Sample Economics Research Paper on Applications of Supply, Demand and Price on a National Economy

A national economy is an aggregate of different sectors that are dependent on the balance of supply, demand, and prices to drive growth. But this relationship goes down to the economic choices that the society has to make on what to produce, how to produce and the agents who will be allowed to consume the goods and services. From a competition perspective, when no one intervenes to set the price, the market determines the price of products and the prices, in turn, determine what will be produced and who will consume. The price is seen as an incentive to the producer and consumers such that low prices discourage production from the producers. It also means that there is reduced consumption from the consumers. When there are high prices, the level of production increases but the consumers spend less. This pair of incentives pushes the prices to balance demand and supply into an economic phenomenon referred to as equilibrium. The demand and supply mechanism offers a national economy the most efficient economic outcome feasible at a particular time. This mechanism, also known as the economic model, plays a huge role in the distribution of resources in an economy. It is regarded as one of the most crucial principles governing a national economy. For example, the economic model is a force that drives the U.S. economy. Supply, in this case, includes labor (employment) and natural resources (land and oil). Baumeister, Christiane, and Peersman (22) note that oil prices have a strong impact on the U.S. economy because they influence almost 70% of the cost of gas. This is the same proportional influence that personal consumption has on the economy especially during the festive season. At the same time, the period of recession in the U.S. raised unemployment levels so that many Americans left the labor force. Eventually, the U.S. economy slowed. This is the extent to which the economic model impacts the national economy. Supply, demand and prices drive the national economy.

Applying the Economic Model on the National Economy

From the introduction above, the economic model has been shown to influence major sectors of the economy. It influences how much is invested, produced, and distributed across the economy. In the U.S. economy, the oil sector, health care sector, and the housing market are some of the major areas where their events follow the economic model. The law of demand applies to these sectors.

Housing Market

The market demand curve for housing in the U.S.A. is downward sloping, and it reflects the choices of the households. In the real sense, as the prices of houses in the economy decrease, the quantity demanded rises. This is in line with the law of demand which partly states that as the price of a commodity decreases, more households demand a positive quantity other than zero. In the case of property, this principle is significant because households either own one or no house. However, the quantity demanded rises once the house prices fall because more households can afford to buy. A leftward shift in the demand curve for houses may be caused by a decline in the prices of rental apartments or a decrease in the income of households in the economy. When it comes to the supply side, the aggregate supply curve for the housing market slopes upward such that as the price increases, the quantity of apartments available for household rises. Just as importantly as the demand, as price increases, more firms join the market and provide more property. Some of the factors that would lead to reduced number of housing units include changes in regulations, that discourage owners from building more apartments, and an increase in the cost of production such as the oil prices and cost of accessing loans. When at equilibrium, there is a perfect match between the owners of houses selling apartments and the number of buyers. Therefore, the price of housing influences demand and supply of housing units in a national economy.

Favara, Giovanni, and Imbs (960) indicate that the U.S. housing market has been experiencing rising home sales and an increase in prices. The low mortgage rates and a rise in job growth in the past two years have fuelled demand to boost house sales to levels that were last experienced almost a decade ago. These are some of the gains that could spur more house construction in the economy. However, it has been observed that the number of houses for sales has declined significantly. With the demand for house rising and the supply decreasing, the prices of houses have been noted to rise at a higher rate than the household income. This mismatch between demand and supply is being felt at a rather delicate period. The national economy is looking more to the consumer as the statistics reveal an increasing pressure on the house market. By March 2016, the sale of existing houses had risen by 0.4% in a matter of a month to reach a seasonally adjusted yearly rate of $ 546 million. In 2015, the sale of houses had hit a ten-year peak, proof of healthy demand that seems to show that the property market will keep improving (Chatterjee, Satyajit, and Eyigungor 171). However, the number of house listings had fallen by 2.2% in February compared to the previous year. The immediate impact of the mismatch is that the consumers shopping houses have fewer choices and have to pay higher prices. Consider that the median house sale price in January 2016 was recorded as $213,805 which was an 8.5% annual increase from 2015 (Seok, Hoon, and You 22).

The economic model can be applied to the housing market in the U.S. As observed above, supply is a major concern for the growth of house sales. The high demand comes from several areas. One of them is the low mortgage rates that have brought the borrowing costs even lower for house buyers and refinancers. This is proven by the high activity of mortgage application that has been seen in the U.S. since 2013. Lambertini, Luisa, Mendicino, and Punzi (1521) state that the three-decade fixed mortgage rate was recorded at 3.64% in 2015 to become the lowest recorded weekly average since 2013. Another major factor that raises demand includes the existing-house sales rebounding. The yearly pace of existing house sales was noted to be almost 4% higher compared to 2014. But despite the high demand, supply is still a great concern given that the inventory of existing houses is recorded at a 4.5-month supply, a pace below the recommended 6-month supply that is regarded as healthy. By the end of September 2016, the months’ supply improved to 5.0 which are still less than what the economists consider a healthy house growth in the U.S. There is no question that the houses have been underbuilt. Schwartz (122) explains this phenomenon using the point of resources by explaining that due to the past damage on the housing sector and the slow recovery, other sectors utilized the housing market resources. The huge problem of having a tight supply in the house sector is that it will lead to a growing pressure on the prices. This will, in turn, lead to a rise in unaffordability for first-time house consumers.

