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Rationing

Rationing

Rationing is the controlled distribution of resources and scarce goods or services: it restricts how much people are allowed to buy or consume. Rationing, for whatever reason, controls the size of the ration, one's allotted portion of the resources being distributed on a particular day or at a particular time.

Rationing in economics

In economics, it is often common to use the word "rationing" to refer to one of the roles that prices play in markets, while rationing (as the word is usually used) is called "non-price rationing." Using prices to ration means that those with the most money (or other assets) and who want a product the most get the largest amount, whereas non-price rationing follows other principles of distribution. Below, we discuss only the latter, dropping the "non-price" qualifier, to refer only to marketing done by an authority of some sort (often the government). In market economics, rationing artificially restricts demand. It is done to keep price below the equilibrium (market-clearing) price determined by the process of supply and demand in an unfettered market. Thus, rationing can be complementary to price controls. An example of rationing in the face of rising prices took place in the Netherlands, where there was rationing of gasoline in the 1973 energy crisis. A reason for setting the price lower than would clear the market may be that there is a shortage, which would drive the market price very high. High prices, especially in the case of necessities, are unacceptable with regard to those who cannot afford them. In wartime, it is usually imperative for a government to maintain the support of this part of the population, to maintain "equality of sacrifice," especially since in most countries, the working-class and poor families contribute most of the soldiers. Rationing using coupons is only one kind of non-price rationing. For example, scarce products can be rationed using queues. This is seen, for example, at amusement parks, where one pays a price to get in and then need not pay any price to go on the rides. Similarly, in the absence of road pricing, which is infeasible in many or most cases, access to roads is rationed in a first come, first serve queueing process, leading to congestion. Authorities which introduce rationing often have to deal with the rationed goods being sold illegally on the black market.

Military rationing

Rationing has long been used in the military, especially the navy, to make supplies last for a defined duration, such as a voyage. To ration the supplies, they are divided up into equal portions for each person for each day, or even a meal, over the expected voyage period. The objective is to ensure that each person receives a fair share of supplies throughout the voyage. Often some reserve was also held. If supplies ran short or the voyage went longer than expected, the ration portions would be reduced. For example, half rations means the portions are cut in half, making the supplies last twice as long.

Civilian rationing

Rationing is often instituted during wartime for civilians as well. For example, each person may be given "ration coupons" allowing him or her to purchase a certain amount of a product each month. Rationing often includes food and other necessities for which there is a shortage, including materials needed for the war effort such as rubber tires, leather shoes, clothing and gasoline. Towards the end of the First World War, panic buying in Britain prompted rationing of first sugar, then meat, for the rest of the war. During World War II rationing existed in many countries including Britain and the United States. The British Ministry of Food refined the process in the early 1940s to ensure the population did not starve when food imports were severely restricted and local production limited due to the large number of men fighting the war. Rationing did not end in Britain until the 1950s – see also Rationing in Britain during and after World War II. Civilian peace time rationing of food may also occur, especially after natural disasters, during contingencies, or even after failed governmental economic policies regarding production or distribution (the latter happening especially in highly centralized planned economies, such as North Korea, Communist Romania during the 1980's and the Soviet Union in 1990-1991. See also Rationing in the Soviet Union, Rationing in Communist Romania or Rationing in North Korea)

Medical care rationing

Republican Senate Majority Leader Bill Frist and other conservative Congressional Republicans have expressed concern about government rationing of health care services as a rationale for opposing provision of health care services via government programs. Frist, a cardiac surgeon by profession, turned his Senate office into a makeshift clinic for Republican members of Congress to receive flu shots days prior to October 5, 2004, when the Federal government asked healthy adults to forego the vaccinations because of a nation-wide shortage.

Emergency Rationing

Rationing of food and water may become necessary during an emergency, such as a natural disaster or terror attack. The Federal Emergency Management Agency (FEMA) has established guidlines for civilians on rationing food and water supplies when replacements are not available. According to FEMA standards, every person should have a minimum of one quart per day of water, and more for children, nursing mothers, and the ill. Water should not be rationed in an emergency. Food, on the other hand, can be rationed for many days. More information is available in FEMA's [http://www.fema.gov/areyouready/ Are You Ready?] guide.

Sources

- Matt Gouras. "Frist Defends Flu Shots for Congress." Associated Press. October 21, 2004.

External links

- [http://www.spartacus.schoolnet.co.uk/FWWrationing.htm http://www.spartacus.schoolnet.co.uk/FWWrationing.htm]
- [http://www.youth.net/memories/hypermail/0189.html http://www.youth.net/memories/hypermail/0189.html] Category:Administration Category:Economics

Scarcity

Scarcity is a central concept in economics. In fact, neoclassical economics, the dominant school of economics today, defines its field as involving scarcity: following Lionel Robbins' definition, it is the study of the allocation of scarce goods among competing ends. Scarcity means not having sufficient resources to produce enough to fulfill unlimited subjective wants. Alternatively, scarcity implies that not all of society's goals can be attained at the same time, so that we must trade off one good against others. "Resources scarcity" is defined as there being a difference between what people desire and the demand for a good. Thus, a good is scarce if people would consume more of it if it were free. Scarcity (S) can also be viewed as the difference between a person's desires (D) and his possessions (P). Mathematically, this can be expressed as S = D - P. If P > D, a state of negative scarcity exists which is abundance. For most people desire exceeds possession and this provides the spur to material success. In others an excess of desire over possession can also lead to conflict, crime and war. Goods and services are scarce because of the limited availability of resources (the factors of production) along with the limits on our technology and our management skills. These determine the location of society's production possibilities frontier or curve (PPF). Inefficiencies in the use of resources (less than full employment or inappropriate employment of inputs like land and capital) may limit the amount produced so the economy operates below its PPF. It is difficult to abolish all inefficiencies, and some characterize institutional inefficiency as artificial scarcity. Where goods are scarce it is necessary for society to make choices as to how they are allocated and used. Economists study (among other things) how societies perform the optimal allocation of these resources -- along with how societies often fail to attain this optimality and are instead inefficient. For example, we may all want to own gold jewelry. However, the amount of gold available is limited, so it is necessary to make choices as to how it is allocated. In a market economy, this is achieved by trade. (Other ways to make this decision involve tradition, community democracy, and government top-down or centralized command.) In the market, individuals and organizations (such as corporations) trade resources amongst themselves, reallocating resources to where they are most wanted by those with purchasing power. In a smoothly operating market system, the rate of exchange between different resources, or price will adjust so that demand is equal to supply. One of the roles of the economist is to discover the relationship between demand and supply and to develop mechanisms (such as pricing, incentives, or penalties) to achieve an optimal outcome (in terms of consumer welfare). Some see the above definition of scarcity as invalid, on the grounds that it assumes human wants are unlimited. "Unlimited wants" seems a product of indoctrination (say, by advertisers, way of life, conformity to an American lifestyle). The want to rise to a higher social position, some say, spurs a materialistic way of life. Alternatively, the infinitude of wants may be the result of the unsatisfying nature of work in a capitalist economy; the need resulting from noncreative work used to produce something that is of no interest (except to earn a wage) can be "solved" by buying unnecessary product. Thus in News from Nowhere, a somewhat Marxian utopian novel by William Morris, the existence of creative work for all helps to abolish the scarcity of products. However, most economists disagree with these critiques. Certain intangible goods are likely to remain scarce by definition or by design; examples include awards generated by honours systems, fame, and membership of elites. These things are said to derive all or most of their value from their scarcity. But these are examples of artificial scarcity, reflecting societal institutions. That is, the resource cost of giving someone the title of "knight of the realm" is much less than the value that individuals attach to that title. As informational goods can be copied at negligible cost, they do not need to be scarce. This is why copies of free software such as GNU/Linux are typically available for very little cost. However, proprietary software and many other products are kept artificially scarce by copyright and patent law. Category:Economics simple:Scarcity

