Public policy Defined by different schoolars

Public  policy  may be defined as a course of action taken by a government to address an issue or a matter of national importance or resolve a problem or a crisis ~ Afyne Torleke

Other definitions of public  policy are:

"Public policy is a purposeful  and consistent course of action taken as a response to a perceived problem of a nation, formulated by a specific political process, and adopted, implemented and enforced by a public agency." ~ Wayne Hayes

" The term public policy always refers to the actions of government and the intentions and commitment that determine those actions." ~ Clarke E. Cochran, et al.

"Public policy is whatever governments choose to do or not to do." ~ Thomas Dye

"Public policy consists of political decisions for implementing programmes to achieve societal goals." ~ Charles L. Cochran and Eloise F. Malone

"Public policy is the sum of government activities, whether  acting directly or through agents, as it has an influence and impact on the life of citizens." ~ B. Guy Peters

"Public policy can be generally defined as a system of laws, programmes,  regulatory measures, courses of action and funding priorities concerning a given topic promulgated by a government entity or its representatives." ~ Dean G. G. Kilpatrick

Based on the definitions given  above, we could conclude  that public policies are those that governments adopt to address certain specific problems. For example, most governments have adopted the public policy of banning the sale of alcohol to minors. This policy addresses the problem of teenage alcohol abuse. Policies are expressed in the form of laws,  regulations, decisions and actions. Policies are the means of achieving goals.  If the goal is to provide homes for the homeless, a policy might be a plan to build 20,000 units of low-cost housing. If the goal is to fight and reduce crime, a policy might be to put 500 more police officers on the streets of the city.

Numerous issues are addressed by public policy, including crime, education, healthcare, social welfare, corruption, energy, transportation, agriculture, foreign policy, economic and financial policy, poverty, etc.  There are three parts to public policy-making: problems, players, and the policy. The problems  are  the issues  that need to be addressed. The players are the individuals, politicians, government agencies and officials, legislators, lobbying groups and  pressure/interest groups.  Policy  is the finalized goal-oriented  action taken  by the government to resolve a problem or achieve a certain objective or goal or  to fulfil a specific need under certain circumstances.   Public  policy is made by the institutions of the government, i.e. the Executive, the Cabinet, the legislature, the judiciary and government departments. Many policies are translated into law by government action. For example, to control drink-driving deaths, many sates have enacted tough drunk-driving laws;  to improve the environment, several governments have enacted  air-quality laws; to prevent accidents, some countries have enacted laws restricting cell phone (mobile phone/hand phone)  use while driving. 

Examples of Public Policies in Malaysia

The Malaysian government has formulated and implemented several policies to address specific problems or issues. Some of these  are:

Privatisation Policy.  This policy was introduced by Dr. Mahathir Mohamad  in 1983 and its objectives are  'to reduce the financial and administrative burden of the government,' particularly in undertaking and maintaining services and infrastructure; 'to promote competition, improve efficiency and increase productivity'  in the delivery of these services; 'to stimulate private entrepreneurship  and investment,' and thus accelerate economic growth and 'to reduce the presence and the size of the public sector, with its monopolistic tendencies and bureaucratic support.'

National Social Welfare Policy.  The objectives of this policy are 'to develop human potential to the optimum and to strengthen society to face current social challenges, create various facilities for enhancing self-development and development of the individual, and build and inculcate the spirit of mutual help and assistance to reinforce a caring culture.'

Malaysian Industrial Policy.  The objectives of this policy are the following: (a) "to ensure a fair distribution of wealth amongst different races in the country"; (b) "to promote the development of manufacturing industries serving foreign markets"; (c) " to promote the development of manufacturing industries serving domestic markets"; and  (d) "to cope with new competition from large firms in the domestic (primary services) market." 

National Agricultural Policy.  The objectives of the  third National Agricultural Policy (NAP3) are: (i) "to enhance food security"; (ii) to increase productivity and competitiveness of the sector"; (iii) "to deepen linkages with other sectors"; (iv) "to create new sources of growth for the sector" and (v) to conserve and utilise natural resources on a sustainable basis."

National Education Policy. This policy is aimed at "producing Malaysian citizens who are knowledgeable and competent, who possess high moral standards and who are responsible and capable of achieving high level of personal well-being as well as being able to contribute to the harmony and betterment of the society and the nation at large".

Significance of Public Policy

(i)  Public policy plays an important role in shaping the responses of the various fields of human endeavour - such as education, housing, welfare, healthcare, agriculture, defence, transportation, etc to public needs.

(ii) Public policy is essential to achieving meaningful changes or reforms or improvements  in government administration and its services and activities.  It is also instrumental in bringing about socio-economic development in a country.

(iii) Public policy serves as a tool or instrument  for  identifying  issues of national concern or problems,  implementing   the best course of action for  resolving the problems and evaluating the impact of  the action taken by the government to resolve the problems or issues.

(iv)  It consists of political decisions for the implementation of specific programmes to attain the objectives  of the nation. It is therefore important as it is concerned with the goals of a country, intending to create positive impacts.

