economics cases

7/27/2019 Economics Cases

1/8

CASE 1

What will happen to the price of milk?

As always, the movement in milk price in India is determined by the quantity of milk supplyin the market and by the consumers willingness to buy milk. Short run seasonal factors and

long run decisions on the number and quality of herd size influences the milk supply. Atpresent the Indian economy being in recession, consumer incomes are low and therefore lowdemand and market prices of milk.

Supply of milk in the market is fairly predictable. During summer less milk is available formarketing .while during winters greater quantity of milk is marketed. So the milk prices risein the summers and fall in the winter years. The reason for such variation in supply is mainly

biological in nature. Some studies on milk production in India have revealed that the seasonalvariation in milk supply is also accompanied by significant economic milk cycle of a periodof 15-26 years. The economic milk cycle is a result of over- reaction of the milk suppliers to

both the upward and downward price signals. At present, the Indian milk market isexperiencing low supplies, high seasonal price but is on the rising side of latest economicmilk cycle.

Demand for milk has been found to be influenced mainly by the retail prices of the milk,consumer tastes and the personal disposable income of the consumers. Low demand of themilk in the India is attributed mainly to the shift in consumers taste (both in the urban andrural sectors) and depressed consumers incomes due to recession during 1997-1983.

Now the economic indicators are suggesting an economic recovery. It is, therefore, expectedthat the milk prices will rise, which should serve as signal for milk producers to augmenttheir production capacity. It is expected that a 5% increase in consumers disposable income

results in 2% increase for the demand for milk.

In order to understand the effects of current recovery it is suggested to estimate and comparemilk prices under two alternatives conditions: (1) economic recovery during the current

period, (2) zero economic growth i.e., continued recession. After a statistical analysis of thedata, it was found that the personal disposable income of the consumers is likely to increaseat the most at 3% rate. While in case of the second alternative it was assumed that theconsumer expenditure would remain at the same level as last year. Forecast of monthlysupplies of milk was arrived at for both the alternatives. It was estimated that the milk priceshave gradually increased due to economic recovery and are 4 to 6 percent higher than ifrecession had continued. It is expected that as recovery picks up, the milk prices would

further improve and are likely to go up further by around 10% during the current month nextyear. It is therefore expected that the anticipated income recovery will strength the market formilk producers in the country.

Questions:

1) What are the various determinants of demand for milk2) How far the milk prices affected by (a) seasonal factors, (b) cyclical factors, and

(c) other factors?

3) What is the measure of income elasticity of demand for retail price of milk?


2/8

CASE 2

Resolving Chinas Power ShortageShanghai is Chinas financial and business hub. In late July 2004, with daytime temperatures

reaching 37 degrees Celsius, the citys electricity consumption surged to a weekly record of14.35 million kilowatt hours. The city authorities resorted to asking 2,100 businesses to

operate at night, and a further 3,000 others to adjust operating hours.Even high-profile multinational companies were not spared. General Motors and Volkswagenwere ordered to suspend production for more than a week each. Shanghai Volkswagenspokesman Lu Jun explained, It's a rule. We have to cut power for 10 days Weve cut

power and so have had to stop production. It's all over Shanghai.The Shanghai episode mirrored a nationwide shortage of electric power. In Beijing, on July22, 2004, the Municipal Power Supply Bureau imposed the capitals first brownout of the

year, disrupting supply to suburban areas for 47 minutes in the afternoon.The Chinese government has certainly been working tirelessly to resolve the power crisis.Thermal coal is the principal fuel used to generate electric power in China.In July, Premier Wen Jiabao exhorted, Railway departments should do their utmost for the

transport of coal for electricity generation.2 The Ministry of airways increased train speedand freight loads, and allocated 90% of freight capacity to transport key materials. In the firsthalf of 2004, Chinese railways shipped 480 million tons of coal, up 12.2% over the same

period last year.The Ministry of Communications has also pitched in. It diverted ships from overseas routesto domestic coal transport and approved emergency coal transportation on various roads andwaterways.China is the worlds second-biggest coal exporter. In 2003, China exported 93 million tons ofcoal, including 80.8 million tons of thermal coal. To assure supplies to the electric powerindustry, the Chinese government has limited coal exports to 80 million tons in 2004. ChinaCoal Import & Export Vice President Zhou Dongzhou predicted that exports of thermal coalwould fall to 70 million tons.Since the 1960s, the Chinese government has regulated the supply of thermal coal to electric

power plants. It requires coal mines to supply power plants with about one-quarter of coalpurchases at a contract price. The government regulates the supply of coal to support itsregulation of the electricity industry. In the late 1990s, the Chinese government dissolved theMinistry of Electric Power, and divided its functions between the State Electricity RegulatoryCommission (SERC) and the State Power Corporation of China.The State Power Corporation owns five of the six transmission grids Northwest, North,

Northeast, Central, and East) and about half of the national generating capacity. Regulation isnecessary to ensure that the State Power Corporation does not abuse its monopoly power. The

SERC regulates all aspects of the electricity industry, except pricing. With regard toelectricity pricing, the SERCs role is to advise the National Development ReformCommission (NDRC).To ensure that electric power generation is economically viable, mines are required to sellcoal cheaply to power plants. Typically, the government sets the price below the equilibriummarket price.Many mines have ignored their contracts with power plants and sold coal on the highermarket price to earn higher profits. Some power plants cut back production, so exacerbatingthe national power shortage.Some estimate that the nationwide power shortage will soon reach 30 million kilowatts,which is more than double Shanghais peak consumption. With China headed for a power

crisis, the government is under pressure to increase electricity prices. In June 2004, followingpersistent rises in the cost of fuel, the NDRC increased electricity prices by an average of 2.2


3/8

fen per kilowatthour in the East, North, Central, and South grids. But, apparently, thisincrease has not been sufficient. The threat of a power crisis continues.