Market

are still common in France. Resellers and farmers sell fruits and vegetables, but also meat and fish, and other products.]] In general parlance, a market is a location where those willing to pay a price for something meet those willing to sell it. In marketing, a market is the sum total of potential buyers of a product. In economics, a market is a mechanism which allows people to trade, normally governed by the theory of supply and demand, and thereby allocates resources through a price mechanism. It typically involves a bid and ask process. Both general markets (where many commodities are traded) and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy that is based, e.g., on gifts.

Marketplaces and street markets

200px 200px 200px A marketplace is a location where goods and services are exchanged. The traditional market square is a city square where traders set up stalls and buyers browse the merchandise. This kind of market is very old, and countless such markets are still in operation around the whole world.
- In the USA such markets fell out of favor, but renewed interest in local food has cause the reinvention of this type of market, called farmers' markets, in many towns and cities.
- In continental Europe, especially in France, street markets, as well as "marketplaces" (covered places where merchants have stalls, but not entire stores) are commonplace. Both resellers and producers sell their wares to the public.
- Markets are often temporary, with stalls only present for one or two days a week ("market days"), however some (such as Camden Market in London, UK) are open every day of the week. Such markets are normally specialist—the various stalls of Camden Market, along with the shops associated with it, sell a variety of alternative lifestyle products ranging from clothes and jewellery to CDs, instruments and furniture. An example of a large market is Chatuchak weekend market in Bangkok. The Roman term for market, still in use in a related sense, is forum. The modern shopping mall can be seen as an extension of this concept.

Wholesale markets

A wholesale market is a market which primarily sells to traders such as caterers and small shopkeepers, rather than to members of the public, although members of the public are not necessarily excluded. London, England has several centuries old wholesale markets such as Smithfield Market and Billingsgate Fish Market.

Economic markets and marketspaces

In modern times, mainly after the invention of the electronic computer, markets are not always located in a physical space. Such virtual markets consist of communication paths where information exchange is easy and deals may be struck. These are often called marketspaces. A notable example of this is the international currency market. The e-Bay web site can also be considered a marketspace.

Supply and demand

In microeconomic theory, the partial equilibrium supply and demand economic model originally developed by Alfred Marshall attempts to describe, explain, and predict changes in the price and quantity of goods sold in competitive markets. The model is only a first approximation for describing an imperfectly competitive market. It formalizes the theories used by some economists before Marshall and is one of the most fundamental models of some modern economic schools, widely used as a basic building block in a wide range of more detailed economic models and theories. The theory of supply and demand is important for some economic schools' understanding of a market economy in that it is an explanation of the mechanism by which many resource allocation decisions are made. However, unlike general equilibrium models, supply schedules in this partial equilibrium model are fixed by unexplained forces.

Demand

Demand is that quantity of a good that consumers are not only willing to buy but also have the capacity to buy at the given price. For example, a consumer may be willing to purchase 2 lb of potatoes if the price is $0.75 per lb. However, the same consumer may be willing to purchase only 1 lb if the price is $1.00 per lb. A demand schedule can be constructed that shows the quantity demanded at each given price. It can be represented on a graph as a line or curve by plotting the quantity demanded at each price. It can also be described mathematically by a demand equation. The main determinants of the quantity one is willing to purchase will typically be the price of the good, one's level of income, personal tastes, the price of substitute goods, and the price of complementary goods. The shape of the aggregated demand curve can be convex or concave, possibly depending on income distribution, as shown in this paper: http://www.economicswebinstitute.org/essays/consumers.htm

Supply

Supply is the quantity that producers are willing to sell at a given price. For example, the potato grower may be willing to sell 1 million lb of potatoes if the price is $0.75 per lb and substantially more if the market price is $0.90 per lb. The main determinants of supply will be the market price of the good and the cost of producing it. In fact, supply curves are constructed from the firm's long-run cost schedule.

Simple supply and demand curves

Mainstream economic theory centers on creating a series of supply and demand relationships, describing them as equations, and then adjusting for factors which produce "stickiness" between supply and demand. Analysis is then done to see what "trade offs" are made in the "market", which is the negotiation between sellers and buyers. Analysis is done as to what point the ability of sellers to sell becomes less useful than other opportunities. This is related to "marginal" costs, or the price to produce the last unit that can be sold profitably, versus the chance of using the same effort to engage in some other activity. equation The slope of the demand curve (downward to the right) indicates that a greater quantity will be demanded when the price is lower. On the other hand, the slope of the supply curve (upward to the right) tells us that as the price goes up, producers are willing to produce more goods. The point where these curves intersect is the equilibrium point. At a price of P producers will be willing to supply Q units per period of time and buyers will demand the same quantity. P in this example, is the equilibrating price that equates supply with demand. In the figures, straight lines are drawn instead of the more general curves. This is typical in analysis looking at the simplified relationships between supply and demand because the shape of the curve does not change the general relationships and lessons of the supply and demand theory. The shape of the curves far away from the equilibrium point are less likely to be important because they do not affect the market clearing price and will not affect it unless large shifts in the supply or demand occur. So straight lines for supply and demand with the proper slope will convey most of the information the model can offer. In any case, the exact shape of the curve is not easy to determine for a given market. The general shape of the curve, especially its slope near the equilibrium point, does however have an impact on how a market will adjust to changes in demand or supply. (See the below section on elasticity.) It should be noted that on supply and demand curves both are drawn as a function of price. Neither is represented as a function of the other. Rather the two functions interact in a manner that is representative of market outcomes. The curves also imply a somewhat neutral means of measuring price. In practice any currency or commodity used to measure price is also the subject of supply and demand.

