Post on 28-Mar-2023
i) DEMAND AND SUPPLY CURVE OF BANANAS
ii) The demand curve was downward slopping due to the fact
that of income effect. When the price of the
commodity increases, consumers buy less because the
purchasing power of their money will have depreciated. If
the price is plotted against quantity demanded, we get a
downward slopping demand curve. For instance, at a lower
price, a given amount of money will buy more goods than at
higher price, for example ,$100 can buy 10 Lamps at $10 each
while the same $100 can buy 20 Lamps at a reduced price of
$5. Thus the purchasing power can be equated to an increase
in real income and hence is seen as the income effect of
price fall.
Furthermore, a fall in the price of a good makes it
relatively cheaper when compared with competing goods. There
will be probably be some switching goods of purchases away
from the now relatively dearer substitute towards the good
whose price has fallen . For instance, in this situation,
price of oranges may fall making it relatively cheaper
compared to bananas. This reason is called the substitution
effect. Thus why the demand curve slopes downward.
Moreover, the is the law of diminishing marginal utility.
Utility is a term referring to satisfaction derived from
consumption of a good or service. A person buys a good
because it yields him satisfaction. As he buys more of a
good , the total utility is not proportionate to the
increase in his consumption. The additional utility derived
from the unit purchased is called marginal utility of a good
and it is generally accepted that marginal utility
diminishes as consumption increases. A person only buys more
of a good as price falls as indicated by the diagram above.
Furthermore, the demand curve slopes downward due to the
effect season. During winter season, the demand of summer
wear fall despite the price effect. This have got a greater
impact in developed countries for instance in Russia.
Moreover, common sense and ordinary observation tells us
that consumers prefer cheaper goods to dearer ones. This is
because price is often an obstacle which deters people from
buying more of a product. Hence, the higher the obstacle,
the less will be bought by consumers.
Despite the above, according to the diagram above, the
supply curve is slopping upwards. This may be due to the
fact that, an increase in the price usually means that
production will become more profitable and existing
procedures are expected to expand their outputs in response
to rising prices and hence more profits. Hence thus why
there is a rise in the supply curve.
In addition, a rise in supply curve may be due to the
reason that in the long run an increase in price (and hence
profits) would tend to encourage new firms to enter the
industry. A number of supply in the market for example if
new firms enter the industry, the supply increases, hence an
increase in the supply curve.
Moreover, changes in the technology or technical knowledge
tend to increase supply of goods and services. According to
Thomas Malthus population is increasing at a geometric rate
that is 2,4,6,8, whilst food production is growing at an
arithmetic rate that is 1,2,3. So there is need to make use
of technological advancement for instance the genetic
modified organisms. These tend to increase production so as
to match with the population increase. An increase in
production will mean an increase in supply for instance
chicken production. So it is in this context that the supply
curve is slopping upwards.
iii) Market disequilibrium results if the demand price is
not equal to the supply price and the quantity demanded is
not equal to the quantity supplied. For market
disequilibrium, the opposing forces that are out of balance
are demand and supply. The result of the imbalances between
these two forces is the existence of a shortage or a
surplus. Both arises due to the inequality between quantity
demanded and quantity supplied.
A shortage exists if the quantity demanded exceeds the
quantity supplied at the current market price. This
condition emerges if the market price is below the
equilibrium price. With a market shortage, buyers are unable
to buy as much of the good as they would like at the current
price. As such, they are motivated to raise the price of the
product.
On the other hand, there exist surplus, this situation
happens if the quantity supplied exceeds the quantity
demanded at the current price. This condition emerges if the
market price is above equilibrium price. With a market
surplus, sellers are unable to sell as much of the goods as
they would like at the current price causing market
flooding. This, however, motivates sellers to lower their
product price.
The market disequilibrium can be illustrated using the
following graphs of a market for bananas .
SHORTAGE
The graph above shows a deficit being created at $2 price.
At $2 the quantity demanded is 30 bananas and the quantity
supplied is 10 bananas. This is a clear indication of
disequilibrium . The buyers cannot buy all that they want,
for instance in this case they want to buy30 bananas, but
only 10 bananas are offered for sale by sellers. This
shortage, motivates sellers to raise prises. This brought
about the concept of the highest bidder.
