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Learning Corner
Eco Lesson of The Week : Determinants of Supply and Demand
The intersection of the supply (upward sloping) and demand (downward sloping) curves is called the equilibrium pt. This point represents the price at which goods are sold and purchased at the market. However,
this equilibrium point may change depending on a shift by the curves. The curves may shift one at a time or at the same time both either upwards or downwards. An upward
shift by either curve would raise the price, while a downward shift would lower it.
What we want to know this week is what causes these shifts in supply and demand, called their determinants.
The Determinants of Supply
1. Costs of production
2. Profitability of alternate goods in supply
3. Natural occurences
4. Expectations of future prices
5. Profitability of goods in joint supply
6. The number of sellers
The Determinants of Demand
1. Tastes, fashions, preferences
2. The number and price of related goods
3. Income
4. Expectation of future prices
5. Population
By: Clay Bennet (The Christian Science Monitor, Boston)
By: Thomas Boldt (The Calgary Sun, Alberta, Canada)
Friday, October 12, 2007
Power Up: Sheikh-ant Do That! (Sheikh Can't Do That)
Power Up: Sheikh-ant Do That! (Sheikh Can't Do That) by Kathryn Pua
Energy is one of life's staples. We need food to give us energy to do the day's tasks and electricity to power up our various technological devices and machines (most of which we can't imagine living without). We need oil to power up our cars so we can drive to different places. The fact of life is that we need energy in practically everything we do-- life just wouldn't be the same without it. In most countries, oil and electricity-- due to the huge capital needed for the equipment and operations-- are at the mercy of monopolists and oligopolists. In particular, most of the world is at the mercy of OPEC for it needs oil to sustain not only cars but a lot of machines in different industries. Add to that the fact that most energy sources are non-renewable and difficult to find substitutes for. Despite the prices of oil rising, we can't help but continue our consumption as we see it as a necessity in life. The article "Barrelling Upwards" detailed how oil prices hiked up ($82.38 per barrel) due to a decision by OPEC to increase production by 2%, due to the worry that supply might not meet increasing demands, and lastly due to the market's reaction to the Federal Reserve's decision to cut interest rates. Most people see it as in inelastic good-- such that price increases will only decrease consumption by a small amount because consumers aren't very responsive to price changes. This attitude is better explained by the role of oil, electricity and all other forms of energy in our life rather than an improved economy or a higher income.
Science has come up with various renewable energy sources but most of them are either impractical, too expensive or inaccessible to the common man. It is in this context that Britain sees fit to turn to the sea for power, for renewable energy. According to the article "British Sea Power" from The Economist, Britain has geared its efforts at developing an alternative source of energy for the future, a marine-energy industry. The plan is for a wave farm where 30 machines will generate up to 20 megawatts of power. This endeavor, however, is not an easy one. The cost are no small amount and the technology on wave power is still relatively immature. There is also the issue of fluctuating power though it isn't a main one, given that rough seas and tides are there almost everyday of the year. However, costs can be offset in mass production, as economies of scale shall be put to work. Although the costs of today are a gargantuan amount, the benefits that the future will reap will more than make up for the costs of today.
In light of this, the Philippines too has had a few successes in the realm of renewable energy sources. According to my research, we have biomass (from coconut, rice hulls and sugar), geothermal (in Leyte,Albay, Laguna), hydroelectric (Pulangi, Agus and other rivers), solar (Northern Mindanao) and wind energy (Masbate, Romblon, Palawan, Batanes, Catanduanes, Marinduque, etc.) at various farms and plants. Yet the sad reality is that we are helpless at the hands of Meralco; we still use relatively the same amount of electricity despite constant price increases. Despite the presence of substitutes, because they are not always readily available (most of the renewable sources lie in the outskirts of town or in provinces), we urban folks have no other recourse but to depend on Meralco. We see at work here the reality that the consumer has relatively no power if the good has barely any substitutes (particularly for us urban dwellers). Although the government has more than once argued that there is barely budget for research and development of these alternative sources of energy, they should still allocate funds to these, for as said earlier the benefits will be reaped in the future-- not only in terms of costs but also in terms of the environment.