Effects of being away from the equilibrium point

function Consider how prices and quantities not at the equilibrium point tend to move towards the equilibrium. Assume that some organization (say government or industry cartel) has the ability to set prices. If the price is set too high, such as at P1 in the diagram to the right, then the quantity produced will be Qs. The quantity demanded will be Qd. Since the quantity demanded is less than the quantity supplied there will be an oversupply (also called surplus or excess supply). On the other hand, if the price is set too low, then too little will be produced to meet demand at that price. This will cause an undersupply problem (also called a shortage). Now assume that individual firms have the ability to alter the quantities supplied and the price they are willing to accept, and consumers have the ability to alter the quantities that they demand and the amount they are willing to pay. Businesses and consumers will respond by adjusting their price (and quantity) levels and this will eventually restore the quantity and the price to the equilibrium. function In the case of too high a price and oversupply (seen in the diagram at the left), the profit-maximizing businesses will soon have too much excess inventory, so they will lower prices (from P1 to P) to reduce this. Quantity supplied will be reduced from Qs to Q and the oversupply will be eliminated. In the case of too low a price and undersupply, consumers will likely compete to obtain the good at the low price, but since more consumers would like to buy the good at the price that is too low, the profit-maximizing firm would raise the price to the highest they can, which is the equilibrium point. In each case, the actions of independent market participants cause the quantity and price to move towards the equilibrium point.

Demand curve shifts

right When more people want something, the quantity demanded at all prices will tend to increase. This can be referred to as an increase in demand. The increase in demand could also come from changing tastes, where the same consumers desire more of the same good than they previously did. Increased demand can be represented on the graph as the curve being shifted right, because at each price point, a greater quantity is demanded. An example of this would be more people suddenly wanting more coffee. This will cause the demand curve to shift from the initial curve D0 to the new curve D1. This raises the equilibrium price from P0 to the higher P1. This raises the equilibrium quantity from Q0 to the higher Q1. In this situation, we say that there has been an increase in demand which has caused an extension in supply. Conversely, if the demand decreases, the opposite happens. If the demand starts at D1 and then decreases to D0, the price will decrease and the quantity supplied will decrease—a contraction in supply. Notice that this is purely an effect of demand changing. The quantity supplied at each price is the same as before the demand shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the demand is different.

Supply curve shifts

left When the suppliers' costs change the supply curve will shift. For example, assume that someone invents a better way of growing wheat so that the amount of wheat that can be grown for a given cost will increase. Producers will be willing to supply more wheat at every price and this shifts the supply curve S0 to the right, to S1—an increase in supply. This causes the equilibrium price to decrease from P0 to P1. The equilibrium quantity increases from Q0 to Q1 as the quantity demanded increases at the new lower prices. Notice that in the case of a supply curve shift, the price and the quantity move in opposite directions. Conversely, if the quantity supplied decreases, the opposite happens. If the supply curve starts at S1 and then shifts to S0, the equilibrium price will increase and the quantity will decrease. Notice that this is purely an effect of supply changing. The quantity demanded at each price is the same as before the supply shift (at both Q0 and Q1). The reason that the equilibrium quantity and price are different is the supply is different. See also: Induced demand

Market "clearance"

The market "clears" at the point where all the supply and demand at a given price balance. That is, the amount of a commodity available at a given price equals the amount that buyers are willing to purchase at that price. It is assumed that there is a process that will result in the market reaching this point, but exactly what the process is in a real situation is an ongoing subject of research. Markets which do not clear will react in some way, either by a change in price, or in the amount produced, or in the amount demanded. Graphically the situation can be represented by two curves: one showing the price-quantity combinations buyers will pay for, or the demand curve; and one showing the combinations sellers will sell for, or the supply curve. The market clears where the two are in equilibrium, that is, where the curves intersect. In a general equilibrium model, all markets in all goods clear simultaneously and the "price" can be described entirely in terms of tradeoffs with other goods. For a century most economists believed in Say's Law, which states that markets, as a whole, would always clear and thus be in balance.

Elasticity

Main article: Elasticity (economics) An important concept in understanding supply and demand theory is elasticity. In this context, it refers to how supply and demand change in response to various stimuli. One way of defining elasticity is the percentage change in one variable divided by the percentage change in another variable (known as arch elasticity because it calculates the elasticity over a range of values, in contrast with point elasticity that uses differential calculus to determine the elasticity at a specific point). Thus it is a measure of relative changes. Often, it is useful to know how the quantity supplied or demanded will change when the price changes. This is known as the price elasticity of demand and the price elasticity of supply. If a monopolist decides to increase the price of their product, how will this affect their sales revenue? Will the increased unit price offset the likely decrease in sales volume? If a government imposes a tax on a good, thereby increasing the effective price, how will this affect the quantity demanded? If you do not wish to calculate elasticity, a simpler technique is to look at the slope of the curve. Unfortunately, this has units of measurement of quantity over monetary unit (for example, liters per euro, or battleships per million yen), which is not a convenient measure to use for most purposes. So, for example, if you wanted to compare the effect of a price change of gasoline in Europe versus the United States, there is a complicated conversion between gallons per dollar and liters per euro. This is one of the reasons why economists often use relative changes in percentages, or elasticity. Another reason is that elasticity is more than just the slope of the function: It is the slope of a function in a coordinate space, that is, a line with a constant slope will have different elasticity at various points. Let's do an example calculation. We have said that one way of calculating elasticity is the percentage change in quantity over the percentage change in price. So, if the price moves from $1.00 to $1.05, and the quantity supplied goes from 100 pens to 102 pens, the slope is 2/0.05 or 40 pens per dollar. Since the elasticity depends on the percentages, the quantity of pens increased by 2%, and the price increased by 5%, so the elasticity is 2/5 or 0.4. Since the changes are in percentages, changing the unit of measurement or the currency will not affect the elasticity. If the quantity demanded or supplied changes a lot when the price changes a little, it is said to be elastic. If the quantity changes little when the prices changes a lot, it is said to be inelastic. An example of perfectly inelastic supply, or zero elasticity, is represented as a vertical supply curve. (See that section below) Elasticity in relation to variables other than price can also be considered. One of the most common to consider is income. How would the demand for a good change if income increased or decreased? This is known as the income elasticity of demand. For example, how much would the demand for a luxury car increase if average income increased by 10%? If it is positive, this increase in demand would be represented on a graph by a positive shift in the demand curve, because at all price levels, a greater quantity of luxury cars would be demanded. Another elasticity that is sometimes considered is the cross elasticity of demand, which measures the responsiveness of the quantity demanded of a good to a change in the price of another good. This is often considered when looking at the relative changes in demand when studying complement and substitute goods. Complement goods are goods that are typically utilized together, where if one is consumed, usually the other is also. Substitute goods are those where one can be substituted for the other, and if the price of one good rises, one may purchase less of it and instead purchase its substitute. Cross elasticity of demand is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For an example with a complement good, if, in response to a 10% increase in the price of fuel, the quantity of new cars demanded decreased by 20%, the cross elasticity of demand would be −20%/10% or, −2.

