Business Management for Demand and Supply - myassignmenthelp

Question: Discuss about theBusiness Management for Demand and Supply. Answer: From the given market data regarding the demand and supply schedule of the 100 gm coffee one can say that at price $6 the quantity demanded and supplied is equal to 81 unit. If we look at the data closely we will find that for one unit change in price that is price being $6 to $7 make sthe demand 68 unit and supply 98 unit. This explains that demand falls by 13 unit and supply rises by 17 unit. Now the market set price has been mentioned to rise and reach $6.25. This has led to fall in consumer surplus and producer surplus. Burden on consumers are more than producers. (Source: Author) Initially the price was $6 at B and now the price increased to $6.25 reflected by D which acts like price floor prevailing above the market equilibrium price. The initial consumer surplus was reflected by the are AOB and producer surplus was the area BOC Now the consumer surplus has reduced to area AFD and producer surplus has increased to CHFD where DFIB area is gained by the producers due to rise in price. Clearly the area FOH is loss of total surplus as part of both consumer and producer surplus leaks out of the total surplus which was area AOC initially and now has become The area AFHC. SET-3: Purchasing Power Parity (PPP) is a standardized metrics devised to analyze the difference of the economic conditions and consequent difference in standard of living and economic parameters between countries of the world across time series. The theory of PPP explains the comparison of currencies in different countries through an approach based on common basket of goods. The theory suggests exchange rate between two nations is equivalent to the ratio of the purchasing power of the respective currencies. Differences in prices prevailing in the markets of different nations stem from varied inflation rate in national economy and presence of trade and transaction cost. Moreover exchange rates are different. The Purchasing Power Parity focuses on the concept that builds law of one price. This further explains that when there is no presence transaction cost and trade barriers goods of same type will be sold in same price in different countries markets given that the prices are converted and expressed in same currency. S = exchange rate of currency 2 to currency 1 P1 = Cost of good Y is currency 1 P2= Cost of good Y in currency 2 Suppose 100 gm of meat costs US$10 in USA and the same meat costs EUR 5 in Spain. Even though the good is same the prices differ due to difference in economic and political factors. Now following the formula of PPP we get the exchange rate of Euro in Spain to US dollar as S= 10/5 = $2 = EUR 1 = DOLLAR 2 That is to get one unit of Euro one needs to give $2. Price of one unit of euro is 2 when converted in dollar. Now if we transfer the price of meat in euro to dollar then the converted price of meat in dollar becomes $10 only that is the market price of the mean in USA. One unit of euro comes from giving $2 hence 1 euro has more purchasing power than one unit dollar itself in the US market. The PPP theory doesnt say that one unit of currency would buy same amount in different countries but it makes the prices of good in different markets same through equalization of exchange rate and relative prices of that good. The role of government lies in the adoption of proper exchange rate policy so that the purchasing power of the currencies become equal while exchange rates remaining close to each other. The greater the deviation between currencies in the exchange rate, the greater is the value of one currency in terms of others. In the above example one unit euro carries purchasing power equivalent to 2 unit of dollar. Had the exchange rate become less than 2 and more close to 1, the difference of this purchasing power would have reduced making the currencies have close values. So the target of the government is to appreciate the domestic currency which is possible by increasing the foreign reserve. If the government in USA wants to appreciate its own currency then it needs to supply more of euro and make addition to the US foreign exchange reserve. This would make the price of euro fall and per unit of euro lesser amount has to be paid. The exchange rate modification can take place by revaluation o f the home currency through flexible or pegged exchange rate system. Reference: Bodie, Z. (2013).Investments. McGraw-Hill. Frenkel, J. A., Johnson, H. G. (Eds.). (2013).The Economics of Exchange Rates (Collected Works of Harry Johnson): Selected Studies(Vol. 8). Routledge. Hildenbrand, W. (2014).Market demand: Theory and empirical evidence. Princeton University Press. Rios, M. C., McConnell, C. R., Brue, S. L. (2013).Economics: Principles, problems, and policies. McGraw-Hill.