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Demand And Supply Analysis Case Economics Essay

Hackney is a well-defined geographic area of a city. The area is composed exclusively of apartments and is populated by low-income residents. The people who live in the area tend to stay in that area because:
They cannot afford to live in other areas of the city,
They prefer to live with people of their own ethnic group, or
There is discrimination against them in other areas of the city.
Rents paid in Hackney are a very high percent of peoples’ incomes.
Questions: Would the demand for apartments in Hackney be relatively inelastic or relatively elastic? State why. (3)
There are five main factors that affect the demand for apartments: price of housing, income, price of substitutes , price of complements (i.e., mortgages) and tastes / utility.
In a short-run the demand would be relatively inelastic for the following reasons:
Firstly depends on the degree of necessity of the purchase or rent of housing, and there are not many alternatives for close substitution; new apartments cannot be built in a short time.
Furthermore taste also affect the demand, individuals that are renting in this particular area prefer to live with people of their own ethic group as they are discriminated in other areas of the city.
All these factors make the demand for rents increase.
The demand would be relatively elastic in a long run, because customers would be more sensitive to a change in price as their income is low.
Would the supply of apartments in Hackney be relatively inelastic or relatively elastic? State why. (3)
The factors affecting supply are the same as those affecting the demand, but in opposite directions. The supply of housing is determined by these factors: the profit in building houses compared to other activities, other uses of the land, and how easy it is to build houses.
In a short run the supply of available housing to rent in Hackney is relatively inelastic, because a rise in demand leads to sharply higher prices, however people will still go for it because there is a close relationship between a change in price and an increase in supply of new properties becoming available in the market in a short period of time. So the less the supply, the higher up the demand curve will the equilibrium price be.
Supply can become more elastic over time, if the demand remains high, more properties will tend to come onto the market, and this helps to put downward pressure on the price.
Draw the demand and supply curves as you have described them, showing the initial equilibrium price and quantity. Label carefully. (3)
Now assume the government creates a rent supplement program. Under this program, the renter is required to pay 30% of income in rent. Any additional rent is paid by the government — up to a limit. For example, a low-income person with an income of £1,000 a month would be required 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. (5) Show the changes on the graph and explain what will result. (2) Who gains and who loses from this program? (1)
The government might adopt this measure to improve the general welfare.
Rent limits act as a means of controlling the level of expenditure on rent supplements. In practice, tenants (and landlords) have little incentive to agree rents below the rent limit levels.
Selective lowering of rent limits when market rents fell could have resulted in lower expenditure.
In order to maximise the value of its spending and avoid the risk of windfall gains to landlords, the Department needs to be in a position to promptly adjust the rent limits for new tenancies (nationally or on a selective basis), and to exploit its effective purchasing power in response to market conditions.
There is a need to make this work more effective by developing methods to identify the extent of fraudulent or unwarranted recourse to rent supplements.
Rent control reduces the incentive of landlords to supply rental units. Rental units tend to be in scarce supply under rent control. Ironically this leads to an escalation of complaints against the landlord class. Vacancy levels tend to be relatively low and a available units tend to be rented only under strict conditions, again aggravating relations between landlords and tenants. There is also an incentive for landlords to discriminate against tenants likely to stay for a long time, like retirees or couples with children. Rent control tends to lead to bullying and illegal behaviour by landlords. If rent increases are allowed between vacancies, landlords will try to evict tenants in any way possible.
Tenants in tenancy rent controlled units are less willing to move to other places, despite the possibility of earning higher wages.
the removal of rent control can not only increase efficiency in the rental market, but can also lead to a general lowering of rents, making all tenants better off.”
Rent control is a price ceiling imposed by the government, and is in place in many areas across the world. The practice is controversial, as some people believe it is necessary in order to prevent tenants from paying unfair rents and in order to allow as many individuals as possible access to good housing, while others feel that it could create a housing shortage due to increased demand, that a rent control situation will decrease the quality of available housing, or that it is simply unfair to the property owners.
But if rents are established at less than their equilibrium levels, the quantity demanded will necessarily exceed the amount supplied, and rent control will lead to a shortage of dwelling spaces.