Vertical supply curve

It is sometimes the case that the supply curve is vertical: that is the quantity supplied is fixed, no matter what the market price. For example, the amount of land in the world can be considered fixed. In this case, no matter how much someone would be willing to pay for a piece of land, the extra cannot be created. Also, even if no one wanted all the land, it still would exist. These conditions create a vertical supply curve, giving it zero elasticity (i.e., no matter how large the change in price, the quantity supplied will not change). In the short run near vertical supply curves are even more common. For example, if the Super Bowl is next week, increasing the number of seats in the stadium is almost impossible. The supply of tickets for the game can be considered vertical in this case. If the organizers of this event underestimated demand, then it may very well be the case that the price that they set is below the equilibrium price. In this case there will likely be people who paid the lower price who only value the ticket at that price, and people who could not get tickets, even though they would be willing to pay more. If some of the people who value the tickets less sell them to people who are willing to pay more (i.e., scalp the tickets), then the effective price will rise to the equilibrium price. The graph below illustrates a vertical supply curve. When the demand 1 is in effect, the price will be p1. When demand 2 is occurring, the price will be p2. Notice that at both values the quantity is Q. Since the supply is fixed, any shifts in demand will only affect price. Diagram of vertical supply curve

Other market forms

In a situation in which there are many buyers but a single monopoly supplier that can adjust the supply or price of a good at will, the monopolist will adjust the price so that his profit is maximized given the amount that is demanded at that price. This price will be higher than in a competitive market. A similar analysis using supply and demand can be applied when a good has a single buyer, a monopsony, but many sellers. Where there are both few buyers or few sellers, the theory of supply and demand cannot be applied because both decisions of the buyers and sellers are interdependent—changes in supply can affect demand and vice versa. Game theory can be used to analyze this kind of situation. (See also oligopoly.) The supply curve does not have to be linear. However, if the supply is from a profit-maximizing firm, it can be proven that supply curves are not downward sloping (i.e., if the price increases, the quantity supplied will not decrease). Supply curves from profit-maximizing firms can be vertical, horizontal or upward sloping. While it is possible for industry supply curves to be downward sloping, supply curves for individual firms are never downward sloping. Standard microeconomic assumptions cannot be used to prove that the demand curve is downward sloping. However, despite years of searching, no generally agreed upon example of a good that has an upward-sloping demand curve has been found (also known as a giffen good). Non-economists sometimes think that certain goods would have such a curve. For example, some people will buy a luxury car because it is expensive. In this case the good demanded is actually prestige, and not a car, so when the price of the luxury car decreases, it is actually changing the amount of prestige so the demand is not decreasing since it is a different good (see Veblen good). Even with downward-sloping demand curves, it is possible that an increase in income may lead to a decrease in demand for a particular good, probably due to the existence of more attractive alternatives which become affordable: a good with this property is known as an inferior good.

An example: Supply and demand in a 6-person economy

Supply and demand can be thought of in terms of individual people interacting at a market. Suppose the following six people participate in this simplified economy:
- Alice is willing to pay $10 for a sack of potatoes.
- Bob is willing to pay $20 for a sack of potatoes.
- Cathy is willing to pay $30 for a sack of potatoes.
- Dan is willing to sell a sack of potatoes for $5.
- Emily is willing to sell a sack of potatoes for $15.
- Fred is willing to sell a sack of potatoes for $25. There are many possible trades that would be mutually agreeable to both people, but not all of them will happen. For example, Cathy and Fred would be interested in trading with each other for any price between $25 and $30. If the price is above $30, Cathy is not interested, since the price is too high. If the price is below $25, Fred is not interested, since the price is too low. However, at the market Cathy will discover that there are other sellers willing to sell at well below $25, so she will not trade with Fred at all. In an efficient market, each seller will get as high a price as possible, and each buyer will get as low a price as possible. Imagine that Cathy and Fred are bartering over the price. Fred offers $25 for a sack of potatoes. Before Cathy can agree, Emily offers a sack of potatoes for $24. Fred is not willing to sell at $24, so he drops out. At this point, Dan offers to sell for $12. Emily won't sell for that amount so it looks like the deal might go through. At this point Bob steps in and offers $14. Now we have two people willing to pay $14 for a sack of potatoes (Cathy and Bob), but only one person (Dan) willing to sell for $14. Cathy notices this and doesn't want to lose a good deal, so she offers Dan $16 for his potatoes. Now Emily also offers to sell for $16, so there are two buyers and two sellers at that price (note that they could have settled on any price between $15 and $20), and the bartering can stop. But what about Fred and Alice? Well, Fred and Alice are not willing to trade with each other, since Alice is only willing to pay $10 and Fred will not sell for any amount under $25. Alice can't outbid Cathy or Bob to purchase from Dan, so Alice will not be able to get a trade with them. Fred can't underbid Dan or Emily, so he will not be able to get a trade with Cathy. In other words, a stable equilibrium has been reached. inferior good A supply and demand graph could also be drawn from this. The demand would be:
- 1 person is willing to pay $30 (Cathy).
- 2 people are willing to pay $20 (Cathy and Bob).
- 3 people are willing to pay $10 (Cathy, Bob, and Alice). The supply would be:
- 1 person is willing to sell for $5 (Dan).
- 2 people are willing to sell for $15 (Dan and Emily).
- 3 people are willing to sell for $25 (Dan, Emily, and Fred). Supply and demand match when the quantity traded is two sacks and the price is between $15 and $20. Whether Dan sells to Cathy, and Emily to Bob, or the other way round, and what precisely is the price agreed cannot be determined. This is the only limitation of this simple model. When considering the full assumptions of perfect competition the price would be fully determined, since there would be enough participants to determine the price. For example, if the "last trade" was between someone willing to sell at $15.50 and someone willing to pay $15.51, then the price could be determined to the penny. As more participants enter, the more likely there will be a close bracketing of the equilibrium price. It is important to note that this example violates the assumption of perfect competition in that there are a limited number of market participants. However, this simplification shows how the equilibrium price and quantity can be determined in an easily understood situation. The results are similar when unlimited market participants and the other assumptions of perfect competition are considered.

