FACULTY OF BUSINESS, FINANCE & HOSPITALITY MANAGERIAL ECONOMICS MBA 6073 Final Assignment Case Study A & B Prepared By: ID No: Prepared for Dr.: Case Study A- The Housing Market Question 1 One factor that has been blamed for the housing crisis is Airbnb. Airbnb describes itself as an online marketplace and hospitality service, enabling people to list or rent short-term lodging including vacation rentals, apartment rentals, homestays, hostel beds, or hotel rooms, with the cost of lodging set by the property owner. City councillors have targeted these short term rentals, saying that many landlords have opted to Airbnb their home, rather than rent out longer term. The growth of Airbnb in Vancouver has been shown below. Explain why a housing market at equilibrium could still have a vacancy rate of 4%. Answer Victoria is still emerging from what could charitably be called a renter’s nightmare. Rental vacancy rates dropped from nearly 3% in 2013 to only 0.6% in 2016, which is as close to zero as it has gotten here in the past few decades. That’s excruciating for anyone hunting for a new rental and combined with our aging rental stock has led to BC having the highest proportion of forced moves in the country, mostly due to renovations and non-payment of rent (Spalteholz, 2020). In a perfect equilibrium, the housing market would have no vacancies. However, one of the requirements of a perfect equilibrium is an instant transmission of information. In the real market, this is not the case. Because of this, even if there is an equal amount of supply and demand, it is difficult for renters to match up with landlords. This means that when someone leaves the rental market, it takes time before that vacancy is filled. Therefore even when supply = demand there can be a positive vacancy rate in the market. Depending on the speed of information transfer, there will be an equilibrium vacancy rate that represents healthy market conditions – without further information we could assume this rate is around the Canadian average of 3.3%. This means that a vacancy rate of 0.6% would have to represent a shortage of housing from disequilibrium. Question 2 In the housing market, prices are slow to adjust, landlords cannot simply raise prices immediately under the Residential Tenancy Act. Landlords can only raise prices when negotiating a new contract. This causes many unjustified evictions from landlords as they want to charge the new equilibrium price. In the short-term, prices stay relatively the same causing shortages or surplus. Assume 9000 new renters enter the market instead of mortgaging homes, show the impact of the changes on a new graph. Explain the impact of both the shock from Airbnb and the shock from less housing buyers on equilibrium price and quantity. Do the shocks work together or oppose one another? Briefly explain this using demand and supply approach? Answer: The increase in renters in the market causes an increase in demand as can be illustrated in the following graph. Again, the magnitude of the shift is given to us. We are told that quantity demanded increases by 9000 rental units at every price. This causes demand to shift from D1 to D2. The new equilibrium E3 results from the intersection between S2 and D2, in this case EP3 = $800, EQ3 = 18,000 rental units We can see that compared to EP1 = $600, EQ1 = 15,000 rental units, E3 has seen an increase in price and quantity. Breaking down the two effects: The decrease in supply caused price to rise and quantity to fall. The increase in demand caused price to rise and quantity to rise. We can see that the effects on price worked together, but the effects on quantity opposed. The end result of an increase in quantity is because the demand shock was greater than the supply shock. In this topic we explained that unless you know which effect is greater, the result of opposing shocks are inconclusive. In this case we can say with certainty that quantity has increased because we know the exact size of the shocks. Case Study B - Government Intervention Question 1 Explain, using supply and demand analysis with the assistance of graph, why the price of sugar has been increasing recently. Answer: According to demand theory, demand is the number of goods bought at a particular place and time with the current price and time (Rumánková & Smutka, 2013). If an item on the demand is affected by its own price (P), income level (Y), and the price of other commodities (X), and assuming a constant elasticity of demand, the demand can be exponentially mathematically expressed in terms of a demand function as Eq. When prices rise, demand reduction, there will be more suppliers, and lead to increased supply. This concept actually refers Supply Act. Supply Act refers to suppliers more willing to sell more products at a higher price, rather than at a lower price. It also said that these suppliers will try to increase production in that period, in order to increase their profits. For example, when the price of sugar is increasing, the quantity demanded will be decreasing while the quantity supplied will be increasing as well. There are indications that demand factors explain why sugar is inelastic. First, complementary products (Ron, 2019). Complementary products such as sugar are often flexible. For example, if the sugar prices, the demand for coffee will decrease. Coffee changing demand curve to the left. It is the price of sugar, because they need to demand a negative correlation between coffee each other at the same time. There are other factors that will affect the elasticity, such as the substitution of the closeness, the proportion of income spent on the good, the time elapsed since the price change. First, substitution of the approximation degree. Sugar is a necessity of goods, it has a weak alternative, therefore considered inelastic demand. Second, the proportion of income spent on good. We spend a very small proportion of sugar daily income. Thus, sugar is inelastic demand. Finally, the time, because the price changes through. Elasticity of demand depends on whether the value of the sugar can live a very long time. In this case, the sugar is inelastic, and therefore a greater elasticity of demand. Instead of sugar, for example, in a long time, consumers will find, because they have no choice but to set the price. When the high