SURPLUS
The diagram above illustrates how surplus is created at a $6
price. At $6 price, the quantity demanded is 10 whilst the
quantity supplied is 30 . This indicates a market
disequilibrium and not an equilibrium. The sellers are
deprived of selling all they can offer, for example, in this
scenario, the sellers wants to sell 30 bananas, but only 10
bananas are being purchased by the buyers. This is
unfortunate to sellers to an extent that they allow a price
decree.
Despite the above, for the sake of concluding the above
comparison, there exists a price of equilibrium of $4 and
an equilibrium quantity without shortage or surplus of 20
bananas as indicated below.
EQUILIBRIUM DIAGRAM
1) Money is famously analysed in terms of four functions that
is a medium of exchange, a common measure of value (or unit of
account), a standard of value (or standard of deferred
payment) and a store of value.
In terms of defining money, we have it as a combination of
any liquid or cash assets held within a central bank and the
amount of physical currency circulating in the economy. In
United Kingdom the M0 is referred to as Narrow money. M0 is
the most liquid measure of the money supply. It includes cash
or asserts that could quickly be converted into currency. This
measure is known as Narrow money in the sense that it is the
smallest measure of the money supply for example bank notes
and coins.M0, M1 and M2 fall under narrow money.
Money is also understood in the case of broad money. According
to McConnell broad money is a measure of the money supply that
includes more than just physical money such as currency and
coins (also termed narrow money). It generally includes
demands at commercial banks and monies held in easily
accessible accounts. Components of broad money are still very
liquid and non cash components can usually be converted into
cash very easily. One measure of broad money is M3, which
includes currency and coins and deposits in checking accounts,
savings accounts and small time deposits, overnight repos at
commercial banks and none institutional money market accounts.
This is the main measure of the money supply and is the
economic indicator usually used to assess the amount of
liquidity in the economy as it is relatively easy to track
(Subramanian; 2013).
When money is used to intermediate the exchange of goods and
services, it is performing a function, as a medium of
exchange. It there by avoids inefficiencies of a barter
system, such as the ''double coincidence of wants'' problem.
Money's most important usage is as a method for comparing the
values of dissimilar objects. Thus according to Mc Connell
and Brue (2005) ''money is what money is money does,'' which
generally means anything that performs the functions of money
is money.
Furthermore, according to Blanchard (2006) money as a unit of
account (in economics), is a standard numerical monetary unit
of measurement of the market value goods, services and other
transactions. Also known as ''measure'' or the ''standard'' of
relative worth and deferred payment, unit of account is a
necessary prerequisite for the formulation of commercial
agreements that involve debt. To function as a ''unit of
account,'' whatever is being used as money must be divisible
into smaller units without loss of value, precious metals can
be coined from bars or method down into bars again. It should
also be fungible that is, one unit or price must be perceived
as equivalent to any other, which is why for example diamond
works of art or real estate are not suitable as money.
Furthermore, it should have a specific weight or measure or
size to be verifiably countable. For instance, coins are often
middle with a receded edge so that any removal of material
from the coin (lowering the commodity value) will be easy to
detect. Money therefore, act as a standard measure and common
denomination of a trade. It is thus a basis for quoting and
bargaining of prices. Also necessary for developing efficient
accounting systems, hence ''money is what money does.''
In addition, Whitehead (1982) argues that money function as a
standard of deferred payment. It is particularly distinguished
by some text particularly older ones, other texts subsume this
under functions. A standard of deferred payment is an accepted
way to settle debts, a unit which debts are denominated and
the status of money as a legal tender, in these jurisdictions
which have this concept, states that it may function for
discharge of debts. When debts are denominated in money, the
real value of debts may change due to inflation and deflation
and for sovereign and international debts via debasement and
devaluation.
Moreover, money is used as a store of value. It must be able
to be reliably sowed, stored and retrieved and be predictably
used as a medium of exchange when it is retrieved . The value
of the money must also remain stable over time. Some have
argued that inflation, by reducing the value of money
diminishes the ability of the money to function as a store of
value. Hence problems rises in the functions of money.
Furthermore, there have been many historical disputes
regarding the combination of money's functions .Some argue
that they need more separation and that a single unit is
insufficient to deal with them all. One of these arguments is
that the role of money as a medium of exchange is in conflict
with its role as a store of value. Its role as a store of
value requires holding it without spending , whereas its role
as a medium of exchange requires it to circulate. Others argue
that storing value is just deferral of the exchange, but does
not diminish the fact that money is a medium of exchange that
can be transported both across and time.
