Economics Assignment

Arafatul Islam, ID- ISLAD1403

AUGUST 22, 2014

Moodle – BC1011

Submitted to : Kevan Murphy

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1. Why do most manual transmissions have five forward speeds, most automatics only four?

Ans: The more forward speeds a car's transmission has, the better its fuel

economy. The additional gears act like the overdrive" of cars of the 1940s,

conserving fuel by allowing cars to cruise at highway speeds at lower engine speeds.

Most cars in current production offer five forward speeds on their manual

transmissions, but only three or four speeds on their automatics. Since fuel economy

is obviously a good thing, why limit the number of speeds on automatics? The

reason is that fuel economy is not our only objective. We also want to keep the price

of the car within limits. Automatic transmissions are much more complex than

manual ones, and the cost of adding an extra speed is accordingly much greater in

the former. The benefits of adding an extra speed, by contrast, are the same in both

cases. If car makers follow the rule, "Add an extra speed if its benefits outweigh its

costs," then automatics will have fewer speeds than manuals. The reasoning in this

example also helps make clear why many manual transmissions now have five

forward speeds when 20 years ago most had only three (and many automatic

transmissions only two). The benefit of adding an extra speed, again, is that it

increases fuel economy. The value of this benefit, in dollar terms, thus depends

directly on the price of fuel. The price of gasoline relative to other goods doubled

during the 1970s, and this helps explain why transmissions have more speeds than

they used to.

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2. Use economic analysis to explain changes in the price of aluminium over the period shown in Figure 1 and why the price fluctuations have been so great.

This essay will explain aluminium price fluctuation over the past few years using economics analysis. It will cover years 2008 to 2014. The years between 2008 and 2014, aluminium price fluctuations was sometime massive and sometime gradual. This essay will use economics principles and theory to explain the cause of the fluctuations.

Supply

“The supply of a product is the amount that producers are willing and able to produce at each and every price, all other things being unchanged” (Gillespie, 2011, p.79). The amount supplied will depend on factors such as the price cost and the numbers of producers and the resources available.

Supply curve is usually upward sloping a higher price is needed for firms to be willing and able to produce more , all other things being unchanged; as price increase it become more feasible and appealing to produce more units. This will increase extra cost which means higher price is need by producers to be able to produce.

Figure 1

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As an example supply of coffee is lowest when price is lowest and the supply increases when prices increases and for this reason when price is highest the supply is also highest.

Demand

“The demand of a product is the quantity that customers are willing and able to buy at each and every price, all other things being unchanged” (Gillespie, 2011, p.37). Demand curve measures the quantity that customers are actually able to buy at each and every price not only the quantity that they would like to buy.

A demand curve is usually downward-sloping. This is because of the law of diminishing marginal utility. This law states that, as buyers consume additional units of a product the extra satisfaction that they gain from each unit will fall. The second cup of tea is not as satisfying as the first one in a given time period, the tenth is not as satisfying as ninth. If a extra satisfaction of a product falls then consumes will only buy it if the price is cheaper.

Figure 2

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Figure 2 shows that the demand of coca cola is lowest when the price is highest. The demand increase when the price decrease. So the demand is highest when the price is lowest.

Supply and Demand relation

Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship

shows that the higher the price, the higher the quantity supplied.

If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously

decided that the opportunity cost of buying the CD at $20 was too high.

Equilibrium

When supply and demand are equal ( when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

Figure 3

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Changing Prices

“The difference in the cost of an asset or security from one period to another. While it can be computed for any length of time, the most commonly cited price change in the financial media is the "daily price change", which is the change in the price of a stock or security from the previous trading day's close to the current day's close. Price change over a period of time such as year-to-date or past 12 months are also commonly used time periods, and is generally computed as a percentage change”( Investopedia 2014)

Price Elasticity of Demand

The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD) is:

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

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“Aluminium is a soft, lightweight metal with appearance ranging from silvery to dull

gray, depending on the surface roughness. Aluminium is nontoxic, nonmagnetic, and

no sparking. The yield strength of pure aluminium is 7-11 MPa, while aluminium

alloys have yield strengths ranging from 200 MPa to 600 MPa. Aluminium has about

one-third the density and stiffness of steel. It is ductile, and easily machined, cast,

and extruded”(University of Michigan 2014).