Decision making

Much of economics assumes that individuals seek to maximize their happiness or utility; however, whether they rationally attempt to optimize their well-being given available information is a source of much debate. In this view, which underpins much of economic writing, individuals make choices between alternatives based on their estimation of which will yield the best results. Many important economic ideas, such as the "efficient market hypothesis", rest on this view of decision making. However, this framework, once called "homo economicus", has for decades been the focus of unease even by those who apply it. Milton Friedman once defended the idea by saying that inaccurate assumptions could produce accurate results. Alfred Marshall was careful to differentiate the tendency to maximize happiness with maximizing economic well-being. The limits of rationality have been the subject of intense study, for example, Herbert Simon's model for "bounded rationality", which was awarded a Nobel Prize in 1978. More recently, irrational behavior and imperfect information have increasingly been the subject of formal modeling, often referred to as behavioral economics, for which Daniel Kahneman won a Nobel Prize in 2002. An example is the growing field of behavioral finance, which combines previous theory with cognitive psychology. The new model of information and decision making focuses on asymmetrical information, when some participants have key facts that others do not, and on decision making based not on the economic pressures but on the decisions of other economic actors. Asymmetrical information and behavioral dynamics lead to different conclusions: in a world of asymmetrical information, markets are generally not efficient, and inefficiencies grow up as means of hedging against information. While not yet universally accepted, it is increasingly influential in policy, for example, the writing of Joseph Stiglitz and financial modeling.

History of supply and demand

Attempts to determine how supply and demand interact began with Adam Smith's The Wealth of Nations, first published in 1776. In this book, he mostly assumed that the supply price was fixed but that the demand would increase or decrease as the price decreased or increased. David Ricardo in 1817 published the book Principles of Political Economy and Taxation, in which the first idea of an economic model was proposed. In this, he more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. During the late 19th century the marginalist school of thought emerged. This field mainly was started by Stanley Jevons, Carl Menger, and Léon Walras. The key idea was that the price was set by the most expensive price, that is, the price at the margin. This was a substantial change from Adam Smith's thoughts on determining the supply price. Finally, most of the basics of the modern school theory of supply and demand were finalized by Alfred Marshall and Léon Walras, when they combined the ideas about supply and the ideas about demand and began looking at the equilibrium point where the two curves crossed. They also began looking at the effect of markets on each other. Since the late 19th century, the theory of supply and demand has mainly been unchanged. Most of the work has been in examining the exceptions to the model (like oligarchy, transaction costs, non-rationality).

Criticism of Marshall's theory of supply and demand

Marshall's theory of supply and demand runs counter to the ideas of economists from Adam Smith and David Ricardo through the creation of the marginalist school of thought. Although Marshall's theories are dominant in elite universities today, not everyone has taken the fork in the road that he and the marginalists proposed. One theory counter to Marshall is that price is already known in a commodity before it reaches the market, negating his idea that some abstract market is conveying price information. The only thing the market communicates is whether or not an object is exchangeable or not (in which case it would change from an object to a commodity). This would mean that the producer creates the goods without already having customers — blindly producing, hoping that someone will buy them ("buy" meaning exchange money for the commodities). Modern producers often have market studies prepared well in advance of production decisions; however, misallocation of factors of production can still occur. Keynesian economics also runs counter to the theory of supply and demand. In Keynesian theory, prices can become "sticky" or resistant to change, especially in the case of price decreases. This leads to a market failure. Modern supporters of Keynes, such as Paul Krugman, have noted this in recent history, such as when the Boston housing market dried up in the early 1990s, with neither buyers nor sellers willing to exchange at the price equilibrium. Gregory Mankiw's work on the irrationality of actors in the markets also undermines Marshall's simplistic view of the forces involved in supply and demand.

Special cases of a supply curve

As described above, the general form of a supply curve is that it is upward sloping. There are a few rare cases in which the supply curve may be backward bending. A well known example is for the supply curve for labor: backward bending supply curve of labour. As a person's wage increases, they are willing to supply a greater number of hours working, but when the wage reaches an extremely high amount (say a wage of $1,000,000 per hour), the amount of labor supplied actually decreases.

External link and references

- [http://www.greekshares.com/supdem.asp Economics and Supply and Demand]
- [http://gutenberg.net/1/0/6/1/10612/10612-h/10612-h.htm Supply and Demand] book by Hubert D. Henderson at Project Gutenberg.
- Price Theory and Applications by Steven E. Landsburg ISBN 0-538-88206-9
- An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, 1776 [http://www.gutenberg.net/etext/3300]
- By what is the price of a commodity determined?, a brief statement of Karl Marx's rival account [http://www.marxists.org/archive/marx/works/1847/wage-labour/ch03.htm] ja:需要と供給 Category:Microeconomics

Incomes policies

In economics, incomes policies are wage and price controls used to fight inflation. Such policies were widely used in the 1960s and 1970s as a method of fighting stagflation. Incomes polices vary from "voluntary" wage and price guidelines to mandatory controls like price/wage freezes. One variant is "tax-based incomes policies" (TIPs), where a government fee is imposed on those firms that raise prices and/or wages more than the controls allow. This is seen as internalizing the external cost of raising prices and/or wages, solving a market failure that encourages inflation. Many economists agree that a credible incomes policy would help prevent inflation. However, they would have other effects. By arbitrarily interfering with price signals, they provide an additional bar to achieving economic efficiency, potentially leading to shortages and declines in the quality of goods on the market, while requiring large government bureaucracies for their enforcement. Some economists argue that incomes policies are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. Yet others argue that controls and mild recessions can be complementary solutions for relatively mild inflation. The policy has the best chance of being credible and effective work best for those sectors of the economy dominated by monopolies or oligopolies, particularly nationalised industry, with a significant sector of workers organized in labor unions. These institutions enable collective negotiation and monitoring of the wage and price agreements. Other economists argue that inflation is essentially a monetary phenomenon and the only way to deal with it is by controlling the money supply, either directly or by means of interest rates. This view holds that without a totally planned economy the incomes policy can never work, because the excess money in the economy will greatly distort areas which the incomes policy does not cover. Category:Inflation Category:Economic policy

1973 energy crisis

with odd numbered license plates were allowed to purchase gasoline only on odd-numbered days of the month, while drivers with even-numbers were limited to even-numbered days.]] The 1973 oil crisis began in earnest on October 17, 1973, when Arab members of the Organization of Petroleum Exporting Countries (OPEC), during the Yom Kippur War, announced that they would no longer ship petroleum to nations that had supported Israel in its conflict with Syria and Egypt -- that is, to the United States and its allies in Western Europe. At around the same time, OPEC members agreed to use their leverage over the world price-setting mechanism for oil in order to quadruple world oil prices. The complete dependence of the industrialized world on oil, much of which was produced by Middle Eastern countries, became painfully clear to the U.S., Western Europe, and Japan, requiring Western policymakers to respond to international economic constraints that were qualitatively different from those faced by their predecessors.¹

Origins of the 1973 world oil shock

World competition over resources

The Arab-Israeli conflict triggered an energy crisis in the making. Before the embargo, the industrialized West, especially the United States, had taken cheap and plentiful petroleum for granted. (Indeed, the form American cities took after World War II - with expansive suburbs full of detached, single-family homes - depended on the automobile as the principal means of transportation - a form that consumes oil en masse as fuel.) Between 1945 and the late 1970s, the West and Japan consumed more oil and minerals than had been used in all previous recorded history. Oil consumption in the United States had more than doubled between 1950 and 1974. With only 6 percent of the world's population, the U.S. was consuming 33 percent of the world's energy. At the same time, America's economy accounted for a quarter of total global production, meaning US workers were over 4 times more productive than the global average (because of their advanced industrial sector, which accounts for the bulk (over 5 times the global average), of energy usage).