2) Money can be classified into notes and coins. It is in two
categories of narrow and broad money. Narrow money is the
money that can be used on day to day bases that is for
transaction purposes. Broad money used for both transaction
purposes and a of savings. A central bank is an institution
that issues currency, regulate money supply, controls interest
rates, oversees financial market and financial system
stability and operations. Many central banks also have an
oversight role for the banking industries in their
jurisdiction, having input into policy and regulation and the
implementation thereof. Central banks may also be referred to
as Reserve banks, monetary authority, state banks.
In controlling the supply of money, central banks uses a
monetary policy.Monetary policy refers to deliberate attempts
to manipulate the rate of interest and money supply in order
to bring about desired changes in the economy. In general
terms monetary policy is used to regulate credit conditions
and the supply of money in order to fulfil macroeconomic
objectives. The overall objective is to improve the standards
of living within the economy. There are two main categories of
monetary policy instruments. On the one hand there are those
instruments of policy that are designed to have a general
effect on the financial sector and through that sector, on the
whole economy. On the other hand there are instruments of
control that are specific in their effects on particular
financial organisations. These include instrument for general
control and instrument of specific control.
General control instruments affect certain key interest rates
or the authorities may directly engage in transactions in key
financial markets in order to affect credit throughout the
economy.
This may be through open market operation (OMO). ‘Open market
operations’ refers to the buying or selling of government
securities (bonds or treasury bills) by the central bank to
the public. The principle is to exchange ‘paper assets’ for
‘cash.’ For example, if there is excess liquidity in the
market the central bank will enter the market selling
government securities. People will exchange their cash for the
securities and hence the excess liquidity is mopped up.
Conversely if there is a shortage, the central bank will enter
the market buying the securities from the public thereby
injecting liquidity into the market.
Furthermore, there is discount policy or accommodation window.
The discount policy refers to variations in the rates at which
the central bank discounts first class bills and other terms
at
which the central bank, as a lender of last resort, advances
funds to certain domestic parties in the money market, usually
to enable those parties to make good a reserve asset
deficiency. Holders of first class bills such as treasury
bills can apply to the central bank for the maturity dates of
their bills to be brought forward. This is granted on
condition that the holder will receive an amount less than
what they were going to receive upon maturity of the bill.
Thus the central bank will ‘discount’ the bill. For example if
an investor holds a $100m bill that will mature in the next
three months, the investor can apply to liquidate the bill
today but instead of receiving $100m the central bank will pay
an amount less than $100m for example $80m. The bill would
have been discounted by 20% which is the $20m. Discounting
increases the liquidity situation in the market. Thus if the
central bank is pursuing a tight monetary policy it will
increase the rediscount rate or the central bank can close the
accommodation window facility. Hence, a money regulatory
system by central institutes.
On the other hand there is instrument of specific control,
this have their impact on specific financial institutions and
that impact is in the short-term restricted to those specific
institutions.
Under this, there is Moral suasion or moral persuasion
consists of central bank requests or admonitions to banking
institutions to act or not to act in certain ways and it may
cover any of the bank’s activities e.g. lending policy. Moral
suasion in not compulsory and hence banks may not agree to
change. However because of the nature of the relationship
between the central bank and these banks moral suasion has
been successfully implemented in Zimbabwe.
Furthermore, The central bank can wish to make credit tighter
and call specifically for a special deposit from commercial
banks. This dampens optimism and so curtails business
spending.
In addition , according to Carlton and Perloff, ( 2005) said
that there is Ceilings and directional controls. This refers
to lending ceilings and selective credit controls. It involves
the authorities imposing formal or informal maximum or
minimum levels of amounts banks can lend to certain specific
borrowers or categories of borrowers or for certain specific
purposes.
There is Variable reserve ratio, this refers to attempts to
control credit creation by commercial banks by manipulating
the cash ratio. From the illustration on the credit creation
process we concluded that the smaller the cash ratio, the
greater the banks’ ability to increase money supply and vice
versa. For example the central bank can increase the cash
ratio if it wants to reduce the level of money supply growth
from the creation of credit.