(v) Through public policy, the government strives to advance the collective well-being- social, political, and economic- of a society.

Stages in the Policy-making Process

A policy established and carried out by the government goes through several stages from inception to conclusion. These stages are : 1. Problem Identification; 2. Agenda Setting; 3. Policy Formulation; 4. Policy Implementation; and 5. Policy Evaluation. These are sometimes referred to as elements of public policy.

1. Problem Identification.  The first and the most important step in the public policy process is the identification of the issue or problem that needs to  be addressed or resolved. This involves not only recognising that a problem exists, but also studying the problem and its causes in detail. It is important to have a clear idea about what you want to achieve. Examples of problems: Poverty - ( causes of poverty; should it be eradicated or reduced?); Environmental pollution: (causes of pollution; should it be eliminated or controlled?).

2. Agenda Setting.  Once a problem has been identified that deserves serious attention, policy-makers put it on formal / official agendas. This sets a time, date and place for policy-makers to discuss how to tackle the identified problem.    

3. Policy Formulation.   This means coming up with an approach to solving a problem. Policy-planning agencies, the executive branch, the legislature, bureaucrats,  political parties and interest groups may be involved in this stage of the policy process.   In this stage,  alternative solutions  would be developed to resolve the identified problem. All the alternatives   would  be  thoroughly evaluated during this stage before  the best course of action from among the alternatives generated  is chosen and adopted. 

4. Policy Implementation.   The next obvious step after choosing an option would be implementing the solution. Various  government agencies would be involved in implementing the policies decided.     For example, if the policy is concerned with reducing or eliminating environmental pollution, the agency responsible for the environment  would serve as the implementing agency.    If the policy concerns reducing  incidence of death  due to road accidents, the agency responsible for  public  transportation will be the implementing agency.

5. Policy Evaluation.   This is the final stage in the public policy process.  Evaluation is an ongoing or continuous process. It involves a study or review of how effective the new policy has been in resolving  the original problem. In other words,  evaluation is conducted for checking the effects of the policy (i.e. whether or not it has achieved the pre-determined objectives)  and for  assessing the impact of the policy in terms of  efficiency, effectiveness, validity and  its continued relevance. Based on the feedback or identified weaknesses, corrective action is taken.

MODELS OF PUBLIC POLICY

There are some conceptual models that  describe  how policy-making occurs.  These models explain policies and their development.  Policy analysts use these models to  analyse the creation and application of public policy and to identify important aspects of policy, as well as explain and predict policy and its consequences.  Some selected models of  public policy are the following:

Elite Model of Public Policy

The Elite Model (also known  as the Elite Theory) views public policy as the preferences (pilihan), priorities (keutamaan),   values  (nilai)  and interests (kepentingan) of a ruling elite. The ruling elite is  a small group composed of people with wealth, intelligence, skills, political power, military might, influence, etc. They belong to the upper class  of society.   Elite theory suggests that people are passive, apathetic (bersikap terlalu acuh tak acuh),  ill-informed and easily manipulated.  Therefore, elites actually shape mass (public)  opinion on policy  issues/ matters  more than the masses shape elite opinion. Thus, public policy really turns out to be the preferences of the elite. Mass sentiments do not influence the values of elites. In other words, public policy does not  reflect  the demands or wants (kehendak)  of the masses (people). Moreover, elections would not enable the mass to make public policy; elections only tie the mass to the political system governed by the elite.

The elites  make public policy by themselves. Public officials and administrators (bureaucrats) merely carry out  or execute the policies decided by the elite. Policies flow downwards from elites to the masses (see the diagram below).

Rational Model of Public Policy

The rational model of public policy-making is a process for making logically-sound decisions in the public sector. Herbert Simon, the father of the rational model, describes rationality as "a style of behaviour that is appropriate to the achievement of given goals. The rational model is intended to achieve "maximum social gain";  that is,  governments should choose policies resulting in gains to society - the gains  must exceed costs. In other words, no policy should be adopted if its costs exceed its benefits. Decision-makers should choose the policy that produces the greatest benefit over cost. 

According to this model, achieving   rational decisions involve the following steps: (a) intelligence gathering: data and potential problems and opportunities are identified, collected and analyzed; (b) a list of possible alternatives to resolve the identified problem are generated; (c) the alternatives are evaluated  in terms of the consequences,  costs and benefits of each policy alternative,  the ratio of benefits to costs for each alternative are calculated and  the most efficient and effective policy alternative is selected and implemented.  The implemented policy is then evaluated in terms of its effectiveness, efficiency and impact of policy  and corrective action is taken to overcome the problems identified.

Institutional Model

According to this model, public policy is authoritatively determined, implemented and enforced by political institutions such as the  legislature, the executive, the  judiciary and the political parties. A policy is not a policy until it is adopted by government institutions. Government lends legitimacy to policies. Government policies are generally regarded as legal obligations that command the obedience and loyalty of citizens. Government policies extend to all people in a country.