The Oil Industry

The oil and gas industry is a crucial part of the U.S. national economy as it supports almost 10 million jobs and makes up 10% of the nation’s G.D.P. (Gross Domestic Product) (Kang, Wensheng, and  Ratti 310). Being that it comprises a large proportion of the country’s G.D.P., it means that a little impact in the sector has a ripple effect on the entire economy. The U.S. leads in the supply, production and consumption of energy and this makes it an attractive market with the total investment in the energy sector estimated at $285 billion in 2016. It can be seen that the oil sector is one of the most influential industries in the U.S. national economy.

The channel of oil’s impact is extensive. Baumeister, Christiane, and Kilian (13) note that 30% of agricultural expenses are linked directly to energy inputs, affecting the food prices. The oil prices also influence the price of raw materials such as metal and the entire transportation sector when the cost of fuel rises. The oil prices, therefore, have a direct impact on the economy. In 2014, oil usage accounted for over 5% of the GDP. The Fed made a relationship stating that a 10% increase in the oil prices leads to a 1.5% drop in the real GDP of U.S. By extension, the law of economic model primarily applies in the oil industry be influencing the oil prices. Lippi, Francesco, and Nobili (1081) state that the prices, and accompanying oil price expectations, are key determinants of how the U.S. oil companies will allocate resources. Therefore, prices are involved directly in the creation of incentives that determine behaviour, a behaviour that ultimately leads back into demand and supply to determine oil prices. There have been periods in the U.S. economy when lengthened periods of high oil prices have led to the reduction in the number of people using vehicles that are less efficient in fuel consumption. Businesses also pay more attention to energy conservation as a result of the cost. It is these types of factors that lead to reduced demand. On the other part of supply, rising oil prices lead to more oil production, more resources are channelled toward oil research and modern techniques and other projects that were considered less feasible during times of low oil prices become increasingly viable. These are factors that increase supply. The period between 2007 and 2014 can be used as a point of reference when the oil prices increased significantly to influence huge investments and improve production levels. The oil drilling projects were financed through the banks to explore more oil in North Dakota, Texas, and other targeted areas.

Since the beginning of the year 2016, the oil prices have been reducing significantly because oil production has increased. The previous long run of higher oil prices inspired oil drillers to come up with better techniques to explore new oil deposits. In the U.S., fracking improved oil drilling to add more oil to the market. Despite the low prices that were evident since January, the oil producers did not cut back on production a lot. Kilian, Lutz, and Vigfusson (92) state that the US stockpile is at its highest level in at least eight decades, a level that the IEA (International Energy Agency) predicted would lead to excess supply by 15 million barrels daily. There was a period that the oil prices were going at a price as low as $27 in January 2016 from $105 in mid-2014. The losses were extended as energy firms consistently cut back on investment, leading to a decline in the economic growth rate. The IEA noted that the steady oil production accompanied by the falling demand would send the prices even lower. This is a situation that would direct the oil market into oversupply according to the IEA estimates.

It is evident that supply, demand, and price apply to the oil sector in totality. The high production of oil estimated to be approximately 9.33 million barrels daily is a cause for concern because the price levels could have a huge implication on the future investment in the sector. At this period, the profit of energy companies are low, and the executives agree that it will not be until after a few years that the oil prices will return to the levels of $90 to $100 a barrel. This is because the U.S. oil prices averaged $54 per barrel in November 2016 and the demand for fuel for motorists has been evident across the U.S (Alquist, Ron, Kilian, and Vigfusson 507). This is proven by the uptick in road usage since low gas prices are acting as incentives for motorists to drive more. Analysts are turning toward the economic model to influence the price regulation in the U.S. They are recommending a production ceiling to regulate prices, but others claim that the oversupplied oil sector needs a higher demand to influence “a return to a balance of supply and demand that would support higher prices” (Chapman 100).  However, there are positive signs that demand or fuel could improve in the long term to help in raising the prices.

Healthcare sector

In the national economy, the scarce resources are few to meet all the wants of people and therefore wants to be met have to be chosen. Likewise, in the health care system, the heath care resources are not enough to meet all health needs of people and therefore needs to be met have to be chosen. The healthcare system aims to meet needs rather than wants. So any time a necessity is chosen within the scarce resources, economists refer such decisions as unavoidable, an observation that leads to an economic concept called opportunity cost. So costs usually refereed by the economists are opportunity costs.

