Archive for the 'Determinants of Supply' Category

Apr 29 2008

Obama vs. McCain and Clinton on gas tax relief

As Clinton Seeks Gas Tax Break for Summer, Obama Says No – New York Times

Times are tough for American consumers. Rising food and fuel prices have increased the proportion of household incomes that must be allocated towards these two necessities, both for which demand is highly inelastic, meaning that as their prices rise, the quantity demanded by consumers remains relatively high.

In response to the pinching of Americans’ pocketbooks, two presidential candidates are advocating action at the federal level.

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season.

Sounds like a good idea, right? If Americans are finding it burdensome to pay more at the pump, and the government can do something to relieve that burden, why shouldn’t they do it?

Let’s do a little calculation here: At 18.4 cents per gallon, how much per fill-up will Americans save?

I drive a ’94 Toyota pick-up, has a 15 gallon tank and gets notoriously poor mileage. I’ll save $2.76 per tank of gas I buy. I usually fill up my truck about once a week during the summer, meaning I’ll save that much each week. McCain wants to suspend the gas tax from Memorial Day until Labor Day, or for a total of about 12 weeks. If Clinton and McCain get their way, I could very well save as much as $33.12 this year! ASTOUNDING!! What a deal for Americans!

Clearly, repealing the gas tax will have only a minor impact on disposable incomes in America. Obama seems to understand this better than the other candidates:

Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports

Mr. Obama derided the McCain-Clinton idea of a federal tax holiday as a “short-term, quick-fix” proposal that would do more harm than good, and said the money, which is earmarked for the federal highway trust fund, is badly needed to maintain the nation’s roads and bridges.

The decision to suspend or not suspend federal gas taxes is essentially a cost-benefit decision. The benefit? Well, apparently around $30 per driver, or about half a tank of gas, compliments of the US government. The cost? Read on…

The highway trust fund that the gas tax finances provides money to states and local governments to pay for road and bridge construction, repair and maintenance. Mr. McCain and Mrs. Clinton propose to suspend the tax from Memorial Day to Labor Day, the peak driving season, which would lower tax receipts by roughly $9 billion and potentially cost 300,000 highway construction jobs, according to state highway officials.

There you have it; $9 billion dollars and hundreds of thousands of jobs that won’t be created in order to put half a tank of gas in each American’s car, which if you think about it, will only lead to Americans driving more this summer. Repealing the gas tax may actually induce Americans who weren’t planning road trips to go ahead and take one, increasing the overall demand for gas and driving the price up to the level it would have been with the tax.

And what about the much needed government revenue the tax creates? Hillary has another plan for recouping that loss:

Mrs. Clinton would replace that money with the new tax on oil company profits, an idea that has been kicking around Congress for several years but has not been enacted into law. Mr. McCain would divert tax revenue from other sources to make the highway trust fund whole.

Clearly, Mrs. Clinton needs a refresher course in basic microeconomics. If she had paid attention in AP Economics (did she even take AP Econ?), Clinton would know that a tax on producers of a highly inelastic good such as oil can be passed almost entirely onto the consumers. In this case, the oil companies, when faced with additional federal taxes on profits, will respond by restricting output, which reduces overall supply in oil market, raising the price of the main input for gasoline. Higher input costs for gasoline refineries will reduce overall supply of gasoline, increasing the price paid by consumers at the pump, negating any price-reduction induced by the suspension of the gas tax.

Ultimately, all taxes are borne by the consumers of an inelastic product: gasoline in this case. Whether the tax is levied on drivers directly, or the oil companies “upstream” in the production process, the outcome is the same: supply is restricted and price is higher.

The suspension of a gas tax that only costs Americans $30 over 3 months appears to impose a much greater cost to society than benefit. At least Obama seems to understand the basic economic reasoning behind this fact.

Obama on State Gas Tax Suspension

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Nov 04 2007

Quit cutting chemistry class!

Oil worker shortage could lead to supply squeeze – Nov. 2, 2007
Lately I’ve blogged about the impact of higher oil prices on the petrol market in China (here and here). As the main input in petroleum products such as gasoline and diesel, the price of oil affects the costs of fuel producers, such as China”s SinoPec and PetroChina, the two large state-owned petroleum companies, as well as the scores of smaller competitors in that provide fuel to China’s thirsty economic machine.

As the price of oil has approached $100 per barrel, fuel manufacturers have had to cut back output as their costs have soared, putting upward pressure on the market price of fuel here in China. But what determines the price of a barrel of oil? Is the increase in the price of oil due to an outward shift of demand or an inward shift of supply? Actually, it’s probably both. This article helps answer part of our question, and it does so by discussing one of the determinants of supply of oil, resource costs. Continue Reading »

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Sep 11 2007

As Chinese planes take off, prices may be coming in for a landing


Managing Globalization » Business Blog » International Herald Tribune » Blog Archive » China takes to the skies

and the full article: China hopes a homegrown regional jetliner can challenge Airbus and Boeing – International Herald Tribune

Here’s another great example of a market that is set to experience a serious change in the near future. The oligopolistic market for “regional jets”, long dominated by two firms, is set to see the entrance of a new manufacturer. From whence doth the new bird fly? From the far East, no less…

“After a couple of false starts, the Chinese commercial aircraft industry may finally be getting off the ground. Starting next year, the prosaically named China Aviation Industry Corporation 1 plans to offer a regional jet that will compete directly with the two dominant forces in the market, Canada’s Bombardier and Brazil’s Embraer.”