Discussion Questions1. Explain how the impact of a price increase on electricity consumption depends on the price

elasticity of demand.2. The price elasticity of the Indian demand for electricity has been estimated to be -0.65among residential users and -0.45 among industrial users. If these elasticities apply to Chinaas well, how will the impact of a price increase be spread between residential as comparedwith industrial users?3. Many Chinese organizations ignore the market system. For instance, they borrow moneyfrom banks and refuse to repay, thus creating bad debts for lenders. Likewise, they might

consume electricity without bothering to pay the power supplier. Do such organizations causethe demand for electricity to be more or less price elastic?


4/8

CASE 3

Case on Rent of ApartmentsLets us take the case of a well-defined geographic area of a city. The area is composedexclusively of apartments and is populated by low-income residents. The people who live inthe area tend to stay in that area because (1) they cannot afford to live in other areas of the

city, (2) they prefer to live with people of their own ethnic group, or (3) there isdiscrimination against them in other areas of the city. Rents paid are a very high percent of

peoples' incomes.(1) State whether the demand for apartments in this area be relatively inelastic or relativelyelastic? Also state why.(2) What is the nature of the supply curve of apartments in this area and why(3) Show the equilibrium price and output.(4) Now assume the government creates a program. Under this program, the renter is

required to pay 30% of income in rent. Any additional rent is paid by the government --- upto a limit. For example, a low-income person with an income of $1,000 a month would berequired to pay $300 in rent (30%). If the rent is $500, the other $200 would be paid by the

government. Analyze the results of this program. Show the changes on the graph andexplain what will result. Who gains and who loses from this program?(5) Instead, now assume that the government decides to provide a subsidy to people who

build apartments in this low-income area. A certain percent of their costs will be paid by thegovernment. Analyze the results of this program. Show the results on the graph and explainwhat will result.


5/8

CASE 4

Case on Tobacco Policy in IndiaIndia is the second largest tobacco leaf producing nation and the third largest tobaccoconsuming nation. On October 2, 2008, Indias national smoke-free law came into effect.Healthcare facilities, educational facilities and government facilities have been designated as

smoke-free environments. However, the law allows for designated smoking rooms in hotels,bars, restaurants and airports. Enforcement and compliance levels vary by state and city.Tobacco advertising is banned in major media formats and there are restrictions onadvertising at point of sale. However, size and advertising context restrictions at the point ofsale are not enforced. Tobacco companies engage in surrogate advertising, e.g., by promotingfashion shows, award functions like bravery awards for women and so on. Health warningshave to be printed on packs of cigarettes. But WHO feels that the graphic images are weakand do not convey the harms of tobacco use. Health warnings have been found printed on the

back of the pack instead of the front as required and are of smaller size than the required 40%of the front display area. All these policies are designed to affect the demand curve fortobacco products.

We know that the Govt. can tax tobacco products to bring down consumption and that theincidence of taxation will depend on the relative price elasticitys of demand and supply. The

tax base of tobacco in India is heavily dependent on about 14% of tobacco users, who smokecigarettes. Non-cigarette tobacco products accounting for 85% of the tobacco consumptioncontribute only 15 % of the total tobacco taxes. In many countries, taxation of tobacco

products has been used as an instrument to discourage smoking. In India although cigarettesare taxed heavily, there is almost no tax on bidis (a leaf rolled local mini cigarette) andchewing tobacco. In the face of the rising taxes on cigarettes, cigarette smokers have beenable to switch to cheaper methods of tobacco consumption.

Explain the various factors affecting the demand for tobacco?

How will you apply the various concepts of demand and supply that you have learnt?

What should be the desirable optiona ban on cigarette smoking in public or imposition of

tax on tobacco? How do these programs affect the cigarette consumption?

What would be the combined effect of both the programs


6/8

CASE 5

Tax on Petrol

Petrol is a non-renewable source and the government wants to reduce the use of it also the

use of petrol leads to air pollution. Thus, the govt aims at reducing its use of petrol and thusimpose a Rs. 0.50 tax for each gallon of petrol sold.

1. Should they impose this tax on producers or consumers? Explain carefully using asupply and demand diagram.

2. If the demand for petrol are more elastic, would this tax be more effective or lesseffective in reducing the quantity of gasoline consumed? Explain .

3. Are consumers of petrol helped or hurt by this tax? Why?4. Are workers in the oil industry helped or hurt by this tax? Why?


7/8

CASE 6

Optimal output decisionthe case of a small fast food outlet

The location is the busy town of pune, with the young working population growing

exponentially. Snacks such as paav (Indian /Maharasthrian equivalent of the Americanburger), are in great demand and so is the supply. Every small tea or snack shop sells it. The

going price is Rs.10. a new entrant decides to set up one such stall. She estimates that the

total monthly cost, including normal profit will be

= 1000 + 2Q + 0.01Q

The first question that she seeks an answer to is how much should she produce so that she

maximizes ones profit. She has been told that this is a lucrative business and once she gets

her production figure, she can sit back and enjoy the profits.

You are required to do the following:

1. Assess the market structure in terms of characteristics2. Arrive at the profit maximizing output3. Assess how lucrative the business is in terms of economic profit4. Calculate how long will these profits last5. Assess the incentives to stay on if the economic profits do not last.


8/8

economics cases

Documents