Instead, now assume that the government decides to provide a building subsidy to people who build apartments in this low-income area. A certain percent of their costs will be paid by the government. Analyze the results of this program (4) Show the results on the graph and explain what will result. (2) Who gains and who loses from this program? (1)
A rent ceiling would cause a reduction in the supply of apartments because the price would be too low for some suppliers to sell, so they would simply not sell. They would benefit more from not selling, and this creates a shortage of apartments for people who want them. With the price being a standard for all apartments there would be an increase in demand. The shortage is the disequilibrium in this market. If the demand for apartments is inelastic, the price effect (a price increase makes each unit sell at a higher price which raises revenue) is stronger than the quantity effect (a price increase means fewer apartments are sold which decreases revenue). Without the price ceiling suppliers can sell apartments at higher prices, meaning the price is inelastic, and allows the market to reach equilibrium. The inelastic price means that with the rise in price the total revenue will rise (or opposite if the price decreases the total revenue falls). The market will reach equilibrium because those who are willing to pay for the apartments of nicer quality will get them, and the amount of apartments supplied will equal the amount demanded. There will be no deadweight loss when the market reaches equilibrium because consumer and producer surplus are at their highest potential without harming the other. The removal of the rent ceiling will benefit the market, and increase total revenue and surplus within it.
The price ceiling would cause a shortage of apartments in Marietta. The price ceiling would be below the equilibrium price, so if the price ceiling is removed then the price of an apartment will increase and so will the quantity supplied. Both would increase til reaching equilibrium in the market. Because of the price increase the total revenue would increase meaning that the price elasticity of demand is inelastic, and the price effect is stronger than the quantity effect.
Total Available = 24 Points A = 23-24 B = 17-18 C = 11-12 D- = 6-7
A- = 21-22 B- = 15-16 C- = 10 F = 0-5
B = 19-20 C = 13-14 D = 8-9


“Foreign policy involves all activities of a nation by which that nation is trying to change the behavior of other nations and to adjust its own behavior in the international environment.”
George Modelski
58. The foreign policy of a country in a broad sense, comprises of broad objectives, principles and aims which helps in developing its relations with other nations. Post independence, certain objectives, principle and aims have shaped Indian approach towards trade and political alliance with other countries including BRIC. India shared a very exclusive and time tested relationship in the region as it was based on considerations of geostrategic, political, economical and cultural. The potential of BRIC nations to enter into alliances at international forum was never exploited before to guarantee rightful status in the emerging world order and influence the world economics and politics.
59. The foundation of objectives and parameters of Indian foreign policy were laid by Pandit Jawahar Lal Nehru, based on the concept of Non Alignment and Panch Sheel. This policy was the main stay of India’s conduct on trade, economic and political front with nations during Cold War era. However, during early 90’s, National and economic interests gain prominence in policy makers mind. During this time, CTBT became a crucial policy decision of India’s assertion of following an autonomous policy based on its security considerations. The establishment of trade organisation such as World Trade Organisation (WTO) forced India to shape its strategy to boost its economic growth and prevent isolation on international forum. These changes in policies helped India in understanding open market economy and growing global financial markets. As the cold war period was coming to an end, the world evolved from Bi-Polar to Uni-Polar and then of late has emerged as Multi-Polar in the new world order. India’s look East policy ushered in a new era of awareness and need to understanding the economic imperatives in the globalised world. The Gujral Doctrine was based on the fact that to sustain its economic growth and diversify the relations in the emerging world there is a need for increasing regional co-operation and India’s willingness to achieve it.
60. As per Late J N Dixit, the former National Security Advisor (NSA), the challenges that India’s foreign policy faces are as under :-
(a) The preservation of unity and territorial integrity of the nation is given highest priority.
(b) The foreign policy to ensure an environment of peace and stability at regional and global stage wherein it can focus on its economic progress.
(c) It should help in creating national defence capability based on indigenous assets and technologies based on both indigenous and diversified external sources.
(d) Forging regional co-operation to ensure mutually beneficial relation between South East Asian and other groups to ensure its security and economic sustenance.
(e) Strengthen UN, and attain its rightful place in the organisation to play more active role in the world affairs.
61. As the after effect of Global economic crisis, the views of developing nations are being taken into account in formulating policies at international organisations like World Bank and IMF. India along with China emerged as one of the core state in the emerging world order, its role is crucial for ensuring and maintaining balance of power, economic growth and security in Asia. After 9/11 there is greater recognition of India’s stabilising role in the world which has been born out of consistent restraint, economic dynamism and the history of its civilisational engagement that has positive impact in the region. The new wave of globalisation saw increasing shift in balance of power in favour of emerging economies particularly after global economic crisis. The rise of India and China has resulted in increasing importance of Asia in the world trade and economic forums. The time is apt for India to skilfully engage with other BRIC countries to influence the policies at various world trade, economic and banking forums.