Without even reading the rest of this article, you should be able to picture what will happen in the market for regional jets once the Chinese planes start rolling off the assembly lines. This article will also prove relevant when we begin studying market structures. What are the effects of a more competitive market for regional jets?

“Consumers in the rest of the world could benefit, though. Moving from two companies to three in a growing market could bring aircraft prices down, and eventually airfares as well – especially if the Chinese company’s costs are lower.”

But what of the widespread concerns that have emerges of late about the quality of products coming out of China?

“…if China has to combat worries about product quality in areas like foods and toys, just imagine the hurdles it will face with a passenger plane. Those benefits could still be many years away, depending on how people perceive the new product. Would you fly on a Chinese-made airplane?”

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Sep 07 2007

Supply and demand shifters and the price of pork in China – Ethanol affects price of pork, China’s staple

What does the biofuel we put in our cars have to do with the meat we eat with our noodles and rice? Economics has an answer to this question! This week in AP Economics we learned that market supply of a product is determined not only by the price of the product but also by several “non-price determinants of supply”. To help remember these we learned an acronym:

S- subsidies and taxes
T- technology
O- other related goods prices
R- resource costs
E- expected future prices
S- size of the market (# of firms)

The article above talks about the relationship between the demand for ethanol, which is a corn-based biofuel being manufactured in record quantities all over the world, and the price of China’s staple protein source, pork.

Read the article, and discuss which determinants of supply are being affected, and describe the impact on the pork market (think of the supply and demand curves and equilibrium price).

Discussion Questions:

  1. As the price of pork goes up, what do you think is happening in the market for substitutes in consumption, such as chicken?
  2. How will the rising pork prices affect demand for chicken?
  3. Assuming that pork and chicken are also substitutes in production, how will the changes in the pork market affect the supply of chicken?
  4. What can we expect to happen to the price of other related goods as pork prices continue to rise?

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Jun 04 2007

“Monster Hog” and the price of pork in China

National Geographic News Photo Gallery: Week in Photos: Monster Hog

Near Delta, Alabama, May 3, 2007—Hogzilla may be headed for horror-movie heaven, but the massive swine that became an Internet sensation in 2004 may have been bested, size wise, by this reportedly wild pig killed May 3 by Jamison Stone, 11, and reported by the Associated Press on Wednesday.

From tip to tail, the newfound hog—dubbed “Monster Pig”—measures 9 feet, 4 inches (284 centimeters) and weighs in at 1,051 pounds (477 kilograms), according to Stone’s father.

At a 150-acre (60-hectare), fenced hunting range, Stone said, he shot the huge beast eight times with a revolver before tracking it with his father and guides for three hours. Finally, the boy shot the hog at point-blank range, killing the animal, the AP reported.

While hunting by children is legal in Alabama, officials are investigating whether anyone had transported and released the live feral pig into the hunting preserve, which would violate state law.

Okay, so maybe this one’s a stretch for a blog about economics, but sometimes when you see something in the news this amazing, you just have to share it with the world! Let’s see if I can come up with some questions about this one!

Discussion Questions:

  1. What impact would “monster hog” have on the price of pork (assuming it goes to market)?
  2. What will happen in the beef market once “monster hog’s” meat reaches the market? Explain.
  3. Can you think of a product that might be a compliment to pork? Describe
    what will happen in that product’s market thanks to “monster hog”.

Looks like China could use a few monster pigs of its own to relax the steep increase in pork prices recently!

Tighter supplies lead to big price rises for pork,

THE prices of pork and eggs have soared in past weeks across China due largely to tighter supplies and increasing production costs…Food products account for 33 percent of the CPI in China with meat, poultry and related products making up about 20 percent.

According to the Ministry of Agriculture, live pigs nationwide were 71.3 percent more expensive than a month earlier, and pork, 29.3 percent higher.

In Beijing, the price of slaughtered pigs went up more than 30 percent in recent days…

An outbreak of blue ear disease, also known as Porcine Reproductive and Respiratory Syndrome, among pigs in Guangdong Province and the Guangxi Zhuang Autonomous Region, causing many deaths and a large amount of pigs to be culled, according to the National Development and Reform Commission…

“This sent a strong signal for distributors to jack up prices,” said Xu, adding that this exacerbated the unbalanced supply and demand.

“Pig raisers have lost money in the past couple years and they are reluctant to raise pigs. This led to a marginal decline in live pigs this year.”

Still worse, edible oil and grain prices rose at the beginning of this year, and feed prices followed suit.

Grain prices have risen largely due to an anticipated decline in output this summer and will continue to increase slightly in the coming weeks, boosting the prices of pork

Discussion Questions:

  1. What is the “CPI” and why has it risen in China recently?
  2. Does this article discuss the determinants of demand or the determinants of supply? Which determinant is being affected in the pork market?
  3. What is happening in the market for pork in China? Which curve is shifting, supply or demand?
  4. What “strong signal” led pork distributors to “jack up prices”?
  5. If the price of pork continues to rise, what should happen to the supply of pork? Explain.

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