Rubber Production

Question: If the prices of rubber used in the production of tires increases and the price for cars falls at the same time then the price of the car tires will rise in the market but it wont have any effect on the quantity purchased and supplied. Explain. Answer: If the prices of rubber used in the production of tires increases and the price for cars falls at the same time then the price of the car tires will rise in the market but it wont have any effect on the quantity purchased and supplied. Initially the demand for the car tiers was D1 and the supply was S1. The equilibrium price is P1 and the equilibrium quantity is Q1. When the price of the rubber used in producing car tiers raises the cost of production rises and the supply for that commodity falls shifting the supply curve to its left. At the same time when the price of the cars in the market falls then the demand for the cars will rise in the market. The demand curve will shift to its right. When both the demand and supply curve shift at the same time then the prices of the car tiers will rise from P1 to P2 but the quantity demanded and supplied will remain same at Since car tires and cars are complementary goods any changes in price will have a positive effect (Borio 2014). In a perfectly competitive market for apples when the price of pears rises then the demand for apple rises because pears and apples are perfect substitutes. The demand shifts to it right supply remaining the same. The price of apple rises in the market due to which the individual producer earns supernormal profit in short run. But in long run since the individual firms cannot earn supernormal profit it will only earn normal profit as when the demand curve shifts to right it does not have any effect on price due to presence of competition in the market. Since apple and pears are substitutes any changes in price will have inverse relation (Mankiw 2014). Intersection of short run aggregate supply and aggregate demand is the equilibrium output or level in short run. The potential GDP is given as the long run supply curve. It is also the full emolument level of output. The short run equilibrium is given by E in the following diagram where equilibrium price is 95 trillions of 2000 yen and equilibrium output is 500 trillion yen. The equilibrium output is the actual output level. Real GDP is given as potential output minus the actual output. Real GDP in this case is 100 trillion yen (Fats and Mihov 2013). Japan has a recessionary gap because the equilibrium or the actual output is less than the potential output. This means that economy is utilizing all the resources properly to produce the output that the economy can. Recessionary gap can be corrected by using proper fiscal policies. Recessionary gap is the level at which the economy is not able to produce at a full employment level. Expansionary fiscal policies help the economy come out of recession. Increase in government expenditure and lowering the taxes will help the economy come out of recession. Recessionary gap means the economy is at a lower GDP or aggregate demand level. So increasing the components that contribute to the aggregate demand needs to expand in order to take economy out of recession. Since cutting taxes increases the disposable income that people have will result in increase in demand. Increase in government expenditure also increases the aggregate demand in the economy that will help Japan come out of recession . Fiscal policies include policies such as government expenditure and taxes. If the aggregated demand shifts to right to the level of potential GDP then the recessionary gap falls in the economy (Nakamura and Steinsson 2015). Italy was going through a recessionary phase in 2012 because the real GDP is lower than the potential GDP. The unemployment rate was also rising as can be seen from the case study. Consumer and government spending is also decreasing that is leading the economic activity to fall. During recessionary gap the income and the aggregated demand of the economy fall. Decrease in consumption decreases the aggregate demand further. Recessionary gap is situation when the real GDP is lower than the actual GDP (Kubiszewski et al. 2013). When the Italian economy moves to 2013 from 2012 the unemployment in the economy is rising, the consumer spending is also falling and so is the government expenditure. Due to these macroeconomic indicators the economic activity falls in Italy. A decrease in consumer spending, government spending and rise in unemployment rate decreases the aggregate demand in the economy falls due to which the aggregate demand in the economy falls and shifts to left. This further decreases the price and also the real GDP in the economy causing the economy to fall further in the recession. The aggregate demand falls due to which the prices and the equilibrium output falls further (com. 2016). Unemployment rate in Italy in January 2013 was 11.3% and in July 2013 it was 12.1%. Labor force participation rate in January 2013 is given by 20,000,000/40,100,000 = 0.49%. Labor force participation rate in July 2013 is 27,000,000/40,900,000 = 0.66%. The unemployment rate in Italy rose in 2013 when compared to the previous year (com. 2016). The country chosen is Australia and the key macroeconomic indicators that affect the economy are GDP growth rate, unemployment rate, inflation rate and interest rate. The GDP growth rate is increasing in the economy and so are the exports. Exports are greater than imports. The inflation rate is stable and the unemployment rate is rising. The economy is said to be stable (MacroPlan 2014). References Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?.Journal of Banking Finance,45, pp.182-198. Fats, A. and Mihov, I., 2013. Policy volatility, institutions, and economic growth.Review of Economics and Statistics,95(2), pp.362-376. Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T. and Aylmer, C., 2013. Beyond GDP: Measuring and achieving global genuine progress.Ecological Economics,93, pp.57-68. MacroPlan Dimasi. (2014).The Australian Business Cycle 2015/2016: Excellent Property Sector Outlook?. [online] Available at: https://macroplan.com.au/australian-business-cycle-20152016-excellent-property-sector-outlook/ [Accessed 3 Jun. 2016]. Mankiw, N.G.R.E.G.O.R.Y., 2014.Principles of macroeconomics. Cengage Learning. Nakamura, E. and Steinsson, J., 2015. Assessing the effects of monetary and fiscal policy.NBER Reporter, (1), pp.22-25. Tradingeconomics.com. (2016).Australia | Economic Indicators. [online] Available at: https://www.tradingeconomics.com/australia/indicators [Accessed 3 Jun. 2016]. Ycharts.com. (2016).Italy Youth Unemployment Rate. [online] Available at: https://ycharts.com/indicators/italy_youth_unemployment_rate_lfs [Accessed 3 Jun. 2016].