Aside from electricity, another staple source of energy is oil. Here, the consumer is once again relatively powerless as oligopolists hold most of the market and can mostly control production and prices. The article in The Economist entitled "Sheikh Up" details how the cartel is back in control for the time being. They boosted up their production and increased oil prices consequently. This is opposed to their decreasing their production last year to signal its desire to stop prices from falling below $60 a barrel. OPEC reasoned out that increased prices were implemented to regulate demand, especially in countries like China who have an unimaginably huge demand for oil. Also due to fears of possible shortages due to natural calamities, prices once again rose. Time cleared away those fears but OPEC still kept its prices up. At the present, OPEC is in control of oil and its prices and has the decency to increase supply as well if occasion calls for it. The article says that despite meetings with OPEC, people must still not expect much from OPEC. It ends with a short analysis that the effect of high prices constraining demand will soon surface-- despite recent trends of oil consumption in China. It predicts that OPEC's control over oil now will not likely last for the above-mentioned reasons.
Based on what I've learned in class, the OPEC's behavior truly paints a picture of a typical oligopolist. As profit-seeking firms, it decreases production when prices are expected to be low, indicating its desire to prevent any further decrease in price. Recent oil consumption trends seem to be defying economics-- yet they wouldn't be called laws were it not for their viability and time-tested truths. As such the laws of economics will soon prove itself right. I believe as well that if the OPEC continues to raise its prices unreasonably, people will get creative and their industry will lose loyal customers and will be replaced by newer, better and more efficient sources of energy. With unreasonably high prices fro energy, people will be forced or pushed to try alternative and cheaper sources of energy something renewable and something beneficial for the consumer and Mother Earth. In the end, their actions will have adverse repercussions on economic growth and they will have nothing else to blame but their greediness.
As for us consumers, I truly believe we have to power up and assert our power. We can't be like dogs on a leash-- on OPEC's or Meralco's leash. We should support contemporary sources of renewable energy. And should we have the means to, either now or in the future, we should financially or intellectually support researches on and actual implementation of these renewable sources of energy, for our future and the future of generations to come!
Source: http://www.economist.com/opinion/displaystory.cfm?story_id=9804057 and http://www.economist.com/displaystory.cfm?story_id=9827989 and http://www.economist.com/world/britain/displaystory.cfm?story_id=9833092
Name: Leontief Lovers Home: Manila, Philippines About Me: people wonder why we are called leontief lovers. it's simple, in eco, there is a canonical form of utilty and production function called Leontief Preferences / Technologies. In a two good/input world, you always would need the other good/input in order to remain satisfied/have the ability to produce... in other words, you will never substitute one good for another, you need to consume/use both goods at a fixed proportion at the same time... LIKEWISE, in our blog, WE WILL NEVER TRADE NOR SUBSTITUTE ECO FOR ANOTHER! See my complete profile
An economics professor and a student were strolling through the campus.
"Look," the student cried, "there's a $100 bill on the path!"
"No, you are mistaken," the wiser head replied. "That cannot be. If there were actually a $100 bill, someone would have picked it up."
Feudalism: You have two cows. Your lord takes some of the milk. Socialism: You have two cows. State takes one and gives it to someone else. Communism: You have two cows. State takes both of them and gives you as much milk as you need. Bureaucratic Communism: You have two cows. State takes both of them and gives you as much milk as the regulations say you should need. Bureaucracy: You have two cows. State regulates what you can feed them and when you can milk them. Then it pays you not to milk them. After that it takes both cows, shoots one, milks the other and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows. Fascism: You have two cows. State takes both of them and sells you milk. Nazism: You have two cows. State takes both of them and shoots you. Liberalism: You have two cows. State dosen't care whether you exist, let alone your cows. Capitalism: You have two cows. You sell one and buy a bull.
PRICE IS IMPORTANT! (disclaimer: may be a little off-color)
"My Dear, would you go to bed with me for a million dollars?"
"Well, yes, I guess I would."
"How about $100?"
"What kind of person do you think I am?"
"My Dear, we have already established that. We are merely haggling over the price!"
natural calamities, prices once again rose. Time cleared away those fears but OPEC still kept its prices up. At the present, OPEC is in control of oil and its prices and has the decency to increase supply as well if occasion calls for it. The article says that despite meetings with OPEC, people must still not expect much from OPEC. It ends with a short analysis that the effect of high prices constraining demand will soon surface-- despite recent trends of oil consumption in China. It predicts that OPEC's control over oil now will not likely last for the above-mentioned reasons. 
