13 Oct 2009

Sample Essay: An Equilibrium Point in a Free Market

Free market equilibrium is indeed very good for the rest of the public but the government would intervene in cases wherein it involves the abusive practices of certain corporations that might be holding important monopolies. For example, if a company has a monopoly over the water supply of a certain area and raises their charges and fees without any reason at all except for the fact that no one can afford to complain about it, the government’s interference would provide a fair solution and protection to the ordinary public. In cases other than this, the government would do well to step back and let the strongest and most competitive business entity dominate the field they are in. this will ensure that the most efficient in making use of their resources are handsomely rewarded. This will translate into better goods and services for the rest of the public.

a) The price of substitute product B rises dramatically – Price of product A will remain the same but demand will increase.

b) Consumer’s income decline (Assume A is a normal good) – Price of A will decline and so will the demand

c) A ban is placed on complimentary product C – Price of A will increase and so will demand

d) Taxes are imposed on the sale of A – Price of A will increase and demand will decrease

f) A price ceiling of A is set at $5 per unit – The demand will increase or decrease depending on whether the price ceiling is higher or lower than the previous market rate.

If both supply and demand decrease, one can predict the direction of change of quantity but not of price. If supply decreases, but demand increases one can predict the change of price but not quantity. Explain.

If both supply and demand decrease, the direction of quantity can be predicted since they are both decreasing already. The price on the other hand can’t be predicted simply because the degree of change in the supply and demand has not been quantified if it is viable to increase or decrease the price. The statement is that both supply and demand decreases, there was no indication on whether it was proportional to the market levels that they previously came from. If there is a discrepancy on the proportions between these two variables, then the price will change naturally according to the direction on which variable has been out of proportion. If the supply has decreased bigger than the demand, the price will increase like normal. If the demand has decreased bigger than the supply, then the price will decrease like a normal situation would.

A) Under what condition will the producers bear the burden of an exercise tax

The producers will bear the exercise tax if their profits are too great for the tax to create a considerable dent.

B) Under what condition will the consumers bear the burden of an exercise tax

The consumers will bear the exercise tax if they feel that it is worthy of the price they paid. This is usually applicable to luxury products. The prices are of no importance to the high net worth individual. What matters is the satisfaction that they can get.

5.The argument of the community residents of lesser revenues because of the decrease in the fees that the recreation agency will be implementing will only happen if the number f visitors that visit the park will be the same. This will not happen if there is an increase in the total number of visitors to the park as a result of the lower fees. The difference in smaller fees will be compensated for by the bigger number of visitors. This will not happen only if there are no attractive scenery in the parks that is capable of drawing in visitors from a lot of places.

6. When government imposes prices to help any particular group, there are always negative results. In the case of the rental business, if the government will impose lower rent prices to help the tenants, there will be fewer and fewer landlords willing to lease out their properties and might consider turning it into other forms of commercial properties.

The final result is the disappearance of a major portion of willing landlords. It makes the problem of housing the rest of the public without properties worsen even more. This is very far away from what the government intended to do in the first place. The private sector or the land lords in this case has to be properly compensated in order for them to continue giving out excellent services in the property leasing business. It will also help entice them to continue developing potential properties that can be used for rental purposes.

On the other hand, if the government will impose prices that will benefit the landlords there will be lesser tenants willing to rent out spaced from these property owners. The tenants will most probably seek out other options aside from renting. The most viable option would be for them to finance their own homes or take out a loan and construct their houses in case there are no available houses for them to buy. The average tenant will realize that the payment they make in apartments or other property leases are several times that the mortgage they will pay on their own properties. The final result will be the lost of business on the side of the landlords. Instead of creating more profits by creating an artificially high rent imposition, there will be no willing client for their business.

In both situations, there can be benefits to both sides only if there is a balance of their needs. The only to decide on the fair price would be to let the landlords handle the pricing of their properties. The tenants should also be left for themselves to decide whether or not they are paying a fair price. The market will reach its equilibrium as they are left alone since both sides of the party will be influenced by the degree as to which the other side will be willing to accept their demands. The rent prices will be determined by the degree of demand and supply that are present in the market. It regulates itself automatically.

7. Rent controls as well as minimum wages are so popular publicly because they are in favor of a huge number of the population. This is especially true in the case of the minimum wage imposition. The ordinary citizen will be hard pressed to live a comfortable life if they are to be totally at the mercy of the market forces. It is true that the economy would be better off if they are left in the hands of the business owners and not the government. The issue of minimum wage on the other hand is subject to the unreasonable manipulation of the business owners. It is possible that they will give a wage so low that the workers will not be able to live decently with it. This can happen especially because of the fact that the labor market might be overflowing with laborers willing to take a less than minimum wage. This is where abuse and inhuman treatment of business owners to the workers begins to happen. This is the reason why the government has to step in because the very lives of the common masses are at stake.

8. An equilibrium point in a free market is also considered as the socially efficient point. This is considered as a socially efficient point because both sides of the economic situation, the provider and the consumer agree to the price that is set. This means that there is no side having an advantage of the situation unfairly. If there is a price ceiling created by the government below the equilibrium point, inefficiency exists. This is because one side of the economic transaction, either demand or supply is sold at a price lower than what is expected. For example, if the rent prices are controlled by the government to favor the tenants, the landlords will be suffering from an artificially created low return to their investments. This is the inefficiency created. On the other hand, if the rent prices are too high, then the tenants of a property will suffer from an artificially created excess expense.

9.Income is the amount of compensation that a worker will receive for a specified time period, usually two weeks or a month. It is also known as salary. It affects the supply of labor depending on the amount that is offered. The higher the income offered by a business firm, the greater the supply of labor for them will be. This is naturally the opposite if the income level offered is low. The substitution effect is the changes that are connected in relative to the price of goods. The kind of effect that it shows is somewhat the same effect that compensation has on the supply of labor. If the prices of goods are increased, the consumer will have no choice but to choose a cheaper alternative if they still want to consume the same amount of goods. Only the type of good is changed. This is why it is called a substitution effect. It shows the same type of effect that a lower compensation will have on labor available, it decreases it.

10. a) The consumers indifference curves gets further and further away from both the x and y axis. This is what happens when the consumers are getting indifferent to the price increases of the goods.

b) The budget line will rise on the point where the toll fees are indicated on the line. This shows that the item on that line have rised in comparison with the rest of the other items.

c) Tolls on roads are technically not taxes. In reality they are the same as taxes because the government will be using the excess income from the tolls for other purposes. The toll fees generated are naturally used for the maintenance of the roads that the public is using. The kind of items that the government will be spending the excess toll fees on, are totally under their discretion. This makes the toll fee a tax in reality.

11.a) draw a person’s budget constraint with income guarantee

b) draw a new budget constraint with an increase in income guarantee but with a reduction rate of 75%

The new budget can be considered as the move of BC2 to that of BC1. Since the income is being reduced, the person has no choice but to choose cheaper alternatives when they are out shopping for their needs.

c) Which of the two income guarantee programs are likely to discourage work? Explain.

The program that has an increase in income but with an extremely high reduction rate will be the one that is likely to discourage work. If the two are computed to their lowest possible rate if reduce, the one with 75% reduced rate comes to $2,250 while the other one with a 50% reduction rate comes to only $3,000. This means that the lower income guarantee program is actually offering more income for the worker since they can’t be reduced drastically.

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