervened. For example, when the suppliers were many, the price charged on oil and gas was very low, however, as the demand increased the prices of the oil and gas increased which then forced some household to stop using oil and gas products,.

Gas Supply per Consumer

Price per liter Quantity (liters) supplied per week

$1.20 50

$1.30 60

$1.50 75

$1.75 95

$2.15 120

The data shown in the table above have been used to develop, the supply curve shown bellow.

These two forces lead to the formation of an equilibrium price at which the prices of oil and gas is agreeable to both the suppliers and the customers. At this market equilibrium, the consumers are willing to pay for what the producers and the government charge to the gas and oil

These changes are likely to affect the general consumption of oil and gas, but the fact still remains that the producers and the customers are in charge of the market. The government intervention to reduce reliance on oil and gas is effective as the number of oil and gas consumers decreased remarkably. The market equilibrium price is $1.50, with a supply of 75 liters per consumer per week (Dahl, 2010).

Changes in Demand and Supply

According to Thurman, (2009), a number of changes in the volume and prices of the oil and gas demanded and supplied by the companies can occur, when this occur, the government will have to intervene. However, a number of forces are still at play, causing shifts in the curves as well as movements along the curves. The shift in the demand curves is caused by changes in the Consumer income, Consumer preference Price and availability of substitute goods as well as the population. These forces are

Quantity (liters)per week

Price per liter Demand 1 Demand 2

$2.00 50 30

$1.75 60 40

$1.50 75 55

$1.25 95 75

$1.00 120 100

You can see this in the graph in figure 4, below. At each price point, the total demand is less, and the demand curve shifts.

On the other hand, when the demand shifted, the equilibrium prices also shifted.

Demand 2 Demand 1 Supply

Quantity (liters)per week Price per liter Quantity (liters)per week Price per liter Quantity (liters) per week Price per liter

30 $2.00 50 $2.00 50 $1.20

40 $1.75 60 $1.75 60 $1.30

55 $1.50 75 $1.50 75 $1.50

75 $1.25 95 $1.25 95 $1.75

100 $1.00 120 $1.00 120 $2.15

These are some of the key issues in the oil industry, it is also important to understand that any change in the prices of oil and gas in the US reverberates to the whole world.

Conclusion

The price increase in oil and gas increased the price of most of the things in the world, leading to inflation. Additionally, if the US does not implement proper fiscal measures to check on the escalating prices, the rate of inflation would increase and major trading blocs would break leading to more economic problem. It is therefore important for the fed to develop and implement policies that would help in minimizing the general impact of the oil crisis, by initiating measures geared at reducing the overdependence on oil and gas product. An alternative source of energy can be the only solution; however this new source should also be environmentally friendly.

References

Boardman, E., David H. & David W., (1996). Cost-Benefit Analysis Concepts and Practice. Upper Saddle River, New Jersey: Prentice Hall.

Dahl, C., (2010). “Review and Critique of Elasticities Used in the World Energy Projections plus Model.”U.S Energy Information Administration, Department of Energy, Office of Integrated Forecasting and Analysis. Washington D.C.February 1, 2010.

Foster,G., (2000). Petroleum Supply and Demand Elasticity Estimates.Presented to the U.S. Department of the Interior, Minerals Management Service inpartial fulfillment of Contract No. 1435-01-99-CT-30996

Thurman, N. (2009). “AppliedGeneralEquilibrium Welfare Analysis.”American Journal of Agricultural Economics 73(5).