“Aluminium is derived from the ore bauxite. First bauxite is mined from typically

shallow deposits, and then it is refined into alumina (alumina hydroxide – Al2O3)

using the Bayer process at an alumina refinery. The alumina, a powdery white

substance, is then sent to an aluminium smelter where it subjected to electrolysis

(Hall/Héroult process) which separates out the aluminium metal” (Australian

Aluminium Council 2014).

Aluminium is used excessively in the modern world, and the uses of the metal are

extremely diverse due to its many unusual combinations of properties. No other

metallic element can be used in so many ways across such a variety of domains, like

in the home, in transport, on land, sea and in air, and in industry and commerce.

Aluminium's uses are not always as obvious as they may seem, with sizeable

proportions of manufactured aluminium and aluminium oxide going into other

separate processes, like the manufacture of glass, rather than towards the common

consumer products that we most readily associate Aluminium with.

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The Demand of aluminium

Demand for aluminum is driven by use in growth industries such as aerospace, and

characteristics such as light weight and recyclability make it increasingly attractive

for use in cars and consumer electronics.

Over the past 20 years, aluminum demand grew an average 3.4 per cent a year,

made up of 15 per cent annual growth in China and 1 per cent in the rest of the

world. Alcoa believes that over the next decade, even with slower demand in China,

global demand can grow 6.5 per cent per year, doubling total use by 2020.

( World Aluminium 2014)

The supply of aluminium

Primary aluminium is produced in three stages. It starts with the mining of bauxite, a

reddish-brown aluminous earth found in tropical latitudes in Australia, South

America, India, the Caribbean and Africa. Bauxite is then refined to produce alumina,

which is then smelted to produce aluminium. To produce one tonne of primary

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aluminium takes roughly two tonnes of alumina, which in turn takes about four

tonnes of bauxite.

The reduction of aluminium from alumina is very power-intensive (15 kilowatt hours

per 1 kg of aluminium). For example, the Hillside smelter in South Africa produces

around 460,000 tonnes per year of aluminium, but to do so takes 1,100 MW of

electricity, the equivalent of about 5 percent of all the electricity produced in South

Africa.

Recycling is a major part of aluminium supply.“86 per cent of drink cans sold in the

UK are made from aluminium — that’s nearly 8 billion cans every year! And each

one could be recycled over and over again, saving energy, raw materials and waste”

(Think Cans 2014).

Largest Aluminium supplying countries.

(Graphs 2014)

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Supply and Demand factor causing aluminium price fluctuations

In September 2008 the price of aluminium was highest shown in above figure. But it

drops dramatically to less than half price in March 2014. Because of 2008 financial

crisis people stop using aluminium. So the supply of aluminium was greater than

demand. When there in more supply and less demand, the price will fall drastically.

The average aluminium market price in 2011 was US$2,395 per tonne compared

with US$2,173 per tonne in 2010. Rio Tinto Alcan’s average realised price for ingot

products in 2011 was US$2,715 per tonne compared with US$2,457 in 2010. In the

second half macroeconomic concerns took hold, particularly the unfolding debt crisis

in Europe, thereby reducing prices to below US$2,000 per tonne towards the end of

2011.

“For the past 12 months, aluminium prices have oscillated sideways either side of

$2,000 per tonne and in a range of $1,827-2,200. Given the presence of massive

oversupply and continuing supply surpluses, high-cost producers must regard

themselves lucky that prices have not responded to the oversupply by heading

lower. Needless to say, they cannot feel particularly comfortable with the current

situation so we feel they will have been keen hedge sellers into price strength – this

has effectively capped the upside above $2,200; we also feel that the cap will remain

in place for a considerable time until the market looks set to move back into a supply

deficit”( Fast Market 2014)

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List of references

Australian Aluminium Council, 2014, where does aluminium come from? (Online)

Available at: < http://aluminium.org.au/FAQRetrieve.aspx?ID=42259>[Accessed 21

August 2014].

Gillespie, A., 2011. Foundations of Economics. 2nd Edition. Oxford: Oxford

University Press.

Graphs, 2014, Largest Aluminium Producing Countries (Online) Available at: <

http://graphs.net/largest-aluminium-producing-countries-infographic.html> [Accessed

21 August 2014]

University of Michigan, 2014, Aluminium (Online) Available at: <

http://clair.si.umich.edu/clair/corpora/chemical/Aluminium> [Accessed 21 August

2014]

World Aluminium, 2014, PRIMARY ALUMINIUM (Online) Available at: <

http://www.world-aluminium.org/statistics/#map> [Accessed 21 August 2014]