The fall of the dollar

U.S. economic policies had an important effect on the crisis. While the OPEC boycott was an immediate trigger, historians increasingly see roots in American economic policies. Oil, especially from the Middle East, was paid for in United States dollars(aka petrodollars), at prices fixed in dollars. U.S. President Richard Nixon had inherited an economy in which growth was already sluggish, in which inflation was already troubling. By the summer of 1971, the president was under strong public pressure to act decisively to end the dilemma of rising prices and general economic stagnation (see "stagflation"). On August 15, 1971, Nixon ended the convertibility of the US dollar into gold, thereby ending the Bretton Woods system that had been in place since the end of World War II, allowing its value to fall in world markets. The United States suspended convertibility of the dollar on August 15, 1971; the dollar was devalued by 8 percent in relation to gold in December 1971, and devalued again in 1973. The devaluation resulted in increased world economic and political uncertainty. Concurrently, in the early 1970s, the fall in the dollar went along with a fall in the price in dollars for oil. This improved the situation of U.S. industrialists in relation to European and Japanese competition. But the de-valorization, and then devaluation, of the dollar crystallized the unease of raw materials producers in the Third World who saw the wealth under their lands being reduced and their assets growing in a currency that was worth significantly less than it had been worth just quite recently. This set the stage for the struggle for control of the world's natural resources and for a more favorable sharing of the value of these resources between the rich countries and the oil-exporting nations of OPEC. OPEC devised a strategy of counter-penetration, whereby it hoped to make industrial economies that relied heavily on oil imports vulnerable to Third World pressures. Dwindling foreign aid from the United States and its allies, combined with the West's pro-Israeli stance in the Middle East, angered the Arab nations in OPEC.Thats thrue.

Founding of OPEC

OPEC consisted of thirteen nations, including seven Arab countries but also other major petroleum-exporting countries in the developing world like Iran and Venezuela. It had been formed in 1960 to protest pressure by major oil companies (mostly owned by U.S., British, and Dutch nationals) to reduce oil prices and payments to producers. At first it had operated as an informal bargaining unit for the sale of oil by Third World nations. It confined its activities to gaining a larger share of the revenues produced by Western oil companies and greater control over the levels of production. However, in the early 1970s it began to display its strength.

The Yom Kippur War

1970s, 1973. Nixon's National Security Advisor Henry Kissinger is directly behind Nixon.]] The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC from a mere cartel into a formidable political force. After the Six Day War of 1967 the Arab members of OPEC formed a separate, overlapping group (Organization of Arab Petroleum Exporting Countries) for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States, Western Europe, and Japan. By the early 1970s the great Western oil conglomerates suddenly faced a unified bloc of producers. As mentioned, the Arab-Israeli conflict triggered a crisis already in the making. The West could not continue to increase its energy use 5 percent annually, pay low oil prices, yet sell inflation-priced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil and the closest ally of the United States in the Middle East at the time. "Of course [the world price of oil] is going to rise," the Shah told the New York Times in 1973. "Certainly! And how...; You [Western nations] increased the price of wheat you sell us by 300 percent, and the same for sugar and cement...; You buy our crude oil and sell it back to us, redefined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say 10 times more."²

Arab oil embargo

On October 16th, 1973, as part of the political strategy that included the Yom Kippur War, OPEC cut production of oil, and placed an embargo on shipments of crude oil to the West, with the United States and the Netherlands specifically targeted. Also imposed was a boycott of Israel, and price increases. Since oil demand falls little with price rises, prices had to rise dramatically to reduce demand to the new, lower, level of supply. Anticipating this, the market price for oil immediately rose substantially. A world financial system already under pressure from the breakdown of the Bretton Woods agreement, would be set off on a path of a series of recessions and high inflation that would persist until the early 1980's, and elevated oil prices that would persist until 1986. 1986 The graph to the right is based on the nominal, not real, price of oil, and so overstates prices at the end. However, the effects of the Arab Oil Embargo are clear - it effectively doubled the real price of crude oil at the refinery level, and caused massive shortages in the US. This would exacerbate a recession that had already begun, and lead to a global recession through the rest of 1974. Over the long term, the oil embargo would change the nature of policy in the West, towards more exploration, towards energy conservation, and towards more restrictive monetary policy, which more aggressively fought inflation.

Chronology

- Sept. 15 - The Organization of Petroleum Exporting Countries (OPEC) declares a negotiating front, consisting of the 6 Persian Gulf States, to pressure for price increases and an end to support of Israel, based on the 1971 Tehran agreement.
- Oct. 6 - Egypt and Syria attack Israel on Yom Kippur, starting the fourth Arab-Israeli War.
- Oct. 8–10 - OPEC negotiations with oil companies to revise the 1971 Tehran price agreement fail.
- Oct. 16 - Saudi Arabia, Iran, Iraq, Abu Dhabi, Kuwait, and Qatar unilaterally raise posted prices by 17 percent to $3.65 a barrel and announce production cuts.
- Oct. 17 - OAPEC oil ministers agree to use oil as a weapon to punish the West for its support of Israel in the Arab-Israeli war. They recommend an embargo against unfriendly states and mandate a cut in exports.
- Oct. 19 - Saudi Arabia, Libya and other Arab states proclaim an embargo on oil exports to the United States.
- Oct. 23–28 - The Arab oil embargo is extended to the Netherlands.
- Nov. 5 - Arab producers announce a 25 percent output cut. A further five percent cut is threatened.
- Nov. 23 - The Arab embargo is extended to Portugal, Rhodesia, and South Africa.
- Nov. 27 - U.S. President Richard Nixon signs the Emergency Petroleum Allocation Act authorizing price, production, allocation and marketing controls.
- Dec. 9 - Arab oil ministers agree a further five percent cut for non-friendly countries for January 1974.
- Dec. 25 - Arab oil ministers cancel the five percent output cut for January. Saudi oil minister Yamani promises a 10 percent OPEC production rise.
- Jan. 7–9, 1974 - OPEC decides to freeze prices until April 1.
- Feb. 11 - U.S. Secretary of State Henry Kissinger unveils the Project Independence plan to make U.S. energy independent.
- Feb. 12–14 - Progress in Arab-Israeli disengagement brings discussion of oil strategy among the heads of state of Algeria, Egypt, Syria and Saudi Arabia.
- Mar. 17 - Arab oil ministers, with the exception of Libya, announce the end of the embargo against the United States.

