BBC News - Factories shut as crisis hits China
The Financial crisis today has started affecting the world’s economy in larger ways than originally expected, especially in China. Due to the financial crisis, some of China’s factories have begun to shut down and jobs are no longer available. The article states the west can no longer afford to buy as much from China leading to a decrease in trade. One of the effects of this decrease in trade has been a reduction in the demand for baby cots. The factories that produce cots have suffered from a decrease in turn over leading them to have to take various measures to be able to stay in business. These measures include reducing the wages of the employees and the number of workers. Therefore the factory owners’ quantity demanded for baby cots decreases leading him to decrease wages to reduce his costs in an attempt to stay in business.
The diagrams above show the decrease in quantity demanded after the financial crisis. The quantity demanded has decreased because the west can no longer afford to trade as much with China. This has lead many factories having to close down resulting in lots of people having lost their jobs. The lack of jobs has lead to a surplus of people in the job market which has increased competition for jobs. This allows the factory owner to be able to decrease wages for his employees knowing that there are plenty of employees available.
In the first diagram it shows before the financial crisis, you can see that the equilibrium price, quantity demanded and supplied is being met. In the second diagram you can see that the quantity demanded for baby cots has decreased. The quantity demanded moves from Q to Q? therefore the price moves from P to P?. This then creates a new equilibrium price but lower than before the financial crisis. This shows that the number of baby cots sold could be related to the income elasticity of demand (YED).
The elasticity of a product is the responsiveness of that product to either a change in price, availability of substitute products or income of local consumers. The article states the west can no longer afford to trade as much. Now they have to prioritise what they can afford to buy which means they will look at cheaper products or second hand products. This shows that the cot manufacturer has been exposed to both income and cross-elastic pressure for his product. Cross-elastic pressure is when the products measure of demand is becoming lower; therefore the producer has to lower his prices to gain interest of consumers. The change in demand is due to the financial crisis leading to increasing demand for another product, a substitute.
After the financial crisis factory owners had a surplus of cots they were unable to sell. To sell these cots they had to reduce their prices, so they could compete against cheaper products or second hand goods. The baby cot factory owner therefore cut costs by cutting the wages of his employees by up to 75%. A worker, referred to in the article as waving two wage slips one from May and September showing the difference in pay. This leads to other issues such as unemployment. Some factories have to shut down because they could no longer run on such a low turnover and with such a small number of staff. This is demonstrated by the graphs below.
The implications of the financial crisis on the cot market can therefore be seen as potentially very advantageous to consumers. The result of this crisis could lead to deflation of cot prices around the world. Over time this could lead to increase in demand as economies recover from the financial crisis and people’s jobs become more secure, employers begin to re-employ the workers that had lost their jobs during the recession. Of course in the end increase demand will allow the factory owner to raise his prices and so we end up back where we started.
February 25th, 2009 at 6:55 pm
A very interesting article and good commentary. For the largest part of my life I have always thought of China as the place where almost everything, from plastic toys to car tires, are produced, but I see this has drastically changed. Since China started off as very cheap, and so many businesses were attracted to the nation, as well as all the foreign countries that chose to open trade with China, all this lead to a massive development. However, this rise in welfare in the Chinese society in turn means that the average wages have gone up, and that the Chinese people expect to receive more for their work. What many do not realize is that the Western businesses and nations can easily pull out and trade with, just to name a few, Vietnam, Taiwan and Korea - countries that prove more profitable than China.