Group Model / Group Theory

Group theory views politics as a struggle (perjuangan)  among various  groups (such as political parties, pressure groups, racial and religious groups)  in a society  to influence public policy. It states that public policy is the result of  the struggle and competition between various groups in a society. Policy-makers constantly  (sentiasa)  respond to group pressures bargaining, negotiating and compromising among competing demands (tuntutan bersaing)  of influential groups and balancing conflicting interests in society. The power of each group is checked by the power of competing groups. According to the group theory, public policy at any given time is the equilibrium  (keseimbangan) reached in the group struggle or competition.

Incrementalism (Incremental Model)

Incrementalism views public policy as a continuation of past government activities or policies with only incremental changes (perubahan tambahan) or modifications (pengubahsuaian). Because an in-depth analysis of the costs and benefits of every conceivable alternative for dealing with a problem in public policy is often very time-consuming and  expensive, public organizations may resort to a practical shortcut in deciding on possible improvements to existing programmes. Only a few of the many possible options or alternatives and their consequences are seriously considered or examined. Policy-makers generally accept the legitimacy of established programmes and agree to continue previous or existing policies. They accept previous policies because of the uncertainty and lack of information  about the consequences of completely new or different policies. In this model, existing programmes or policies or expenditures are considered as a base and only small changes, and not radical innovations, are made to existing policies.  There is no optimal policy decision - a good policy is one that is acceptable to all groups  rather than what is best to solve a problem.

Incremental policy-making is essentially remedial; it focuses on small and gradual changes to existing policies rather than dramatic fundamental changes or radical innovations. In this model, policy-making is also serial, you have to keep coming back to problems as  mistakes become  apparent and are corrected, and new approaches to the issues are developed gradually. The model suggests that major changes occur through a series of of small steps, each of which does not fundamentally 'rock the boat.'  "The policy process is one of muddling through" (Lindblom, 1980). An example of incrementalism often cited  concerns increases or decreases in annual government budgets, ranging from 5 to 10%.

© Afyne Torleke 2014-2017

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e Senate committee chairman on police affairs, Senator Abu Ibrahim, has dismissed rumour that President Muhammadu Buhari is sick as untrue.

Senator Abu Ibrahim has said President Buhari is burdened by the problems the country is going through.

Senator Abu Ibrahim representing Katsina south under the platform of the All Progressives Congress (APC) said on Tuesday, February 7, that President Muhammadu Buhari was not sick, but only exhausted as a human being, Vanguard reports.

He said Buhari was exhausted form the weight of the country’s problems.

According to him, the issues that might have taken a toll on the president include destruction of oil pipe line that has reduced production to almost half, fall in oil price that has affected the economy and led to recession, and the falling exchange rate that has affected the purchasing power of most Nigerians.

Senator Ibrahim said President Buhari will soon come back, noting that that there was no need for Nigerians to be unduly apprehensive because the president is not sick but exhausted by the weight of the problems the country is going through.

He however urged Nigerians to continue to pray for the president to come home and continue his work to put the country in a better footing, adding that Nigerians have the right to list what they wanted the President to do when he is back home.

Meanwhile, following the recent letter written by President Muhammadu where he communicated his desire to extend his vacation abroad in order to complete his test cycles, Nigerians have continued to ask questions as to the veracity of the claim.

In a latest effort, Dr Peregrino Brimah, a social commentator questioned the integrity of the president’s spokesmen.

The commentator insisted that there are possibilities that the spokesmen are still feeding Nigerians with lies concerning the health status of President Buhari.

AfyneTorleke.com.ng, Learning Economics... Solved!: Solving for equilibrium price and quantity with incomes and substitutes added in

href="http://www.afynetorleke.blogspot.com">/solving-for-equilibrium-price-and.html?m=1">FreeEconHelp.com, Learning Economics... Solved!: Solving for equilibrium price and quantity with incomes and substitutes added in

Demand, Supply and Equilibrium

   

 
3.3. Demand, Supply, and Equilibrium

LEARNING OBJECTIVES

Use demand and supply to explain how equilibrium price and quantity are determined in a market.

Understand the concepts of surpluses and shortages and the pressures on price they generate.

Explain the impact of a change in demand or supply on equilibrium price and quantity.

Explain how the circular flow model provides an overview of demand and supply in product and factor markets and how the model suggests ways in which these markets are linked.

In this section we combine the demand and supply curves we have just studied into a new model. The model of demand and supply uses demand and supply curves to explain the determination of price and quantity in a market.

The Determination of Price and Quantity

The logic of the model of demand and supply is simple. The demand curve shows the quantities of a particular good or service that buyers will be willing and able to purchase at each price during a specified period. The supply curve shows the quantities that sellers will offer for sale at each price during that same period. By putting the two curves together, we should be able to find a price at which the quantity buyers are willing and able to purchase equals the quantity sellers will offer for sale.

