Impacts of Shift and Price Elasticity of Demand and Supply on Paper Industry


The world paper industry is dominated by the US, Canada, Finland and Latin America. “The US is the world largest paper consumer, and is home of the three world’s largest paper companies” (Paper industry.com). Demand and supply are the forces determining extend of resources allocation in any industry. In market perfect competitive market economy the theories of demand and supply will allocate resources efficiently. Demand and supply are ever changing in the market and It takes sometime between the changes in supply and demand and the ability of sellers and buyers to react to the changes. When supply equals demands at given price and quantity the market is said to be in equilibrium. Market equilibrium signifies efficient allocation of resources because, at this point the total amount of goods supplied totals amount demanded. Some of factors affecting demand are; changes in own price, taste, income, changes in price of substitutes and complementary goods, and factors affecting supply includes; own price, prices of substitutes, natural calamities, time etc.

The law of demand states that holding other things constant (Ceteris paribus) any price increase will reduce quantity demanded of that product. Increase in price adds to the opportunity cost of consuming that product hence people will reduce consumption of it. This is because people will not be willing to fore go consumption of another good they like most so as to transfer resources to this product. The law of supply states that as price of commodity rise, sellers are willing to supply more to the market. Demand and supply shift affects the market prices; the shift in demand and supply results from changes in quantity supplied and demanded. This is happening because either the supply or demand is affected by other factors other than prices. At market equilibrium, consumers and firms are satisfied because, producers are able to sell all what they have produced and consumer can get what they require. As changes to this position harms both consumer and the firms and market is said to be at disequilibrium. Prices elasticity of supply and demand is the responsiveness of supply to change in prices.

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The shift and price elasticity of demand and supply have an impact on demand and supply of papers. Let say in the market the demand for papers increases causing shortages. Due to market forces of demand and supply and demand price relationship, the prices of papers will tend to increase. With more papers demanded producers will adjust accordingly by producing more to feed the rising demand. More resources will be employed to increase production capacity in a bid to maintain the market at equilibrium. On the other hand,the if demand falls, the number of papers being sold is less than the quantity supplied leading to a surplus. The prices will tend to fall in order to offload the excess papers. As prices begin to fall consumers will turn to buy more and producers cut in production as they see that the papers are no longer demanded. The shift in supply will after the paper industry just like the shift in demands although, shortages and surplus will result when supply decreases and increases respectively. The real impact in the industry will depend on the magnitude of changes in demand and supply which depends on the price elasticity of demand and supply of papers.

Price elasticity is important to the “industry because it helps firms in terms pricing strategies and their influence in the market” (Mankiw 2008). The firms in the paper industry depending on variance in the degree of price elasticity of demand and supply of paper will be in a position to charge different prices for the same papers at different times. Price elasticity of paper influences the amount of revenue earned by the firm as a result of price changes. Therefore firms use elasticity to determine the impact of changes in supply and demand in the market. Papers have few substitutes hence an increase in the price of papers may not affect its demand because consumers have to bear with the increased price.

Positive and negative externalities impacts on paper industry

“Externalities are impacts on the third party who is not directly involved in decision making of the industry and are caused by operations of the industry” (CWAC.Net). It occurs when the operations of the firm cause external benefit (positive externalities) or cost (negative externalities) to the surrounding environment. In a competitive market firm’s main objective is to maximize profits. Pollution is the common negative externality associated with paper manufacturing while investment in public safety and education is example of goods with positive externalities. Production and consumption of papers are beneficial to both the producer and consumer. If the exchange between producers and consumers is not of any benefit then they would not engage themselves in such an act. Consumers require the producer to make the papers while the producer expects the consumer to pay for the paper acquired.

Such arrangements between producers and consumers may have an impact on the third parties. From the affected person’s’s view the effects may be positive or negative. Negative externalities such as pollution have got harmful impact on the third party. Pollution causes problems to people and the environment where they live. Pollution reduces people’s utility and pleasures as well as increasing medical expenses to the affected people. Pollution is associated with lung diseases and contamination of water resources. On other side,, positive externalities increase the utility of consumer without paying any extra charge. They improve the general welfare of the citizens; for example provision of education,, facilities will increase the productivity of people while the provision of health facilities will improve health conditions and minimize health risks. These externalities may not be monetary quantifiable because they depend on the preference of the society in general. Negative externalities increase social marginal costs while positive externalities increase social marginal benefit.