62. The Indian approach towards its foreign policy in achieving its rightful place to emerge as regional and global power by 2030. The Indian approach can be divided in five broad categories :-
(a) Flexible Foreign Policy. The biggest challenge facing Indian foreign policy today is changing the mindset. The policy pillars of Nehru still haunts the foreign policy makers as the Gandhi family still dominates the Indian politics. Its high time that strategic thinker and policy makers should come to terms with changing world which warrants key role to be played by India in formulating major economies policies. It should not get tied down to its past policies and adopt flexible and policies in the interest of its economic and industrial growth depending on the changes in the world order.
(b) India’s Economic Interests. In the emerging multi-polar world order, limited access to market in some countries, protectionist approach by some nations, monopoly over energy sources by limited countries, investment and transfer of technology, control regimes in place pose challenges to India’s foreign policy to exploit the relation with other countries to its advantage. These challenges have led to new thrusts in its foreign policy. Look East policy of India is one of the policies that addresses this concern. Today India needs to engage more dynamically at international forums of trade and banking based on common interest for sustaining its growth rate in the years to come. It also needs to engage more realistically with other nations of BRIC forum to exploit the economic alliances to improve its trade with them. The foreign policy should be based on mutual trust and co-operation to fulfil her dream of becoming world economic power by 2030.
(c) Creating Stable and Co-operative Environment. As per foreign policy expert, the Indian foreign policy must help in creating an international environment which is conducive for its economic development. That is there should be harmony between domestic capabilities, aspirations and external policies. However India faces biggest threat in the form of a turbulent neighbourhood which offers challenges for an stable and co-operative atmosphere in the region. India is engaging politically and economically to forge new structures of co-operation with emerging economic powers such as the IBSA forum (with Brazil and South Africa) or BRIC (with Brazil, Russia and China), BIMSTEC.
(d) Enhancing Security Co-operation. The enhanced co-operation in the field of energy, internal and external security is critical to larger efforts aimed at building economic ties. As per defence experts issues like Afghanistan, Iran, Iraq continue to dominate security and defence agenda.
(e) Working Towards Multi-polar World. The world is changing from uni-polar to multi-polar after disintegration of erstwhile Soviet Union. In the emerging world order Indian foreign policy makers faces challenge of ensuring constructive engagement with various countries with conflicting objectives in various forums thus evolving a multi-polar world order.
63. Since the reforms of the Indian economy in the early 1990s, India has been undergoing exceptional economic growth. Thus attracting attention at the regional and global level. As a result India has strengthened its regional and global profile, which is evident from the increased engagement at WTO, UN and especially through its commitment to reconstructions efforts in Afghanistan. There is No better interpretation of India’s growing importance in world affairs then the shift of US policy towards India. It is in this context that India’s engagements with the regional and global levels are seen reflected in four sets of relationships.
(a) The immediate region of South Asia.
(b) The major Powers – US, EU, China, Russia and Japan.
(c) The relations with South-East Asian countries aimed at increasing trade by gaining access to their market and economic relations, West Asia and Central Asian region to strengthening and securing India’s energy requirement.
(d) The engagement with Latin American countries like Brazil and Africa which have been ignored since long. Indian relations with these countries are critical to fulfil her energy requirements. The most critical factor in sustaining economic growth is uninterrupted energy supply, which is possible by diversifying its imports and collaboration and investment oil exploration in other countries.
64. The consistent growth rates of 6 to 9 per cent for almost a decade is increasingly overstraining Indian energy production and transmission capacities. The lack of home-grown energy resources, inadequate infrastructure, energy theft, slow incremental addition to existing energy production and high subsidies contribute to a situation of energy shortage. This resulted in increased dependence on import from few supplier countries. Against this backdrop, as per experts the energy security has been identified as one of the most serious threats to India’s future development. Therefore, it has become an important factor of India’s foreign policy which need to be addressed on priority. Strategists in India are incorporating the aim of energy security into foreign policy which has already manifested in increased partnership with Brazil and Russia and increased collaboration and investment in the field of oil and gas exploration project. Furthermore, this aims to diversify not only India’s energy requirement but also the list of supplying countries from the existing ones. In its pursuit of opportunities in the field of energy, India often faces competition with China, the fastest growing consumer of energy. Moreover, India’s energy cooperation with countries like Iran complicates its relationship with US and EU. The relations with Russia and Brazil plays important role in achieving energy security by means of imports and related technology collaboration.