Figure 3.14, “The Determination of Equilibrium Price and Quantity” combines the demand and supply data introduced in Figure 3.1, “A Demand Schedule and a Demand Curve” and Figure 3.8, “A Supply Schedule and a Supply Curve” Notice that the two curves intersect at a price of $6 per pound—at this price the quantities demanded and supplied are equal. Buyers want to purchase, and sellers are willing to offer for sale, 25 million pounds of coffee per month. The market for coffee is in equilibrium. Unless the demand or supply curve shifts, there will be no tendency for price to change. The equilibrium price in any market is the price at which quantity demanded equals quantity supplied. The equilibrium price in the market for coffee is thus $6 per pound. The equilibrium quantity is the quantity demanded and supplied at the equilibrium price.

Figure 3.14. The Determination of Equilibrium Price and Quantity


When we combine the demand and supply curves for a good in a single graph, the point at which they intersect identifies the equilibrium price and equilibrium quantity. Here, the equilibrium price is $6 per pound. Consumers demand, and suppliers supply, 25 million pounds of coffee per month at this price.

With an upward-sloping supply curve and a downward-sloping demand curve, there is only a single price at which the two curves intersect. This means there is only one price at which equilibrium is achieved. It follows that at any price other than the equilibrium price, the market will not be in equilibrium. We next examine what happens at prices other than the equilibrium price.

Surpluses

Figure 3.15, “A Surplus in the Market for Coffee” shows the same demand and supply curves we have just examined, but this time the initial price is $8 per pound of coffee. Because we no longer have a balance between quantity demanded and quantity supplied, this price is not the equilibrium price. At a price of $8, we read over to the demand curve to determine the quantity of coffee consumers will be willing to buy—15 million pounds per month. The supply curve tells us what sellers will offer for sale—35 million pounds per month. The difference, 20 million pounds of coffee per month, is called a surplus. More generally, a surplus is the amount by which the quantity supplied exceeds the quantity demanded at the current price. There is, of course, no surplus at the equilibrium price; a surplus occurs only if the current price exceeds the equilibrium price.

Figure 3.15. A Surplus in the Market for Coffee


At a price of $8, the quantity supplied is 35 million pounds of coffee per month and the quantity demanded is 15 million pounds per month; there is a surplus of 20 million pounds of coffee per month. Given a surplus, the price will fall quickly toward the equilibrium level of $6.

A surplus in the market for coffee will not last long. With unsold coffee on the market, sellers will begin to reduce their prices to clear out unsold coffee. As the price of coffee begins to fall, the quantity of coffee supplied begins to decline. At the same time, the quantity of coffee demanded begins to rise. Remember that the reduction in quantity supplied is a movement along the supply curve—the curve itself does not shift in response to a reduction in price. Similarly, the increase in quantity demanded is a movement along the demand curve—the demand curve does not shift in response to a reduction in price. Price will continue to fall until it reaches its equilibrium level, at which the demand and supply curves intersect. At that point, there will be no tendency for price to fall further. In general, surpluses in the marketplace are short-lived. The prices of most goods and services adjust quickly, eliminating the surplus. Later on, we will discuss some markets in which adjustment of price to equilibrium may occur only very slowly or not at all.

Shortages

Just as a price above the equilibrium price will cause a surplus, a price below equilibrium will cause a shortage. A shortage is the amount by which the quantity demanded exceeds the quantity supplied at the current price.

Figure 3.16, “A Shortage in the Market for Coffee” shows a shortage in the market for coffee. Suppose the price is $4 per pound. At that price, 15 million pounds of coffee would be supplied per month, and 35 million pounds would be demanded per month. When more coffee is demanded than supplied, there is a shortage.

Figure 3.16. A Shortage in the Market for Coffee


At a price of $4 per pound, the quantity of coffee demanded is 35 million pounds per month and the quantity supplied is 15 million pounds per month. The result is a shortage of 20 million pounds of coffee per month.

In the face of a shortage, sellers are likely to begin to raise their prices. As the price rises, there will be an increase in the quantity supplied (but not a change in supply) and a reduction in the quantity demanded (but not a change in demand) until the equilibrium price is achieved.

Shifts in Demand and Supply

Figure 3.17. Changes in Demand and Supply


A change in demand or in supply changes the equilibrium solution in the model. Panels (a) and (b) show an increase and a decrease in demand, respectively; Panels (c) and (d) show an increase and a decrease in supply, respectively.

A change in one of the variables (shifters) held constant in any model of demand and supply will create a change in demand or supply. A shift in a demand or supply curve changes the equilibrium price and equilibrium quantity for a good or service. Figure 3.17, “Changes in Demand and Supply” combines the information about changes in the demand and supply of coffee presented in Figure 3.2, “An Increase in Demand” Figure 3.3, “A Reduction in Demand” Figure 3.9, “An Increase in Supply” and Figure 3.10, “A Reduction in Supply” In each case, the original equilibrium price is $6 per pound, and the corresponding equilibrium quantity is 25 million pounds of coffee per month. Figure 3.17, “Changes in Demand and Supply” shows what happens with an increase in demand, a reduction in demand, an increase in supply, and a reduction in supply. We then look at what happens if both curves shift simultaneously. Each of these possibilities is discussed in turn below.