sugar prices, supply will be higher, and because providers can earn more profits, while demand will be lower. Therefore, it would result in a surplus of graphics. When there is a surplus of supply over demand, excess quantity quantity certain price. In surplus supply and demand curves represented by the above equilibrium price point. When the presence of excess product oversupply buyers to choose from, you may pay less for goods and services. For sellers, they are working with other suppliers to compete for customers and their prices will fall, but also their sales. Question 2 Justify on how might companies such as Mars and Nestlé react to an increase in the price of sugar in the world scenario. Answer: Sugar prices have reached a record level during the past three years in the world due to the significant decrease in its production in India, Europe and Brazil, while its prices are continuously declining in Russia due to its abundance. Since the beginning of 2020, the price of sugar in the world market has grown by 18%, thereby renewing its highest level in three years, during this month. According to ICE global commodities and financial services exchanges, prices peaked on February 12, when raw sugar pounds reached 15.8 cents. Experts explain this rise in the increasing shortage of this vital substance in the global market, and according to the International Sugar Organization, in the 2019/2020 season the global demand for sugar can exceed the supply by 6.1 million tons, while the experts of the Dutch company expected that this figure to reach 8.2 Million tons (Skelly, 2015). A number of companies operating in the chocolate industry are preparing to inject new investments into the market during the coming period, with the recovery of the economy following the crises that it was exposed to during the past two years, and affected most markets. Chocolate production declined in the past two years at rates ranging between 10 and 50% among many producers, and the market expects exports to recover during the coming period. Local alternatives that tried to take advantage of the high prices of imported brands have recovered, and currently two companies control about 72% of sales in the market, namely "Nestle" and "March." Nestle has announced a 10 percent reduction in sugar in its chocolate products, such as Kitkat, Yorkie and Aero, by next year. Sugar is to be replaced with more quantities of ingredients in chocolate or other non-industrial ingredients, and the caloric intake will also decrease. This means that approximately 7,500 tons of sugar will be used to make other products for the company. Nestle said the move could help her have a major impact on public health (Bundeskartellamt, 2017). Fiona Kendrick, President and CEO of Nestle in the United Kingdom and Ireland, said: "Our brand of sweets has been accepted by audiences in Britain for more than a century, and we know that if we can improve our food products, and provide more options and information to our customers. To have a major impact on public health. " "Nestle is at the forefront of efforts to find and develop new technological means to manufacture better foodstuffs for our customers," she added. And she continued: These innovations will help us reduce the sugar in the candy, and that when combined with other methods more common, such as re-composition recipes and replace sugar with other non-industrial ingredients. Last year, Nestle said its researchers had made a scientific breakthrough by discovering a way to synthesize sugar in a different way, with its use less than 40 percent (Sayid, 2017). The two companies might plan to shrink the size of household name chocolate bars such as KitKats, Mars bars and Dairy Milk in order to reduce the level of sugar in them. Both companies mastered a secret method which uses natural ingredients to alter sugar crystals so they taste sweeter in smaller amounts. The two companies struggling to utilize sugar alternatives in their products. Sugar substitute is a food additive that gives the same effect of sugar on the sense of taste (that it is a sweetener), and it is usually less than sugar in terms of calories. Some sugar substitutes are natural and some are processed. Abnormal alternatives are usually called artificial sweeteners. A class of sugar substitutes is considered a high-density sweetener. They are compounds that have several times the sweetness of sucrose (usual sugar) and therefore need less than normal sugar, and therefore the energy entering the body with food or tea sweetened with sugar substitute is negligible. The sense of sweetness that results from compounds is sometimes different compared to sucrose, so it is often used within a complex mixture that achieves the feeling of sweetness more naturally. All in all, the reaction of the two companies is justified as below: They might shift their production base to those countries where they could get cheaper sugar to check their production costs. They could marginally increase the prices of their output in accordance with increase in sugar prices References Bundeskartellamt, 2017. Fine proceedings against confectionery manufacturers. [Online] Available at: https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Fallberichte/Kartellverb ot/2017/B11-11-08_update.pdf?__blob=publicationFile&v=5 [Accessed 17 April 2020]. Ron, 2019. World sugar supply seen tightening. [Online] Available at: https://www.foodbusinessnews.net/articles/14258-world-sugar-supply-seentightening [Accessed 17 April 2020]. Rumánková, L. & Smutka, a. L., 2013. Global sugar market - The analysis of factors influencing supply and demand. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 6(12), pp. 463-471. Sayid, R., 2017. Nestle is slashing sugar by 10% in its chocolates - but they say it won't change Available the at: taste. [Online] https://www.mirror.co.uk/lifestyle/health/nestle-slashing-sugar-10- chocolates-9985709 [Accessed 17 April 2020]. Skelly, J., 2015. A Bittersweet Future for Sugar Consumption in Packaged Food. [Online] Available at: https://blog.euromonitor.com/a-bittersweet-future-for-sugar-consumptionin-packaged-food/ [Accessed 17 April 2020]. Spalteholz, L., 2020. The Capital Explains The Victoria Rental Crisis. [Online] Available at: [Accessed 17 April 2020]. https://www.capnews.ca/news/rental-crisis-victoria
