Sunday, February 14, 2010

Unit 2 - Demand and Supply and Mobile Telephoney in India

This unit started off by very quickly explaining the basics of supply and demand graphs. It discuss concepts of individual and market supply and demands.

Effectively the individual demand curves is the quantities a person/firm would buy at variable prices. Market demand curves is the total quantity of a product that all buyers within the market are willing to buy at various prices. The demand curves will shift either left or right for various reasons such as changes in price of a substitute product, price of a complementary product, buyers income, number of buyers in the market, information available to buyers, expectation of future variables. Another reason for the curve being able to shift to the left or right is the availability of credit, which directly effects an individual, a firm or market's buying power. I believe that this is one of the main reason why there has be a large inflation in New Zealand's property market over the last few decades because in general banks and lending finance companies have continually made it easier for an individual, firm and market to borrow larger amounts of money to invest in the property market, which shifted the supply curve to the right as more people/groups could afford more expensive properties.

The supply curves are very similar to the demand curves. The most noticeable difference is that the supply curves generally have a positive slope, whereas the demand curves have a negative slope. The market supply is the total quantity of the product that all sellers in the market are willing to sell at various prices. The individual supply is the supply that of one seller. One thing which I believe is an exception to the positive slope of the supply curve is if a company has a very niche product which people buy for "social status" like a prada bag, the company will want may want only sell a little amounts of the bag at a very high price, in which they might meet the demand curve for them, whereas if they produced a larger quantity they may be more comfortable selling these at a lower price and therefore creating a negative sloped supply curve.

The major thing I think about is that the curves are generally are not going to be linear relationships because of many reason. For such for a demand curve that is derived from tastes, income etc. there will be many people that for say value receiving foxtel television at for say a price of $90/month, however there will be a large % drop off of customers for a 10% price increase and then a less % drop off for a further 10% price increase, therefore meaning the demand curve takes on a more of a hyperbola shape in this example.

In a perfect world there is excess supply or excess demand for a product, the market will find the equilibrium. However sometimes these excess supplies or demands are regulatory forced. Taxation and subsidies will shift the supply curve left and right respectively. The New Zealand government is looking at decreasing income tax and increasing GST which I believe will move the supply curve to the left initially as the companies will try pass on the increase in GST in there pricing. However, over the long term the supply curve will probably come back to the left generally as companies will not give pay increase or very little pay increase because they believe their employees got an "effective pay increase" with the decrease in income tax (also the company tax will decrease as well, which will also put pressure on pushing the curve to the left). The income and company tax will make production cheaper and therefore should bring the curve back over to the left.

Inelasticity means that quantity does not change much for the demand and supplies curves when the price changes along the curves, whereas elastic curves do. The perfect example of an elastic demand curve was the case study of Mobile Telephoney in India. It was obivous that the when the phone prices and tariffs were reduce there was a huge increase in the amount of mobile phones taken up in the India. It was reported that a 10% price increase is would reduce demand by roughly 21%.

It was also noticeable in the case study that the increase in mobile phones decreased the amount of fixed phones (per mobile phone). this indicated that the demand curve for fixed phones may of shifted to the left as a substitute product entered the market. However, it would of been better to see fixed phone lines quantity outright rather than per mobile phone. As the increase in mobile phones alone could of caused the number of fixed phones per mobile phone to decrease.
There appeared in the article that there was a rise in the general publics income would of moved the demand curve for mobile phones to the right. Also another effect of income rises is that the demand for higher quality mobile phones also moved to the right.
The phones became more of a necessary in India with a elasticity of under 1. The mobile phone providers offered pre-paid cards and other features/services which appears to be one of the reasons for the termendous growth in Mobile phone subscriptions.
Back to notes; the elasiticity of a curve depends is measure of sensitivity of one variable to another. It is not the slope of the curve. Note that elasticity can be different on the same curve. The degree of elasicity normally depends on if the customer views the product as a necessity.

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