a) Why does choice arise in economics? Use one example or more to discuss the concept of “rational choice” and opportunity cost. b) What do you understand by the law of demand? Pick a product and discuss two factors, which in your opinion would cause the demand curve to the left. Can you think of two other factors which would shift the supply curve of your product to the right? According to Sloman (2007), economics is a social science that studies human behaviour including individuals, businesses and government in the context of market, where the trade takes place.
In our daily life we all have to make choice and decide which desire we will satisfy and which one we will leave unsatisfied. The reason why is because there are unlimited wants but limited resources which is known as scarcity. Scarcity limits us both as individuals and as a society. As individuals we want more than we can have due either to income, time or ability. As a society, limited resources such as land, labour or machinery determine a maximum amount of good and services that can be produced.
Therefore before to take any decision we need to think sensibly which involves weighting up the cost and benefits of any activity. It is known as rational choice. The opportunity cost of something is the best thing you must give up to get it. It means that the production or consumption of one thing involves the sacrifice of alternatives. The law of demand represents the relationship between price and consumption and state, if the price of a good rises, the quantity demanded will fall and vice versa.
Therefore there are two reasons for this law: the substitution effect is when the price of a product rises, consumers will tend to buy its substitute and the income effect is when the price of a good rises and consumers cannot afford it so the demand for that good decrease. The demand curve shows the relationship between the quantity demanded of a good and its price. Firstly a factor that would decrease the demand for a good can occurs if the price of a substitute falls. For instance let assume chicken burgers cost ?
2. Also the price of alternatives such as beef burgers falls to ?1. 50; consumers will buy more of beef burgers and thus decrease the demand for chicken burgers. Secondly, another factor could be if the complement of a good rises. For example, if the price of laces which is a complementary goods for shoes increases so then the total price of the shoes increases. The demand for shoes will decrease and the demand curve shift to the left. The supply of a good can rises and shifts the supply curve to the right if the price of a factor of production used decreases.
If the price of a factor of production used for bread such as flour decreases: the supply for bread will increase as it becomes more profitable for a firm to produce bread. Moreover if the price of a good is expected to fall in the future the supply of that good will increase. If the price of laptops is ?500 and expected to fall to ?350 in the future, supplier will produce more now as it more profitable for them. As a result there is an increase in supply and the curve shift to the right. Question 2 a) How is the price of oil determined? Discuss the factors that let to the surge in the price of oil in 2008 and its subsequent fall in 2009. ) Over the ten coming years, which factors are likely to affect (a) demand for oil (b) supply of oil? c) Explain why the price of oil is such an important consideration for firms? The supply and demand have a significant impact on the price of oil. If the demand for oil decreases, as it happened in 2009 (BBC website), the price of the barrel dropped of almost ?3 in order to encourage people to consume more and thus boost the production. Therefore, the price of oil had significantly increased in 2008 due to the economic crisis, the recession.
The price of oil and the inflation (two consecutive negative … resulting to a recession) are interconnected. This is because oil is a major input in the economy: it is used for several activities such as fuelling, heating homes. Secondly the price oil raised due to the political, war tensions in the exporter countries such as Iraq, or Nigeria (BBC website) where the facilities were damaged after attack, the supply was affected and people worried that the demand became greater than the supply. Thus as an important commodity, people were ready to pay very high price for it.
However, the price of oil falls for several reasons. Firstly the economic recovery boosted consumption of oil as the demand rose in a global market. For instance United States represents ? of the demand of oil due to its recovery and greater need; china’s demand grows by 20% as it is in expansion. Moreover, financial investments played a key role in the fall of oil price. b) In the coming years, the demand is likely to increase due to the world trade expansion and the consumption, particularly concerning the transportation in industrialized countries. Also the population growth will lead to increase the oil consumption