Distance Learning College and Training – IOE ACIT Submission Sheet NAME DATE SUBMISSION NUMBER Marta Sobkiewicz 16/02/2013 Assignment 4 Question 1 What are the two main factors affecting demand? The two main factors affecting demand are: - the demands of the individual consumer; which vary with changing fashions, different tastes and conditions. In the market economy the individual consumer decide what is produced and grown and business organisations of all sectors attempt to meet those needs or demands at an appropriate price. The purchasing power of money is a key issue, because people usually operate within a household budget, so they know how much they can afford. Consumers developed “the scale of preferences” which identifies people’s needs with the essentials like food at the top and goods and services seen as luxuries at the bottom. - the demands of the whole market, can be perceived as a demand of a certain population, nation or as a aggregate (global) demand. As with the individual consumer, the given population dictate what to produce and create demand for all services and manufactured products and can back this up with purchasing power. Question 2 Explain the concept of ‘price elasticity’ of demand or supply. Give examples to illustrate your comments. In market economy consumers and producers react quickly to changing conditions of the economy, particularly to price change. Thus both supply and demand extend and contract in a similar fashion to elastic. Price elasticity of demand is the responsiveness of the quantity demanded of a product to changes in its price. Price elasticity can be calculated using this formula: Price elasticity of demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 1 Distance Learning College and Training – IOE ACIT Submission Sheet The demand for a good is said to be inelastic when the response to a price change is less than proportional (less than 1). Food products usually respond little to price change, because they are the top products according to “the scale of consumer preferences”: basic products essential for living. Also products which do not have close substitutes (petrol, certain medicines) or habit forming goods (such as tobacco and alcohol) have inelastic demand. The demand for goods is elastic when there is more than proportional response (greater than 1). It means that changes in price have a relatively large effect on the quantity of a good demanded. This applies to luxury products like confectionery, package holidays, fruit, electronics (iPhones, notebooks). Question 3 Discuss the multiplier and accelerator effects under Keynesian economic theory. Keynes believed that recession could not be solved by any natural tendency in the economy. The multiplier effect is Keynes’s response on how to come out of the recession. According to his theory the government need to inject an extra spending power into the economy to encourage more spending. In contrast to classical school, he advised to lower interest rates, reducing the investment costs, save failing businesses and to pump money directly into market by government investments. The accelerator is any movement of that sort that injects spending power into economy and causes a surge of economic activity such as various interventions: taxes, spending, projects that would provide work and other direct regulations. The multiplier explains the working of aggregate demand by demonstrating how consumption, investment and other variables interact to determine aggregate demand. The Aggregate Monetary Demand increase by what is spent, and it increase again when the money is spent again by others. If the government give an extra injections of spending power (investments), the AMD will rise and in consequence it encourage employment and further spending. 2 Distance Learning College and Training – IOE ACIT Submission Sheet Question 4 Identify the main features of: a) Inflation: - is a process of raising price caused by excessive money supply: moderate inflation occurs when prices rise slowly, galloping inflation takes place in the double or triple figure range, usually accompanied by serious economic problems, hyperinflation exists when prices go to astronomical levels and the real demand for money falls dramatically (in the result of this peoples savings become valueless). It is extremely rare and occurs during times of war or great social upheaval, - it can be harmless for the economy if prices, wages and rents rise in line. However in times of unplanned or unforeseen inflation there are significant effects as: fall in the purchasing power of money (the loss of real value). b) Deflation: - takes place when the general level of prices falls (but not all declines in the prices qualify as deflation – nearly always it is a normal situation on the market that prices for some products or services are falling, while prices for other things are rising), - it is proven to be rare in the latter half of the 20th Century: the time of the Great Depression in 1930s was the last time a widespread deflation occurred. How do these concepts affect business organisations? For business organisations inflation may have various results, both positive and negative: - economy struggling with high or unpredictable inflation makes it more difficult for companies to budget or plan long-term It also discourage investments and savings. Some negative after-effects may occur between international trade partners. Export may become more expensive when fixed exchange rates are imposed, 3 Distance Learning College and Training – IOE ACIT Submission Sheet - so-called “menu costs”: in the high inflation firms have to adjust prices what is involved with additional costs, e.g. restaurants changes their menus more often, - because the prices of goods rise, consumers are prone to buy cheaper substitutes and hence profits of substitute’s producer rise, - lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. The effects of deflation: - as a result of increasing the purchasing power of money consumers can afford more , - consumption and orders from manufactures may be put off in anticipation of lower prices what drive the recession, - it makes manufacturing less profitable, - the costs of borrowing rise in the long-term deflation – investing and real estate’s purchasing become more expensive. 4