Demand, supply and price of good and services determine how the society decides. Prices analyses markets. It is the market that brings together consumers and supplier from demand and supply of goods basing on their prices. Prices are therefore like a signal to both groups on what they should do and want they should not do. Consumers tend to buy more if the price is lower and less if the price is higher. If the price is too high, then suppliers may not sell to their target and may be forced to lower prices to increase sales. If prices are too low, demand will be higher than supply and producers may be forced to reduce prices to balance demand and supply. The observation of this is excess demand and excess supply. Health care is not always demanded because is it pleasurable but instead demanded to improve health. Health care is a fundamental good essential for people’s wellbeing, and therefore its demand is towards the improvement of it.The supply of healthcare is mainly a relationship between resource use, costs and output. This concerns efficiency for example issue of economies of scale like cost saving schemes by having a larger general practices. Supply also determines the structure of the market. There is perfect competition and a monopoly. A perfectly competitive firm merely makes significant profits and does not have any real economic power. A monopoly has a great market power and makes great profits. Some organisations behaviours make them monopolies, for example, pharmaceutical companies, provider services like dentistry, and profit making insurance.

There are costs uncured in producing a unit product of healthcare usually referred to as marginal costs. These marginal costs are built into the cost of products like prescription drugs and other medications along with medical supplies and equipment. An example of these marginal costs includes trade and transport costs from transport services and distribution of medical goods and services. Prices, therefore, apply directly in promoting services like transportation within the economy of a nation.Moreso, it is its value that pays all factors of production in the US healthcare system. Demand for domestic healthcare also attracts foreign trade. About 45% of U.S demand for pharmaceuticals products is fulfilled by imports (Martin, Anne B., et al. 216)

Demand supply and price are the main components explaining the high healthcare spending in the US. Some drivers to increased health care spending are the increasing demand for healthcare due to increasing ageing population needing more healthcare needs and changing lifestyles and behaviours resulting in health-related needs like tobacco consumption and obesity. One-third of the population in the United States is obese (Martin, Anne B., et al. 211).The study further showed that medical spending as a result of obesity reached 10% of all healthcare spending in 2008 which has been increasing over the years.

Supply has also contributed to high healthcare spending in the US. This is because it is low as compared to demand hence increasing prices according to demand and supply theory. The utilisation of healthcare services in the US has been greater compared to economies of other countries in healthcare sector. In fact, studies show that doctors, physicians and other medical providers are always paid as a reward for doing more instead of doing effectively. In 2009 US report, 2.4 physicians were recorded to be serving a population of 1000 in the US. So demand is excess in the healthcare sector which consequently raised the cost of healthcare. Patients spend more on physician services at a larger component of the total health spending than pharmaceuticals. Also, the US primary care doctors especially the orthopaedic doctors earn more income as compared to other countries in the same level of development. This is because of the excess demand as compared to, low supply of healthcare.

The medical technology commonly used in the US is very expensive. This converts to high spending and this value is included in the final service or medical good to a patient in the form of a price. An example is the expensive technological procedure used in the hip and knee replacement. Apart from technology, the increased share for the market is making hospital and other providers to demand higher prices. Even with mergers and insurers striving to increase efficiency and help reduce prices, consolidations have on opposite effect allowing the creation of monopolies in some markets hence driving up prices. This trend of increasing demand and increasing prices of demand continue to impact the healthcare sector of the US negatively, and it is difficult balancing demand and supply because healthcare is an essential commodity so maybe supply should be increased and focus on effective production.

Conclusion

The U.S. economy is comprised of a number of crucial industries that drive the nation’s G.D.P. These include the oil sector, manufacturing industries, the health sector, and many other critical areas. What has been observed through economic reports is that each of these sectors has its unique features that rely on the application of supply, demand, and prices to determine the market relationships. The economic model is applicable in most of the sectors because, in every part of the industry, there are consumers who are highly linked to the demand, supply, and eventually the prices in the economy. The economic model is applicable mostly in the allocation of resources as seen in the oil sector, distribution of resources in the health sector, and determination of when to invest in the housing market. A seen above, analysts have recommended production caps and price ceilings in some sectors to influence the prices in the economy. This shows that the economic model accompanies major decisions in the national economy.

Works Cited

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Baumeister, Christiane, and Gert Peersman. “Time-varying effects of oil supply shocks on the US economy.” American Economic Journal: Macroeconomics 5.4 (2013): 1-28.

Baumeister, Christiane, and Lutz Kilian. “Understanding the Decline in the Price of Oil since June 2014.” (2016).

Chapman, Ian. “The end of Peak Oil? Why this topic is still relevant despite recent denials.” Energy Policy 64 (2014): 93-101.

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Schwartz, Alex F. Housing policy in the United States. Routledge, 2014.