An Increase in Demand

An increase in demand for coffee shifts the demand curve to the right, as shown in Panel (a) of Figure 3.17, “Changes in Demand and Supply”. The equilibrium price rises to $7 per pound. As the price rises to the new equilibrium level, the quantity supplied increases to 30 million pounds of coffee per month. Notice that the supply curve does not shift; rather, there is a movement along the supply curve.

Demand shifters that could cause an increase in demand include a shift in preferences that leads to greater coffee consumption; a lower price for a complement to coffee, such as doughnuts; a higher price for a substitute for coffee, such as tea; an increase in income; and an increase in population. A change in buyer expectations, perhaps due to predictions of bad weather lowering expected yields on coffee plants and increasing future coffee prices, could also increase current demand.

A Decrease in Demand

Panel (b) of Figure 3.17, “Changes in Demand and Supply” shows that a decrease in demand shifts the demand curve to the left. The equilibrium price falls to $5 per pound. As the price falls to the new equilibrium level, the quantity supplied decreases to 20 million pounds of coffee per month.

Demand shifters that could reduce the demand for coffee include a shift in preferences that makes people want to consume less coffee; an increase in the price of a complement, such as doughnuts; a reduction in the price of a substitute, such as tea; a reduction in income; a reduction in population; and a change in buyer expectations that leads people to expect lower prices for coffee in the future.

An Increase in Supply

An increase in the supply of coffee shifts the supply curve to the right, as shown in Panel (c) of Figure 3.17, “Changes in Demand and Supply”. The equilibrium price falls to $5 per pound. As the price falls to the new equilibrium level, the quantity of coffee demanded increases to 30 million pounds of coffee per month. Notice that the demand curve does not shift; rather, there is movement along the demand curve.

Possible supply shifters that could increase supply include a reduction in the price of an input such as labor, a decline in the returns available from alternative uses of the inputs that produce coffee, an improvement in the technology of coffee production, good weather, and an increase in the number of coffee-producing firms.

A Decrease in Supply

Panel (d) of Figure 3.17, “Changes in Demand and Supply” shows that a decrease in supply shifts the supply curve to the left. The equilibrium price rises to $7 per pound. As the price rises to the new equilibrium level, the quantity demanded decreases to 20 million pounds of coffee per month.

Possible supply shifters that could reduce supply include an increase in the prices of inputs used in the production of coffee, an increase in the returns available from alternative uses of these inputs, a decline in production because of problems in technology (perhaps caused by a restriction on pesticides used to protect coffee beans), a reduction in the number of coffee-producing firms, or a natural event, such as excessive rain.

Heads Up!

Figure 3.18.


You are likely to be given problems in which you will have to shift a demand or supply curve.

Suppose you are told that an invasion of pod-crunching insects has gobbled up half the crop of fresh peas, and you are asked to use demand and supply analysis to predict what will happen to the price and quantity of peas demanded and supplied. Here are some suggestions.

Put the quantity of the good you are asked to analyze on the horizontal axis and its price on the vertical axis. Draw a downward-sloping line for demand and an upward-sloping line for supply. The initial equilibrium price is determined by the intersection of the two curves. Label the equilibrium solution. You may find it helpful to use a number for the equilibrium price instead of the letter “P.” Pick a price that seems plausible, say, 79¢ per pound. Do not worry about the precise positions of the demand and supply curves; you cannot be expected to know what they are.

Step 2 can be the most difficult step; the problem is to decide which curve to shift. The key is to remember the difference between a change in demand or supply and a change in quantity demanded or supplied. At each price, ask yourself whether the given event would change the quantity demanded. Would the fact that a bug has attacked the pea crop change the quantity demanded at a price of, say, 79¢ per pound? Clearly not; none of the demand shifters have changed. The event would, however, reduce the quantity supplied at this price, and the supply curve would shift to the left. There is a change in supply and a reduction in the quantity demanded. There is no change in demand.

Next check to see whether the result you have obtained makes sense. The graph in Step 2 makes sense; it shows price rising and quantity demanded falling.

It is easy to make a mistake such as the one shown in the third figure of this Heads Up! One might, for example, reason that when fewer peas are available, fewer will be demanded, and therefore the demand curve will shift to the left. This suggests the price of peas will fall—but that does not make sense. If only half as many fresh peas were available, their price would surely rise. The error here lies in confusing a change in quantity demanded with a change in demand. Yes, buyers will end up buying fewer peas. But no, they will not demand fewer peas at each price than before; the demand curve does not shift.

Simultaneous Shifts

As we have seen, when either the demand or the supply curve shifts, the results are unambiguous; that is, we know what will happen to both equilibrium price and equilibrium quantity, so long as we know whether demand or supply increased or decreased. However, in practice, several events may occur at around the same time that cause both the demand and supply curves to shift. To figure out what happens to equilibrium price and equilibrium quantity, we must know not only in which direction the demand and supply curves have shifted but also the relative amount by which each curve shifts. Of course, the demand and supply curves could shift in the same direction or in opposite directions, depending on the specific events causing them to shift.

