Demand Curve Shifters and Elasticity

Factors Shifting the Demand Curve

• Technological advances can decrease demand; restaurant dining is declining because food delivery apps save consumers time and inconvenience, making 'take outs' a substitute to traditional dining
• Demand can decrease due to innovation, print journalism is declining with newspapers being substituted by more popular and cheaper online articles
• The coronavirus pandemic has decreased demand; border closures reduced demand in the aviation industry, causing price drops and companies to put workers on furlough
• National lockdowns during the pandemic have increased demand; E-commerce businesses and Amazon saw sales and profits soar due to consumers being unable to shop in brick-and-mortar stores
• National lockdowns have increased demand; Peloton, the producer of exercise equipment saw its services skyrocket because gyms were closed. Revenues rose by 172% to $607 million with increases forecast for 2021.

Price Elasticity of Demand

• Price elastic goods include furniture stores and motor vehicles, with many competitors and substitutes available to consumers. A price increase triggers a proportionally larger fall in demand
• Price inelastic goods include electricity and water industries, as natural monopolies, with few substitutes available. The price increases cause a much smaller fall in demand
• Perfectly elastic goods are firms such as book stores which are set up as e-commerce and brick-and-mortar stores and if one store raised their prices, demand would theoretically fall to zero
• Perfectly inelastic goods are lifesaving drugs that would be bought regardless of price, and yields a vertical demand curve
• Unitary price elastic goods are those where quantity changes in proportion to price, such as clothing

Factors Shifting the Supply Curve

• Trade deals may lead to a decrease in supply; the UK's deal with the EU meant tariffs on UK imports and exports, impacting the supermarket industry by reducing the supply of fruits and vegetables and boosting prices
• Houses deemed uninhabitable due to natural disasters may lead to a decrease in supply; a falling supply results in higher house prices
• Innovation increases supply; the 'digital revolution' in the early 2000s increased supply chain efficiency, lowering production costs, and lowers prices

Price Elasticity of Supply

• Goods supplied are PES elastic when plentiful spare capacity leads a firm to offer more of a good/service if prices rise without operating too close to their production possibility frontier (PPF).
• Housing in prime locations exemplifies perfectly inelastic goods; the Green Belt policy in London keeps the housing supply fixed regardless of price offered

The Objectives of Firms

• Moderna aimed to profit maximise; after discovering a COVID-19 vaccine, vaccines were sold at the highest price
• Pfizer had an ethical objective; vaccines were distributed for free to curb COVID-related deaths
• Lush has ethical objectives; cosmetics not goods tested on animals enhance the brand image, increasing market share, and allowing higher prices and profit maximisation
• British Gas aimed to profit maximise; in February 2020, the minimum price of gas meter top-ups was raised, resulting in backlash from customers. As a result, the firm reversed its policy to maintain market share
• Companies in a pandemic aim for survival; Firms shut down factories and had to place employees on furlough in order to reduce costs

Examples of Market Structures

• Perfect Competition: the agricultural industry exemplifies perfect competition. Farming in India accounts for nearly 55% of all jobs, around 120 million people, land possesssion and most farmers homogeneous
• Monopolistic Competition: the fashion industry has low barriers to entry. Brick-and-mortar clothing stores are declining due to cheaper online options, and the existence of brand differentiation
• Supermarket industry in the UK is an oligopoly; the Big 4 (Tesco, Morrisons, Asda, and Sainsbury's) own over 70% of the market share. High barriers to entry exist to prevent new entrants from seizing any market share
• Duopoly: Boeing and Airbus are an aerospace duopoly; holding over 90% of the market share, they are in constant competition due to profit-motives and geopolitical factors (Airbus is European-owned, Boeing is American-owned)
• Monopoly: Google is a prime example, because; since 1998 Google seized 70% of the market share for search engines, Apple and Amazon also possess a high level of monopoly, evident with Parler being banned

Barriers to Entry

• Government legislation is the highest; the Financial Services Authority (FSA), used to approve firms wanting to set up stock exchange
• Amazon and Apple have monopoly power; operating a market and competing in the market enables the promotion of in-house product
• Intellectual Property Rights, IPRs are essentially copy rights; pharmaceutical companies use these to maintain monopoly powers
• Concerns about climate change leads people to be more eco conscious; climate change gives rise to electric cars and more regulation

Contestability

• Technological advancements have lowered barriers to entry; Stadia, the gaming subsidiary of Google, minimises cost by using technical economies of scale compared to Xbox and Playstation
• To maintain power, Xbox and Playstation enforce strategic barriers to entry like predatory pricing, stunting the growth of other entering firms.

Labour Market

• In August 2020, the UK unemployment rate rose to 4.9%; consumer demand and investment greatly declined
• Prior to the pandemic, the US had its longest economic expansion, until an economic reset with the Great Depression reaching a 14.7% unemployment rate

Trade Unions and Discrimination

• The Equal Pay Act (1970) in the UK, which prohibited discrimination regarding salaries
• Milton Friedman and Margaret Thatcher frowned upon the idea of; can raise cost of production which can lead to cost-push inflation
• If there are issues that aren't resolved, workers are likely to go on strike; employees can work to rule or not work extra hours if salaries raised
• By pushing higher wage rates, workers are discriminate against if they don't have the skills to match higher wage rate; black and brown youth are trigged by trade unions

Monopsony Power

• NHS has significant monopsony power over pharmaceutical goods; American hospitals are smaller so have less power
• Big 4 supermarket chains occupy 70% of market, exploiting farmers causing farmers to protest
• NHS is the largest employer of nurses and doctors; can reduce wages without losing workers but firms maintain wages to uphold their image

Distribution of Income and Wealth

• COVID-19 wiped decades of of poverty alleviation; preventing students from receiving high paying jobs
• Coronavirus has spread North-South divide; most people in London can work from home with the internet, as opposed to the North of England

Market Failure and Government Intervention

• European Competition Commission: firms are regulated in the European Union; OFGEM, OFCOM and OFSTED are oversees markets
• British Telecommunications BT used to own fibre optic; announced that cable networks
• Regulation: in blocked marriage of sainsburys and asda so it wouldn't take power
• UK: ex ante digital market unit, will stop abuse;
• Tech firms apple of Facebook can't Ban parler; Twitter and YouTube; regulators have too much power

Deregulation

• Reducing intervention allows free market to operate, increasing contestability; airline deregulation forced incumbents to lower prices and improve efficiencies
• Reduce regulation resulted in contestable markets for; postal service with royal mail was only the one to send packages

Privatisation

• Prior to privatisation of the water industry, UK investments of 160 billion were poor and pollution was severe; positive extermality
• Privatization did not always results in productivity; firms were handed off and they couldn't function, there has to be other options as well
• Climate change is handled by Emissions Trading Scheme who created markets; pollution drop with GFS crisis created drops undermines this

Government Failure

• Financial crisis created a fall in economic activity and companies no longer needed permits; the purpose of the ETS was to reduce carbon, which was undermined by a price drop
• The McCarran-Ferguson Act in 1945 tried to increase industry efficiency, it had the; opposite affect because of the insurance industry