Immediate economic impact of the embargo

The effects of the embargo were immediate. OPEC forced the oil companies to increase payments drastically. The price of oil quadrupled by 1974 to nearly US$12 per 42 US gallon barrel (75 US$/m³). [http://www.cbc.ca/news/background/oil/] This increase in the price of oil had a dramatic effect on oil exporting nations, for the countries of the Middle East who had long been dominated by the industrial powers were seen to have acquired control of a vital commodity. The traditional flow of capital reversed as the oil exporting nations accumulated vast wealth. Some of the income was dispensed in the form of aid to other underdeveloped nations whose economies had been caught between higher prices of oil and lower prices for their own export commodities and raw materials amid shrinking Western demand for their goods. Much of it, however, fell into the hands of elites who reinvested it in the West or enhanced their own well-being. Much was absorbed in massive arms purchases that exacerbated political tensions, particularly in the Middle East. OPEC-member states in the developing world withheld the prospect of nationalization of the companies' holdings in their countries. Most notably, the Saudis acquired operating control of Aramco, fully nationalizing it in 1980. As other OPEC nations followed suit, the cartel's income soared. Saudi Arabia, awash with profits, undertook a series of ambitious five-year development plans, of which the most ambitious, begun in 1980, called for the expenditure of $250 billion. Other cartel members also undertook major economic development programs. Meanwhile, the shock produced chaos in the West. In the United States, the retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. Meanwhile, New York Stock Exchange shares lost $97 billion in value in six weeks. With the onset of the embargo, U.S. imports of oil from the Arab countries dropped from 1.2 million barrels (190,000 m³) a day to a mere 19,000 barrels (3,000 m³). Daily consumption dropped by 6.1 percent from September to February, and by the summer of 1974, by 7 percent as the United States suffered its first fuel shortage since the Second World War. Underscoring the interdependence of the world societies and economies, oil-importing nations in the noncommunist industrial world saw sudden inflation and economic recession. In the industrialized countries, especially the United States, the crisis was for the most part borne by the unemployed, the marginalized social groups, certain categories of aging workers, and increasingly, by younger workers. Schools and offices in the U.S. often closed down to save on heating oil; and factories cut production and laid off workers. In France, the oil crisis spelt the end of the Trente Glorieuses, 30 years of very high economic growth, and announced the ensueing decades of permanent unemployment. The embargo was not blanket in Europe. Of the nine members of the European Economic Community, the Dutch faced a complete embargo (having voiced support for Israel and allowed the Americans to use Dutch airfields for supply runs to Israel), the United Kingdom and France received almost uninterrupted supplies (having refused to allow America to use their airfields and embargoed arms and supplies to both the Arabs and the Israelis), whilst the other six faced only partial cutbacks. The UK had traditionally been an ally of Israel, and Harold Wilson's government had supported the Israelis during the Six Day War, but his successor, Ted Heath, had reversed this policy in 1970, calling for Israel to withdraw to its pre-1967 borders. The members of the EEC had been unable to achieve a common policy during the first month of the Yom Kippur War. The Community finally issued a statement on 6 November, after the embargo and price rises had begun; widely seen as pro-Arab, this statement supported the Franco-British line on the war and OPEC duly lifted its embargo from all members of the EEC. The price rises had a much greater impact in Europe than the embargo, particularly in the UK (where they combined with industrial action by coal miners to cause an energy crisis over the winter of 1973-74, a major factor in the breakdown of the post-war consensus and ultimately the rise of Thatcherism). Unlike any other oil-importing developed nation, Japan fared particularly well in the aftermath of the world energy crisis of the 1970s. Japanese automakers led the way in an ensuing revolution in car manufacturing. The large automobiles of the 1950s and 1960s were replaced by far more compact and energy efficient models. (Japan, moreover, had cities with a relatively high population density and a relatively high level of transit ridership.) A few months later, the crisis eased. The embargo was lifted in March 1974 after negotiations at the Washington Oil Summit, but the effects of the energy crisis lingered on throughout the 1970s. The price of energy continued increasing in the following year, amid the weakening competitive position of the dollar in world markets; and no single factor did more to produce the soaring price inflation of the 1970s in the United States.

Price controls and rationing

1970s The crisis was further exacerbated by government price controls in the United States, which limited the price of "old oil" (that already discovered) while allowing newly discovered oil to be sold at a higher price, resulting in a withdrawal of old oil from the market and artificial scarcity. The rule had been intended to promote oil exploration. This scarcity was dealt with by rationing of gasoline (which occurred in many countries), with motorists facing long lines at gas stations. In the U.S., drivers of vehicles with license plates having an odd number as the last digit were allowed to purchase gasoline for their cars only on odd-numbered days of the month, while drivers of vehicles with even-numbered license plates were allowed to purchase fuel only on even-numbered days. The rule did not apply on the 31st day of those months containing 31 days, or on February 29 in leap years — the latter never came into play as the restrictions had been abolished by 1976

Conservation and reduction in demand

1976 The U.S. government response to the embargo was quick, but of limited effectiveness. A National Maximum Speed Limit of 55 miles per hour (90 kilometers per hour) was imposed to help reduce consumption. This, incidentally, was claimed by some to have caused traffic fatalities to drop by 23 percent between 1973 and 1974. As a result this law was not completely reversed until 1995. President Nixon named William Simon as an official "energy czar," and in 1977 a cabinet-level Department of Energy was created, which led to the creation of the United States' Strategic Petroleum Reserve. The National Energy Act of 1978 was also largely a response to this crisis. Year-round Daylight Saving Time was implemented: at 2:00 AM local time on January 6, 1974, clocks were advanced one hour across the nation; the move spawned significant criticism because it forced many children to commute to school before sunrise. As a result, the clocks were turned back on the last Sunday in October as originally scheduled, and in 1975 clocks were set forward one hour at 2:00 AM on February 23, the later date being adopted to address the aforementioned issue. The pre-existing daylight-saving rules, calling for the clocks to be advanced one hour on the last Sunday in April, were restored in 1976 (this date being changed to the first Sunday in April in 1987 and to the last Sunday in March in 2007). The crisis also prompted a call for individuals and businesses to conserve energy — most notably a sophisticated campaign by the Advertising Council using the tag line "Don't Be Fuelish." Many newspapers carried full-page advertisements that featured cut-outs which could be attached to light switches that had the slogan "Last Out, Lights Out: Don't Be Fuelish" emblazoned thereon. The U.S. "Big Three" automakers first order of business after Corporate Average Fuel Economy CAFE were enacted was to downsize existing automobile categories; by the end of the 1970s, 121 inch wheelbase vehicles were a thing of the past. Before the mass production of automatic overdrive transmissions and electronic fuel injection, the traditional FR (front engine/rear wheel drive) layout was being phased out for the more efficient and/or integrated FF (front engine/front wheel drive) starting with compact cars. Using the Volkswagen Rabbit as the archetype, much of Detroit went FF after 1980 in response to CAFE's 27.5 MPG mandate. Vehicles such as the Ford Fairmont were short-lived in the early 1980s.

