Effects of Increases in Demand - Essay Example

Effects of increases in demand Effects of increases in demand Outline: Likely effects of increases in demand of iron-ore on iron-ore prices iron ore production demand &‘price’ of inputs used in the production of this commodity, Labor. Effect of changes in wage rates on supply of workers to mining and other industries; The importance of workers’ preferences for living in city locations for the wage rates And other features of jobs in the mining sector. Introduction Demand in a regular dictionary is to ask for, call for or require. While Webster dictionary define it as the willingness or one’s ability to get a item or service or the quantity of a item or service that one could buy at specific price and time. This could be taken as the random means of defining demand but in the Economics ‘Demand’ is defined as the want or will to get a commodity or service with some other goods, services, or any other non-cash instrument vital to carry out a legal exchange for such goods or services. Effects of an increase in demand: The rapid growth of the Chinese economy has resulted in a surge in demand for many minerals and metals located in Western Australia. This has caused increase in demand for Iron-ore to carry out the firms production and produce the resulting output. Effect of increase on Iron-ore prices Price is derived by the crossing of supply and demand. (Figure 3) The resultant market price is dependent upon both of these basic components of a market. A transaction of goods or services will occur when so ever buyers and sellers can agree on a certain price. When a transaction occurs, the agreed upon price is called the "market clearing price” or "equilibrium price". As the population of China has grown, the demand for minerals and metals has risen. This has pushed the price of iron ore (and complementary products) up and also spurred the development of iron, accelerating the quantity of iron supplied as well. We can see the demand increase in Figure 1 below, that represents an increase in the demand of iron-ore. In the figure, supply and demand have been short formed as S and D. Demand begins at D1 and is moves to D2 provided that supply remains the same. We see that the equilibrium price even increases from p1 to p2, and the quantity moves from q1 to q2. Figure 1 an increase in demand The figure clearly shows that increase in demand for iron ore would clearly cause an increase in price. As the quantity of iron ore increases so would the resultant price provided supply remains constant. Effect of increase on Iron-ore production In order to meet the increasing demand the quantity of iron ore production would even have to be increased. An increase in supply results about from a decrease in the marginal cost as like the marginal cost of production. As a result, an increased in production is represented by a line to the right on the supply and demand graph. The effects of an increase in production are illustrated in Figure 2. The supply line goes from S1 to S2 that represents a lesser marginal cost. Moreover in this case, the quantity also rises from q1 to q2 and price falls from p1to p2. Figure 2 an increase in supply Effects of increase on demand &price of inputs production As the demand of Iron-ore increases and as a result the firms and industries consider increasing their output to take advantage of demand shifts, the inputs material, labor and overheads used would also have to be increase in order to produce the final product. This would increase the demand of input products used in producing iron-ore. The price of relevant input product would increase considering the shift in demand curve as shown in figure 3 of the demand and price curve. < -- Figure 3 increase in demand of input causes increase in price of the product. Effect of increase on demand of labor Labor demand is derived demand; that is, hiring labor is not for its own sake rather because it aids in producing the output that contributes to an employers sales and hence profits. The demand for additional amount of labor depends on the Marginal Revenue Product and the marginal cost of the worker. The MRP can be calculated by multiplying the price of the final product or service by the MPP (Marginal Physical Product) of the worker. In case where MRP is greater than the firms Marginal Cost, the firm will employ the additional worker since doing that will increase the firm’s profit. Figure 4 and Figure 5 Figure 4 show that if the demand for product (iron ore) increases, at fixed supply the price of the product would also increase. The demand of labor being a derived demand would increase because of the increase in demand for iron ore. Thus, due to increase demand at fixed supply the wage rate would also increase. Here the rapid growth of the Chinese economy has affected an increase in demand for iron-ore. Therefore, this increases the demand for labor required to produce such output production. The firm will continue employing up to the point till MRP=MC, and not beyond that in economic theory. Effect of changes in wage rates on supply of workers to mining and other industries Wages are determined in the free market by the interaction of supply of labor and demand for labor. The labor supply curve The labor supply curve for any occupation or industry will be upward sloping. This attributes to the wage rises which leads to other workers entering this mining industry attracted by the higher incentives or rewards. They may not have previously held any job or they may have moved from other industries such as housewives or the unemployed workers. The extent to which this rise in the prevailing salary or wage in an iron ore occupation leads to an expansion in supply of labor depends on the elasticity of labor supply. Concept of Worker’s Preference: Free dictionary defines Preference as selecting of something or someone over another or others. The determinants of labor supply or workers preference depends on which certain model as observed or utilized. One way of looking at this is the neoclassical model. It looks at the indifference curve of a worker in terms of labor versus leisure. It covers both extensive and intensive margins of labor supply. The general concept behind the intensive margin is the workers preferences regarding leisure and work. The framework implies that every worker will have different labor supply behavior. Preference for living in city locations Workers are highly motivated with increase in wage rates; however at times pay is not the only factor that motivates a worker. For instance, some workers cannot live in isolation or live and work at a place where their family does not live. So it is important that pay motivates a worker and it is preferred by him to move to different city. Preference for the wage rates It is important that workers get the pay at which he is willing to work. In a competitive market the firm is usually wage taken and has no control whatsoever over the wage of the employees. Neither demander nor supplier has any bargaining power to rise or lower wages; hence there is a single wage rate which both parties will have to choose. It is important that workers prefer the rate offer in Western Australia. Preference for other features of jobs in mining sector The order for features of the jobs in mining sector that male workers prefer is supervisor, benefits, hours, security, and type of work, company, pay, co-workers, advancement, and working conditions. Women might not consider this type of work as other factors which may be important to them, such as security, working conditions and hours at mining that may not be of their preference. Preferences attributed to workers differ markedly from self-preferences, with both women and men believing pay as an important motivating factor. Work Cited 1. Demand(2011), Dictionary from http://dictionary.reference.com/browse/demand 2. Demand(2011), Dictionary from http://www.merriam-webster.com/dictionary/demand 3. Demand (2011) Economics about glossary from http://economics.about.com/cs/economicsglossary/g/demand.htm 4. Free dictionary. Preference from http://www.thefreedictionary.com/preference 5. Jurgensen, Clifford E, What makes a job good or bad from http://psycnet.apa.org/index.cfm?fa=buy.optionToBuy&id=1979-14633-001 6. Supply of labor from http://tutor2u.net/economics/revision-notes/a2-micro-supply-of-labour.html 7. Wiki Answers from http://wiki.answers.com/Q/Describe_two_factors_that_affect_labor_supply_and_two_factors_that_affect_labor_demand_-_45k_-#ixzz1M6pWCYGk Read More