Question

Discuss

• the law of supply and demand and price effects on producer surplus relate to the trial polic.
• how the principles of economics can be seen at work,
• The role that technology and data play in the policy

Answer 1

I PART

The Law of Supply states that, as the price of a good increases, the quantity supplied of that good by a producer also increases and vice versa, keeping all the other factors as constant. In other words, quantity supplied and price changes in the same direction.This law operates as due to increase in the price, the producer finds it profitable to produce more of that good as it will increase the revenue for the producer. Hence, he is willing to supply more at higher prices.

The Law of Demand states that, as the price of a good decreases, the quantity demanded by the consumers of that good increases and vice versa, keeping all the other factors (such as consumer's income, preferences etc.) constant. In other words, quantity demanded and price changes in opposite direction. This law operates due to two effects: Income effect and Substitution effect happening in the background.

Income Effect: With a decrease in the price of a good, consumer's real income increases. That is, with the same amount of money in hand, he is now able to purchase more units of a commodity. Hence, the demand for that commodity will increase.

Substitution Effect: With a decrease in the price of a good, the consumer will shift the demand from a substitute good (similar good) towards the demand of the good whose price is fallen. Hence, the consumer substitute the good having a lower price increasing its demand.

II PART: PRODUCER SURPLUS: PRICE EFFECTS

Producer Surplus in nothing but the profits earned by a producer a given price. In other words, it is the difference between the amount at which a producer is willing to supply a good and the amount that he actually receives for that good from the consumers. Graphically, it is the area above the supply curve and below the price line. Price changes are directly linked to the amount of Producer surplus. Accordingly, when equilibrium price of a good increases, the amount of Producer surplus and the number of goods supplied also increases and vice versa.

The principles of economics can be very well seen in the real life situations and problems. For instance, in reality people always face trade-offs as one of the principles of economics. Example- one might have to make a choice between choosing a train or a plane as a mode of transportation. By choosing one option, the person had to give up the other option. Hence, it always involves a trade off. Discussing the above concepts of the law of demand, supply and producer surplus in real life, imagine the prices of air tickets increasing at peak travel seasons in few countries which increases the profits for airline companies. At higher prices, the companies are willing to increase the number of flights (law of supply) and add to their revenue (Increase in producer surplus). On the other hand, travellers cut down and might choose some different mode of transportation (Law of demand).

III PART: ROLE OF TECHNOLOGY AND DATA IN POLICY

Technology and Data, both play a very important role today in the process of any policy making. With the advancement of technology and new ways of doing the same jobs, the policy making process for any organization has become very smooth. For instance, the Blockchain technology has a high potential of application in the banking and financial world and the vision of various governments is to use this technology for making better policies for their citizens. On the other hand, 'Data' is the key driver of a good policy. Without data, the foundation of any policy is very weak. A sound policy decision should always be backed by a rich data analysis which is only possible when good quality of data is available. The policy can be at any organisation's level or can be at the national/international level. So, both technology and data play a crucial role in the policy.