Tag: Supply

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Analysis

The Impact of Taxes and Subsidies on the Market Price and Supply of a Product

Introduction

Taxes are a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures. Taxes can be both indirect and direct.  A direct tax is one that the taxpayer pays directly to the government. These taxes cannot be shifted to any other person or group. An indirect tax is one that can be passed on or shifted to another person or group by the person or business that owes the tax.

Taxes

Taxes are placed on the price of a good or service, which leads the consumer to pay more for the good/service. Therefore, the imposition of a tax leads to an increase in the price of a good or service, making it look less attractive to consumers. Moreover, the introduction of taxes also impacts producers, as these taxes are also placed on the factors of production that are used to supply these goods and services. This would eventually increase the cost of production for firms, leading to a decrease in quantity supplied. As a whole, the introduction of a tax on a good/service would increase the market price and decrease the market quantity. As seen in figure 1, the increase in cost of production, led to a decrease in quantity supplied. This is shown through a leftward shift in the market diagram. With the leftward shift from SS to S1S1 we can see that the price increases from Pe1 to Pe2, whereas the quantity decreases from Qe1 to Qe2.

Subsidies

Subsidies are a form of financial aid or support extended to an economic sector, generally with the aim of promoting economic and social policy. It can also be done to ensure that a firm stays in business and to protect jobs as a whole. A subsidy is an amount of money that governments give to encourage producers and consumers to consume or produce a good or service. The amount of money is used to increase the price producers receive, while reducing the price a consumer pays for the product. Therefore, with a decrease in the price, the goods or service would look more attractive to a consumer. And with the money that producers have received they can use it to produce more goods or services. As a whole, the introduction of a subsidy would decrease the market price and increase the market quantity. As seen in figure 2, the subsidies lead to an increase in quantity supplied, which is shown through a rightward shift in the market diagram. With the rightward shift from SS to S1S1 we can see that the price decreases from Pe1 to Pe2, whereas the quantity increases from Qe1 to Qe2.

Conclusion

This concludes that taxes lead to an increase in the market price and decrease in market supply. This means that consumers have to pay more for a good or service due to the increase in the cost of production. On the contrary, subsidies lead to a decrease in the market price and increase in the market supply as the governmental organizations decrease the price that consumers pay through giving producers money to produce more of their goods and services.

Sources

  1. https://saylordotorg.github.io/text_introduction-to-economic-analysis/s06-01-effects-of-taxes.html
  2. https://www.investopedia.com/terms/i/indirecttax.asp
  3. https://www.investopedia.com/ask/answers/060215/how-do-government-subsidies-help-industry.asp
Categories
News

The upcoming market that is destroying livelihoods

Introduction

Sand is the second most used natural commodity, whose relative importance in the global market has increased drastically in the past half a century, due to the substantial increase in demand for materials in which sand is a major contributor. The number of people living in urban areas has more than quadrupled since 1950, to over 4.5 billion today. The UN predicts that another 2.5 billion people will join the 4.5 billion people already living in cities within the next 3 decades.

The increasing demand for sand

Therefore, the demand for sand has increased. An example of this is within the construction industry, where sand is used to provide strength to materials such as asphalt, mortar, and concrete. However, due to the world’s ever-increasing population, there is forever an increase in the demand for sand-based materials used to increase supply for buildings and infrastructure. To meet these demands, many billions of tonnes of sand are used worldwide annually, so much so that a UN report estimated that the global sand use in 2012 alone could have created a concrete wall 27m high by 27m wide around the equator.

Effects of increasing demand for sand

Although sand is associated with its trivial use of constructing sandcastles on holiday as a child, or in the play area at your local park, it is a necessity to keep global river systems intact, a resource that we certainly take for granted. As innocent as sand may seem, the incredible demand for it is causing loss of livelihoods, loss of ecosystems, and is even a cause of death around the world.

As described by an article written by the BBC, in Kenya, the over-dredging of the local riverbeds in poor, rural counties such as Makueni, is leaving some communities without access to drinking water, subsequently leading to the eventual deaths of many locals. Kenya, alongside many other African countries, is known for its seasonal, sand-filled rivers due to its desert biome. When heavy rainfall occurs, the sand allows water to percolate, and therefore acts as a natural store for water flow, providing a water source for the surrounding villages. However, once these rivers are dredged by companies and governments who wish to sell this commodity, only the bedrock — a relatively impermeable surface — remains, causing no water to be stored and surrounding land to be flooded.  It is important to understand that many thousands of people rely on such natural resources of water to live. While companies continue to exploit indigent areas, many are left without the means to survive. 

Furthermore, the increased demand for sand has led to it becoming a highly desired commodity, which subsequently has encouraged unofficial markets to emerge. An example is India’s black market for sand harvesting, which is operated by violent sand mafias. There have been many reports of killings, in a growing wave of violence sparked by the global desire to own one of the worlds’ most under-appreciated commodities. Many hope to purloin sand, through methods of violence in order to export this product in unofficial markets. Based on the law of demand and supply, when there is increased demand, there is an increase in the price. As the price elasticity of demand for sand is relatively elastic this provides mafias and other rogue organizations the power to gain significant funds from the export of such product. 

For some, sand is just a means to an end; a way to exploit yet another non-renewable resource (a skill our population has, sadly, acquired profoundly), but for many, sand protects their village, their livelihood.

Sources

BBC, September 2017. How the demand for sand is killing rivers. Available at https://www.bbc.com/news/magazine-41123284. (Accessed May 2021)

Categories
Analysis

The Economic Consequences of COVID-19

Before describing and diving deeper into the economic impact of the pandemic on the worldwide demand and supply levels, let’s begin with defining both demand and supply. Demand refers to the request made by consumers on a range of goods & services at a certain price over a period of time. On the other hand, supply refers to the provision of these requested goods by suppliers.

Unfortunately, the virus left a scope of countries, cities, and societies facing detrimental consequences, both socially and economically. However, lets discuss the effect of the pandemic on the economies of various nations, specifically a very important component of each economy – demand and supply.

Let’s begin with supply. COVID-19 led to a massive supply shock – a disruption and reduction of production levels of goods & services due to the sudden closure of businesses and factories all around the world.

Conversely, it is argued by many of the world’s professors that the supply shock was of smaller magnitude than the demand shock. Besides decreasing production levels, the closure of businesses and factories led to a loss of many jobs, consequently resulting in a fall of income received by workers and hence, the levels of consumer spending and consumption within an economy.

All of these adverse impacts of COVID-19 on the demand and supply levels of different economic agents led to a state of turmoil for the different businesses, firms, and economies all around the world.