For example, all three panels of Figure 3.19, “Simultaneous Decreases in Demand and Supply” show a decrease in demand for coffee (caused perhaps by a decrease in the price of a substitute good, such as tea) and a simultaneous decrease in the supply of coffee (caused perhaps by bad weather). Since reductions in demand and supply, considered separately, each cause the equilibrium quantity to fall, the impact of both curves shifting simultaneously to the left means that the new equilibrium quantity of coffee is less than the old equilibrium quantity. The effect on the equilibrium price, though, is ambiguous. Whether the equilibrium price is higher, lower, or unchanged depends on the extent to which each curve shifts.

Figure 3.19. Simultaneous Decreases in Demand and Supply


Both the demand and the supply of coffee decrease. Since decreases in demand and supply, considered separately, each cause equilibrium quantity to fall, the impact of both decreasing simultaneously means that a new equilibrium quantity of coffee must be less than the old equilibrium quantity. In Panel (a), the demand curve shifts farther to the left than does the supply curve, so equilibrium price falls. In Panel (b), the supply curve shifts farther to the left than does the demand curve, so the equilibrium price rises. In Panel (c), both curves shift to the left by the same amount, so equilibrium price stays the same.

If the demand curve shifts farther to the left than does the supply curve, as shown in Panel (a) of Figure 3.19, “Simultaneous Decreases in Demand and Supply”, then the equilibrium price will be lower than it was before the curves shifted. In this case the new equilibrium price falls from $6 per pound to $5 per pound. If the shift to the left of the supply curve is greater than that of the demand curve, the equilibrium price will be higher than it was before, as shown in Panel (b). In this case, the new equilibrium price rises to $7 per pound. In Panel (c), since both curves shift to the left by the same amount, equilibrium price does not change; it remains $6 per pound.

Regardless of the scenario, changes in equilibrium price and equilibrium quantity resulting from two different events need to be considered separately. If both events cause equilibrium price or quantity to move in the same direction, then clearly price or quantity can be expected to move in that direction. If one event causes price or quantity to rise while the other causes it to fall, the extent by which each curve shifts is critical to figuring out what happens. Figure 3.20, “Simultaneous Shifts in Demand and Supply” summarizes what may happen to equilibrium price and quantity when demand and supply both shift.

Figure 3.20. Simultaneous Shifts in Demand and Supply


If simultaneous shifts in demand and supply cause equilibrium price or quantity to move in the same direction, then equilibrium price or quantity clearly moves in that direction. If the shift in one of the curves causes equilibrium price or quantity to rise while the shift in the other curve causes equilibrium price or quantity to fall, then the relative amount by which each curve shifts is critical to figuring out what happens to that variable.

As demand and supply curves shift, prices adjust to maintain a balance between the quantity of a good demanded and the quantity supplied. If prices did not adjust, this balance could not be maintained.

Notice that the demand and supply curves that we have examined in this chapter have all been drawn as linear. This simplification of the real world makes the graphs a bit easier to read without sacrificing the essential point: whether the curves are linear or nonlinear, demand curves are downward sloping and supply curves are generally upward sloping. As circumstances that shift the demand curve or the supply curve change, we can analyze what will happen to price and what will happen to quantity.

An Overview of Demand and Supply: The Circular Flow Model

Implicit in the concepts of demand and supply is a constant interaction and adjustment that economists illustrate with the circular flow model. The circular flow model provides a look at how markets work and how they are related to each other. It shows flows of spending and income through the economy.

A great deal of economic activity can be thought of as a process of exchange between households and firms. Firms supply goods and services to households. Households buy these goods and services from firms. Households supply factors of production—labor, capital, and natural resources—that firms require. The payments firms make in exchange for these factors represent the incomes households earn.

The flow of goods and services, factors of production, and the payments they generate is illustrated in Figure 3.21, “The Circular Flow of Economic Activity”. This circular flow model of the economy shows the interaction of households and firms as they exchange goods and services and factors of production. For simplicity, the model here shows only the private domestic economy; it omits the government and foreign sectors.

Figure 3.21. The Circular Flow of Economic Activity


This simplified circular flow model shows flows of spending between households and firms through product and factor markets. The inner arrows show goods and services flowing from firms to households and factors of production flowing from households to firms. The outer flows show the payments for goods, services, and factors of production. These flows, in turn, represent millions of individual markets for products and factors of production.

The circular flow model shows that goods and services that households demand are supplied by firms in product markets. The exchange for goods and services is shown in the top half of Figure 3.21, “The Circular Flow of Economic Activity”. The bottom half of the exhibit illustrates the exchanges that take place in factor markets. factor markets are markets in which households supply factors of production—labor, capital, and natural resources—demanded by firms.

Our model is called a circular flow model because households use the income they receive from their supply of factors of production to buy goods and services from firms. Firms, in turn, use the payments they receive from households to pay for their factors of production.

