F.4 Economics – News analysis Ⅱ
4C
Ethel Lam (16)
Jacqueline To (30)
Karen Leung (17)
Adapted from the South China Morning Post, 22nd April,2005.
Description of the issue
Export value of Hong Kong household goods (i.e. tableware and kitchen utensils etc.)
has increased by 12% this year, and this rise is expected to continue.
There are 3 factors contributing to the growth in houseware exports, the soft US
dollar, the removal of quotas resulting in an expansion of sales to Europe, and last,
resurgent US economy which leads to an increase in demand for Hong Kong
houseware exports.
However, the houseware firms (manufacturers) face one of the biggest challenges –
the rising price of raw materials, which will undermine their profits.
News analysis
1. The houseware firm is a planning unit, which makes production decisions. The
firms employ different factors of production and produce goods and services to
satisfy human wants. The primary aim of most firms is profit maximization, i.e.
maximize the difference between total revenue and total cost.
2. Manufacturing household goods belongs to secondary production, as it turns raw
materials into finished goods or semi-finished goods. Production is the process of
turning inputs into outputs.
3. Removal of quotas
Quotas put direct restriction on the supply of housewares. A quota is a limit on the
maximum quantity (below the equilibrium level) on goods that can be offered for
sale. Quotas were imposed on Hong Kong houseware exports to protect domestic
goods in Europe.
Now the lifting of quotas makes the supply curve shifts from S1 (the kinked supply
curve) to S2, and the quantity transacted of household goods increases from Q1
to Q2 (refer to figure 1). At the unchanged price level (Pe), excess supply existed
for a short time.
4. Resurgent US economy
Due to the resurgent (rising) US economy, people (Americans) can afford superior
goods like porcelain, ceramic and bone china tableware. So the demand for these
household goods increases from D1 to D2, and the quantity transacted further
increases from Q2 to Q3 (refer to figure 1).
Figure 1 Effect of lifting quotas and resurgent US economy on Hong Kong
household exports
The gain in revenue of the houseware firms due to the increase in quantity
transacted is represented by the yellow area.(total revenue = price x quantity
transacted)
5. Increase in production cost and decrease in profit
Profit is the positive difference between total revenue and total production cost.
(Profit = Total revenue – total cost)
As the price of raw materials rises, the production cost of producing a household
good increases. Hence the per-unit profit of selling a household good decreases.
However, due to an increase in the quantity transacted, there is an increase in
total revenue that is larger than the increase in total production cost. Greater profit
is resulted.