Operations of paper industries have resulted in both negative and positive externalities. “Emission from the production of paper affects negatively the surrounding environment; emission of toxic chemicals that pollutes air and water bodies” (CWAC.Net). The need to conserve our environment for the better of a future generation has led the government to legislate rules and policies with a view of protecting the environment from industrial pollution. Environmentalists require “industrial designers and planners of new technology to incorporate aspects of environmental management and protection into the new technologies introduced in the industry” (Karvinen). Pollution increase the cost of production to the paper mills because firms are required to improve their process to reduce harmful emissions. This is done by installing equipment that can handle emissions efficiently. The ages of equipment being used are associated with the amount of emission produced. Acquisition of such equipment is a burden to the mills because they were not budgeted and calls for an increase in capital investment. Firms have to create a good relationships with their stakeholders for the ’firm’s benefit hence may be forced to contribute towards the improvement of society’s welfare. Large dense forest across the world has been destroyed by the paper industry. As result, the world has experienced changes in climate causing severe droughts and hunger among many communities.

Wage inequality

Wage inequality is the gap between higher-wage earners and lower-wage earners. Wage inequality is due to differences in measurable skills such as college graduates and high school leavers will not be paid equally. Wage inequality may have negative and positive implications; on the positive side, an economy with a wage gap is seen as a system with rapid job creation and reduced unemployment levels” (George, 1997 p, 49). And on the negative side, it may lead to increased crimes, family instability, and poor health. Wage inequality requires firms to reinforce the difference by increasing the non-wage benefit to the workers. These benefits include health insurance and pension schemes. As noted above wage inequality is due to differences in formal education. This means that increased investment in education will minimize the gap as more people acquire formal education. Paper mills due to the need to reduce wage difference invest much in constructions of schools and colleges and giving scholarships to students.

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There are factors associated with demand and supply and institutional factors (such as government policy on wage difference) also explain why there is wage inequality. Demand factors are associated with those factors that determine the quantity of workers employers want to employ. Such factors include; changes in production techniques that may require new employees with necessary skills and a decline in manufacturing capacity which reduces wages. Supply factors such as “female labor participation and immigration factors” (George, 1997 p, 54) determines the quantity of worker with different skills. Wage inequality may not have a direct effect on the industry but factors leading to wage inequality affect the industry. Changes in technology require the acquisition of more skilled labor, for instance, use of computers. First will be forced to pay more wages to the newly acquired worker and also the cost of acquiring the new technology. Wage inequality increases production costs through changes in technology and the desire to hire people with relevant skills.

Government policy on wage inequality affects the industry. The government sets lower wages level to protect workers from exploitation which firms have to adhere to. Membership in workers unions has increased pressure on employers to pay their workers reasonable wages. Union is always championing better wages for their members increasing firms-union conflicts and worker strikes and unrest.

Fiscal and monetary policy

“Fiscal policies are the mechanism used by the government to control macroeconomic environment through the use of tax and government spending” (Easterly & Rebelo, 1993 p, 420). Monetary policies is use to control the circulation of money in the economy. Both monetary and fiscal policies have an impact on the operations of firms in the paper industry. Many firms may acquire credit from banks to increase their capital base. The central bank of any country is the ones responsible for the implementation of these policies. Monetary policies may set the market interest rates high hence increasing the cost of capital. The high cost of capital reduces the ability of paper mills to expand. Increased money supply in circulation more than what the economy can produce causes inflation. High and prolonged inflation rates affect the production capacity of firms by increasing productions costs. Taxes on papers hurt production levels. Any minimal increase in taxes on papers raises the cost of production and reduces demand. Increased cost on papers is reflected in increased retail price lowering the demand for papers. Increased government consumption of papers increases the production of the same. Government spending may increase liquidity in the market availing financial resources to the paper mills for expansion.

Conclusion

The economic conditions of a country affect how the business operates. The credit crunch being experienced across the world has affected businesses’ performances. Some have collapsed, others experienced huge losses and others were bought out. Instability in the economy has resulted in uncertainty in the investment environment causing investors to withdraw from the stock markets. Investments have declined because people have no confidence in the market. The surge in stock markets across the globe has the stock value of the paper mills in domestic and international stock markets.

Inflation level in the economy affects the level of business functions. As a result of the high level of inflation the cost of production increases translating into high consumer goods prices. The increased cost of production may reduce production volumes, loss of jobs, and losses to the business. If the costs of inputs are high, more resources will be allocated in the production of one unit of output. Inflation increases the cost of living and as result workers may demand wage increases causing increased production costs. The high petroleum prices experienced in the month of August 2008 year doubled the cost of production in the industry. The paper industry relies much on petroleum and any price increases the cost of doing business.

References

  1. Easterly, William & Rebelo, Sergio, 1993. Fiscal policy and economic growth: An empirical investigation, Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458.
  2. Johnson, George E. (1997). Changes in Earnings Inequality: The Role of Demand Shifts. Journal of Economic Perspectives 11(2), pp. 41-54.
  3. Karvonen, Minna-Maari H. production function of the Finnish pulp and paper industry.
  4. Mankiw, N. G. (1999). Principles of Economics (3rd Ed). Chicago: Thomson Smith-Western.
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