The demand and supply model developed in this chapter gives us a basic tool for understanding what is happening in each of these product or factor markets and also allows us to see how these markets are interrelated. In Figure 3.21, “The Circular Flow of Economic Activity”, markets for three goods and services that households want—blue jeans, haircuts, and apartments—create demands by firms for textile workers, barbers, and apartment buildings. The equilibrium of supply and demand in each market determines the price and quantity of that item. Moreover, a change in equilibrium in one market will affect equilibrium in related markets. For example, an increase in the demand for haircuts would lead to an increase in demand for barbers. Equilibrium price and quantity could rise in both markets. For some purposes, it will be adequate to simply look at a single market, whereas at other times we will want to look at what happens in related markets as well.

In either case, the model of demand and supply is one of the most widely used tools of economic analysis. That widespread use is no accident. The model yields results that are, in fact, broadly consistent with what we observe in the marketplace. Your mastery of this model will pay big dividends in your study of economics.

KEY TAKEAWAYS

The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It is determined by the intersection of the demand and supply curves.

A surplus exists if the quantity of a good or service supplied exceeds the quantity demanded at the current price; it causes downward pressure on price. A shortage exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price; it causes upward pressure on price.

An increase in demand, all other things unchanged, will cause the equilibrium price to rise; quantity supplied will increase. A decrease in demand will cause the equilibrium price to fall; quantity supplied will decrease.

An increase in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; quantity demanded will decrease.

To determine what happens to equilibrium price and equilibrium quantity when both the supply and demand curves shift, you must know in which direction each of the curves shifts and the extent to which each curve shifts.

The circular flow model provides an overview of demand and supply in product and factor markets and suggests how these markets are linked to one another.

TRY IT!

What happens to the equilibrium price and the equilibrium quantity of DVD rentals if the price of movie theater tickets increases and wages paid to DVD rental store clerks increase, all other things unchanged? Be sure to show all possible scenarios, as was done in Figure 3.19, “Simultaneous Decreases in Demand and Supply”. Again, you do not need actual numbers to arrive at an answer. Just focus on the general position of the curve(s) before and after events occurred.

Case in Point: Demand, Supply, and Obesity

Figure 3.22.


Why are so many Americans fat? Put so crudely, the question may seem rude, but, indeed, the number of obese Americans has increased by more than 50% over the last generation, and obesity may now be the nation’s number one health problem. According to Sturm Roland in a recent RAND Corporation study, “Obesity appears to have a stronger association with the occurrence of chronic medical conditions, reduced physical health-related quality of life and increased health care and medication expenditures than smoking or problem drinking.”

Many explanations of rising obesity suggest higher demand for food. What more apt picture of our sedentary life style is there than spending the afternoon watching a ballgame on TV, while eating chips and salsa, followed by a dinner of a lavishly topped, take-out pizza? Higher income has also undoubtedly contributed to a rightward shift in the demand curve for food. Plus, any additional food intake translates into more weight increase because we spend so few calories preparing it, either directly or in the process of earning the income to buy it. A study by economists Darius Lakdawalla and Tomas Philipson suggests that about 60% of the recent growth in weight may be explained in this way—that is, demand has shifted to the right, leading to an increase in the equilibrium quantity of food consumed and, given our less strenuous life styles, even more weight gain than can be explained simply by the increased amount we are eating.

What accounts for the remaining 40% of the weight gain? Lakdawalla and Philipson further reason that a rightward shift in demand would by itself lead to an increase in the quantity of food as well as an increase in the price of food. The problem they have with this explanation is that over the post-World War II period, the relative price of food has declined by an average of 0.2 percentage points per year. They explain the fall in the price of food by arguing that agricultural innovation has led to a substantial rightward shift in the supply curve of food. As shown, lower food prices and a higher equilibrium quantity of food have resulted from simultaneous rightward shifts in demand and supply and that the rightward shift in the supply of food from S1 to S2 has been substantially larger than the rightward shift in the demand curve from D1 to D2.

Figure 3.23.


ANSWER TO TRY IT! PROBLEM

An increase in the price of movie theater tickets (a substitute for DVD rentals) will cause the demand curve for DVD rentals to shift to the right. An increase in the wages paid to DVD rental store clerks (an increase in the cost of a factor of production) shifts the supply curve to the left. Each event taken separately causes equilibrium price to rise. Whether equilibrium quantity will be higher or lower depends on which curve shifted more.

If the demand curve shifted more, then the equilibrium quantity of DVD rentals will rise [Panel (a)].

If the supply curve shifted more, then the equilibrium quantity of DVD rentals will fall [Panel (b)].

If the curves shifted by the same amount, then the equilibrium quantity of DVD rentals would not change [Panel (c)].

Figure 3.24.

Aliko Dangute, Africans Richest man emerged the 8th Position of the world's richest Men

HOW TO PRODUCE DETERGENT (Powdered Soap)

HOW TO PRODUCE POWDERED DETERGENT
HOW TO PRODUCE POWDERED DETERGENT

A. INTRODUCTION:

Detergent like soap is used in wide range of cleaning activities. It is employed at home, office, factories, hospitals, farms etc. The major deferent between detergent and soap is that detergents have the advantage of retaining its efficiency in hard water.
Nowadays soap can also be powder or liquid as found in detergents. These liquid or powder soap are differentiate by the use of word SYNTHETIC for detergents.