65. China has attracted higher levels of Foreign Direct Investment (FDI). At present trade between India and China is in favour of China. The trade has passed US $ 60 billion mark making China the biggest trading partner and despite long unsettled border dispute between the two countries the bilateral relations have improved since 1988, when Indian Prime minister visited China. During the recent visit by Chinese premier to India, both countries have sought to reduce tensions on the issue of border, expand trade, open markets for each other and normalize relations. Though they have competitive interest in Latin American and African countries, India needs to constructively engage with China to exploit its potential and reduce the trade deficit of US $ 24 billion which is widening every year. During the recent visit the Chinese premier indicated that China is ready to open market for Indian goods and provide better platforms for its products. Agreements have reached to facilitate the access of Indian IT products, Pharmaceuticals and agro products to Chinese market. It is stressed by the economical expert that both the Asian giants needs to interact more vigorously to increase the bilateral trade which is meagre 0.2 % of the global output, whereas both countries account for almost 10 % of global output. However future seems to be bright with the completion of joint feasibility study for a regional trade pact. Both India and China understands the fact that to maintain the economic growth mutual differences needs to be kept on back burner and should act as catalyst for mutual growth. Thus the India- China relations are in the process of transformation and a carefully calibrated and mutually beneficial relationship, based on a clear analysis of the political, economic, security, social, and cultural implications of China’s rise, is one of India’s crucial foreign policy objectives.
66. The engagement with Latin American countries like Brazil which have been ignored for long, needs to be explored to ensure more diversified energy imports and availability of markets for Indian products. The relations with Brazil are also critical to fulfil her energy requirements. The most critical factor in sustaining economic growth is uninterrupted energy supply, which is possible by diversifying its imports and collaboration and investment oil exploration in other countries. In recent years the bilateral relations with Brazil have grown considerably and co-operation has been extended to diverse areas such as science and technology, pharmaceuticals and space. The trade is has already crossed US $ 10 billion in 2010. India is engaging with Brazil at various forum such as BRIC and IBSA to exploit its potential to fullest. However, in the coming years, India needs to improve its co-operation and technology collaboration with Brazil to improve mutual trade between the two countries which is far from reaching its peak. There is increased opportunities in the defence and space sector. Brazil is the world leader in the use of Ethanol which can be of major advantage to India in reducing its oil import bill. With Brazil being a member of Nuclear Supplier Group (NSG), India gained advantage in getting its Nuclear agreement with US through. There exist great opportunities in the Latin American region which needs to be harnessed by India in coming years to fuel her economic growth and move a step further in attaining energy security for maintaining consistent growth rate.
67. Indian relations with Russia are time tested and are based on continuity, trust and mutual understanding. However of late the relations between the two countries are seems to be strained over number of issues like delayed defence supplies, poor quality of spares, increased cost and treating India just like any other nation. These differences and various disagreements over trade and Indian foreign policy have all served to put strain on once close relations. There is tremendous opportunity in improving bilateral trade which is mere US $ 10 billion, during the recently concluded visit by Russian president agreement has reached to double the trade in next four to five years. There exist opportunities in the area of nuclear co-operation, defence deals, joint ventures in the field of defence production and space technology to gain advantage of each other’s strength. There is a need for Indian foreign policy makers to exploit the time tested and strategic relations with Russia to its advantage to sustain its economic growth. Though Russia is vary of growing diversification of Indian defence imports, and its increasing tilt towards US. However it understands the growing clout of India in the emerging world order and would like to exploit the Indian market. There exist enormous opportunity in the defence, space and energy sector, also there is a requirement of opening of Russian markets for Indian products which will be instrumental in increasing the trade from existing US $ 10 billion.
Implications for the World Order 68. In a globalised world, just as India engages with other BRIC countries, India is also being engaged by them. The new dynamism in the India-BRIC relationship is so profoundly different in its bilateral conduct, that there is a quantum jump in its trade and collaboration and co-operation in various fields which is beneficial for India in fulfilling her dream of becoming a formidable economical power by 2030. Russia and India are pursuing their Strategic Partnership while India and China are leaving their differences behind to build a growing trade between the two for mutual development and more influence in the emerging world order. However there is a need for both to de-hyphenate their relationship from border dispute. The foreign policy maker should keep in mind that, being a emerging power, what type of power India aims for and the kind of relation and policy, the government has in mind to develop its stature and influence in the emerging world order. It is for this reason that India seeks to create and participate actively in a new multilateralism – like BRIC, IBSA.
69. However, it is the India’s political and economic relations with the existing major powers and emerging powers that will have a major impact on its growth. Thus, India’s foreign policy looks beyond the immediate neighbourhood to safeguard its economic interests. In CAR and Africa, Indian and Chinese interest are on a competition course as regards to access to raw materials and energy supplies. Indian foreign policy today aims to enhance its power and influence in the world by enhancing bilateral relation and cooperation with US, EU, China and Russia and by means of engaging and actively participating in regional alliances and international forum and dynamically using its soft and responsible power.