According to Miller (1999) another way of controlling money
supply is when banks are required to maintain reserve cash
balances with the Reserve Bank for management purposes. These
reserves can be varied depending on the monetary policy. For
example with a tight monetary policy the reserves can be
increased so as to reduce excess cash in the market.
REFERENCES
Blanchard, O.(2006). Macroeconomics. New Delhi: Peason
Education Inc.
Carlton, D. W and Perloff, J. M (2005). Modern industrial
organisation. International edition.
McConnell, C. R. and Brue, S.L. (2005). Economics Principles,
Problems and Policies. New York: McGraw Hill.
Miller, R. L. (1999). Economics today and tomorrow. New York:
McGraw Hill.
Suberamanian, S. (2003).Factors underlining the definitions of
broad money :An examination of recent U.S.A monetary
statistics and practices of other countries.IMF Working Paper.
Whitehead, G. (1982). Economics made simple. London: Heinemann
Ltd.
4) The economic problem is sometimes called basic
fundamental economic problem. It is one of the fundamental
economic theoretical principles in the operation of any
economy. It asserts that there is scarcity meaning there is
finite resources available and are insufficient to satisfy
human needs and wants. The question then becomes how to
determine what is to be produced and how the factors of
production (such as capital) are to be allocated. Economics
revolves around methods and possibilities of solving
fundamental economic problems. The economic problem can be
divided into different parts that is, problem of allocation of
resources, problem of economic efficiency, problem of
employment of resources and the problem of economic growth.
The problem of the allocation of resources arises due to the
scarcity of resources and refers to the question of which
wants should be satisfied and which should be left
unsatisfied. In other words, what should be produced and how
much to produce. More production of a good implies more
resources required for the production of that good, however
the challenge still remains that resources are scarcity. This
statement mean that if an economy decides to work with the
scarce resources to increase production of a good, it has to
withdraw some resources from the production of other goods. In
other words more production of a desired commodity can be
made possible only by reducing the quantity of resources used
in the production of other goods. For instance ZINARA may
decide to resurface Harare-Bulawayo road at the expense of
Harare- Beitbridge simply because the resource available will
be limited to undertake the work of Harare-Beitbridge road. So
it is in this context that one may note how resources may
shift on to another project. However, this have got a greater
impact on the opportunity cost. Thus economic is therefore to
find a possible solution to this problem.
Furthermore, the problem of allocation of resources also deals
with the question of whether to produce capital goods or
consumer goods. If the community decide to produce capital
goods, resources will have to be withdrawn from the production
of consumer goods. However, in the long run the investments on
capital goods will augment the production of consumer goods.
Thus both capital and consumer goods are important. However,
the problem is on determining what the optimal ratio of
production between these types of goods. Hence, economics have
come as an emergence aid to this problem.
In addition, there is the problem of economic efficiency.
Resources are scarce and it is important to use them as
efficiently as possible. Thus, it is essential to know if the
production and distribution of national product made by an
economy is maximally efficient. The production becomes
efficient only if the productive resources are utilised in
such a way that any reallocation does not produce more of one
good without reducing the output of any other good. In other
words, ''efficient distribution,'' means that any
redistribution of goods cannot make anyone better off without
making someone else worse off. Hence, the problem of scarcity
of resources have made it impossible to deal with economic
efficiency, but economics should find a possible solution to
this problem.
Moreover, there is the problem of full employment of
resources, it bases also its argument on the scarcity of
resources. The problem question is on whether all available
resources are fully utilised and this argument is the
important one. A community should achieve maximum satisfaction
by using the little resources that we have in the best
possible manner, resources should not be wasted but utilised
fully. However, in the capitalist economies, the available
resources are not fully utilised. In times of depression there
are many people willing and wanting to work who go without
employment . It supposes that the scarce resources are not
fully utilised in a capitalist economy. Hence, in this
scenario resources are not being fully utilised, thus a
problem in the economy, on the other hand economics is an
answer to this problem.
In addition, the economy faces a challenge of economic growth.
If the productive capacity of the economy grows, it will be
able to produce progressively more goods which will result in
a rise in the standard of living of the people in that
economy. The increase in the productive capacity of any
economy is called economic growth. However, there are various
factors affecting economic growth. This have been discussed by
numerous models including the Harrod-Domor model, the
Neoclassical growth model of Solow and Swan and the Cambridge
models of Kalder and Joan Robinson.