B. RAW MATERIALS (ALL TYPES) FUNCTION

1. Vegetable Oil (e.g PKO)- To form soap
2. Fat - To form soap
3. Sulphonic Acid - To form soapless soap
4. Hydrogen peroxide - To help in breaking dowetergent
5. Sodium Silicate - Hardener and Bristleness
6. STPP or TSP - Water softener (optional)
7. Sodium Sulphate - Hydration (Removing water) (ptional)
8. Sodium perborate - Cleaning Material (bleach)(optional)
9. Tinapol - Brighter (Like blue dye)
10. Caustic Soda - To form soap and detergent
11. Soda Ash - Basing agent (Neutralizer) (optional)
12. Urea - To Neutralize (optional)
13. Colourant - To impact colour
14. Perfume - To impact scent
15. Sodium - Foam Booster (optional)
16. Water - To solubilize Solids

C. EQUIPMENT / TOOLS FUNCTION

1. Reactor(s) (Mixer/Heater)
(Stainless steel or Plastic) For Boiling
2. Storage Tanks (Stainless Steel
or plastic) For various purposes
3. Drying Chamber For drying (Oven, Rotary or Flash)
4. Pulveriser (Grinder) or sieve For Grindings/sieving
5. Filling machine (optional) For Filling
6. Packaging Machine (optional) For Sealing / Packaging
7. Weighing scales For Various Weighing
8. Hydrometer For Guaging of Solutions

D. PACKAGINGS:

The product is packed in a paper packets, polythene bags, plastic cans etc which in turn will be put in bigger cartons. Packaging should carry brand name, quantity, manufacturer and any other relevant instructions.

E. FORMULATIONS:

Many formulations are available for use. The producer however must consider the factors in choosing one of them adopt.

VIZ:

1. Cost of production materials
2. Availability of these materials
3. Ease of production process
4. End user requirements (Quality)
It is important to mention that a combination of soap type and synthetics detergent type formulations have been adopted when the process is cheaper. Use in made of oils, sulphonic acid and caustic soda as the basic materials.

PRATICAL PRODUCTION PROCESS:

1. Making of solution: Measure out in the container of your choice as below

(a) Caustic Soda Solutions: (N.B. Caustic Soda is corrosive)

Caustic Soda - 1 part
Water - 4 parts

Note: This means that to every one part of caustic soda pearls add 4 parts of water (e.g 1 milk cup of caustic soda plus 4 cups of water). Mix well till the colour (milk) is clear. Do not touch with bare hand or body.

(b) Soda Ash Solution: Treat as in caustic soda solution

Soda Ash light - 1 part
Water - 4 parts
Mix these two materials till Soda Ash is fully dissolved.

(c) These two solutions (a) and (b) are kept for use.



CAUTION:

Use rubber or plastic hand glove anytime you are producing to avoid direct body contact with caustic soda. Caustic soda is corrosive. Avoid body contact.

IMPORTANT NOTES:

1. The formulation given above if carefully followed and good materials are used given s a good and affordable detergent that will guarantee the investor good return on investment.
2. Do not hesitate to make further inquiries where in doubt or were further explanation is needed.
3. Use plastic containers for storage, measurement and mixing to avoid corrosion and rusting.
4. Ordinary mild steel will corrode and rust easily but can however be used where reduction of cost for a start is absolutely necessary.
5. Prepare each solution on a separate container.
6. Store all materials properly.

POWDERED DETERGENT (synthetic) FORMULATIONS

Alkyl Benzene sulphonate (ABS) or D.D.B.S. - 20 parts (kg)
Soda Ash (Light) - 40 parts
STPP - 26 parts
Sodium Metasilicate - 8 parts
CMC - 2.0 parts
Colourant (optional) - Q.S. (50g for 20kg DDBS)
Tinapol - Q.S.[100g “ “ “ ]
Papain (enzyme) to remove stains - Q.S.[100g “ “ “ ]
Water - 15 parts (or kg)
Total about 100kg

Q.S. means sufficient quantity (usually 0.05 – 0.2%)

PROCESSING:

Add all the materials into a low speed mixer except ABS. Mix very well. Add the ABS or DDBS kg by kg as you mix. Let the mixture set then strain through a fine mesh (About 200 ms) DDBS and Idet 10 are brand names of ABS.
Dry in a low temperature spray dryer set under 600c or less.

Other Formulation

Idet 10 - 45 parts(kg)
STPP - 35 parts
Soda Ash Light - 16 parts
CMC - 2 parts
Colourant - 0.1 part
Tinapol - 0.2 part
Papain (optional) - 0.2 part
Water - 15parts

PROCESSING:

Treat as in No. 1 above. Detergent of No. 1 is harder than detergent No. 2 yet cheaper in production cost.

Note: This is the modern synthetic detergent made without vegetable oil. It foams more and easily removes stains from fabrics. It is replacing the oil base detergent.