Search for alternatives

The energy crisis led to greater interest in renewable energy, especially wood fuel and spurred research in solar power and wind power. It also led to greater pressure to exploit North American oil sources, and increased the West's dependence on coal and nuclear power. In Australia, heating oil ceased being considered an appropriate winter heating fuel. This often meant that a lot of oil-fired room heaters that were popular from the late-1950s to the early-1970s were considered outdated. It also meant that some enterprising individuals designed aftermarket gas-conversion kits that let these heaters burn natural gas or propane. But the initial moves toward more efficient automobiles and alternative sources of energy stalled as oil prices fell and memories of gasoline shortages of 1973 faded. For the handful of industrialized nations that were net energy exporters the effects of the oil crisis were very different. In Canada the industrial east suffered many of the same problems of the United States. In oil rich Alberta there was a sudden and massive influx of money that quickly made it the richest province in the federation. The federal government attempted to correct this imbalance through the creation of the government-owned Petro-Canada and later the National Energy Program. These efforts produced a great deal of anger in the west producing a sentiment of alienation that has remained a central element of Canadian politics to this day. Overall the oil embargo had a sharply negative effect on the Canadian economy. The economic malaise in the United States easily crossed the border and increases in unemployment and stagflation hit Canada as hard as the United States despite Canadian fuel reserves. The Soviet Union was also a net oil exporter and the increase in the price of oil had an immediate effect on that country. The Soviet economy had stagnated for several years and the increase in the price of oil had a beneficial effect, especially after the bloc's internal terms of trade were adjusted to reflect the increased value of Russian oil. The increase in foreign currency reserves allowed the import of grain and other foodstuffs from abroad, increased production of consumer goods and the ability to keep military spending at its traditional levels. Some historians believe the windfall in oil revenues during this period kept the Soviet Union in existence for a considerably longer period of time than would otherwise have occurred.

Macroeconomic effects

The 1973 oil crisis was a major factor in Japanese economy shift away from oil-intensive industries and resulted in huge Japanese investments in industries like electronics. The Western nations' central banks decided to sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern. Although this was the orthodox macroeconomic prescription at the time, the resulting stagflation surprised economists and central bankers, and the policy is now considered by some to have deepened and lengthened the adverse effects of the embargo.

Perception of the oil industry

Long-term effects of the embargo are still being felt. Public suspicion of the oil companies, who were thought to be profiteering or even working in collusion with OPEC, continues unabated (seven of the fifteen top Fortune 500 companies in 1974 were oil companies, with total assets of over $100 billion).

Effects on international relations

The Cold War policies of the Nixon administration also suffered a major blow in the aftermath of the oil embargo. They had focused on China and the Soviet Union, but the latent challenge to U.S. hegemony coming from the Third World was now starkly evident. U.S. power was under attack even in Latin America. The oil embargo was announced roughly just one month after a right-wing military coup in Chile toppled elected socialist president Salvador Allende on September 11, 1973. The U.S.'s subsequent assistance to this government did little in the short-run to curb the activities of socialist guerrillas in the region. The response of the Nixon administration was to propose doubling of the amount of military arms sold by the United States. As a consequence, a Latin American bloc was organized and financed in part by Venezuela and its oil revenues, which quadrupled between 1970 and 1975. In addition, Western Europe and Japan began switching from pro-Israel to more pro-Arab policies (some of which are still in effect today). This change further strained the Western alliance system, for the United States, which imported only 12 percent of its oil from the Middle East (compared with 80 percent for the Europeans and over 90 percent for Japan), remained staunchly committed to its backing of Israel. A year after the unveiling of the 1973 oil embargo, the nonaligned bloc in the United Nations passed a resolution demanding the creation of a "new international economic order" in which resources, trade, and markets would be distributed more equitably, with the local populations of nations within the global South receiving a greater share of benefits derived from the exploitation of southern resources, and greater respect for the right to self-directed development in the South be afforded by the North.

Decline of OPEC

Since 1973, OPEC failed to hold on to its preeminent position, and by 1981 its production was surpassed by that of other countries. Additionally, its own member nations were divided among themselves. Saudi Arabia, trying to gain back market share and to make the most expensive oil production facilities less profitable or even unprofitable, exerted pressure toward lowering prices. The world price of oil, which had reached a peak in 1979, at more than US$80 a barrel (503 US$/m³) in 2004 dollars, decreased during the early 1980s to US$38 a barrel (239 US$/m³). In real prices oil briefly fell back to pre-1973 levels. Overall, the reduction in price was a windfall for the oil-consuming nations: Japan, the consuming nations of Europe and of the Third World especially. Part of the decline in prices and in the relative economical and geopolitical power of OPEC and other oil-producing countries, as well as of oil-related companies, comes from the move away from oil consumption, which was a foreseeable consequence of the cartelization of any market as consumers look for alternatives. (OPEC had relied on the famously limited price sensitivity of oil demand to maintain high consumption, but had underestimated the extent to which other sources of supply would become profitable as the price increased.) At the same time, the drop in prices represented a serious problem for oil-producing countries in Northern Europe and in the Persian Gulf region. And for a handful of heavily populated, impoverished countries, whose economies were largely dependent on oil — including Mexico, Nigeria, Algeria, and Libya — and whose governments and business leaders failed to prepare for a market reversal, the price drop placed them in wrenching, sometimes desperate situations. When reduced demand and over-production produced a glut on the world market in the mid-1980s, oil prices plummeted and the cartel lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela, whose economies had expanded frantically, were plunged into near-bankruptcy, and even Saudi Arabian economic power was significantly weakened. The divisions within OPEC made subsequent concerted action more difficult. Nevertheless, the 1973 oil shock provided dramatic evidence of the potential power of Third World resource suppliers in dealing with the developed world. The vast reserves of the leading Middle East producers guaranteed the region its strategic importance, but the politics of oil still proves dangerous for all concerned to this day. In thirty-year-old British government documents released in January 2004, it was revealed that the United States considered invading Saudi Arabia and Kuwait during the crisis and seizing the oil fields in those countries. According to the BBC, other possibilities, such as the replacement of Arab rulers by "more amenable" leaders, or a show of force by "gunboat diplomacy," were rejected as unlikely. ³

Notes and references

¹ See, e.g., Alan S. Blinder, Economic Policy and the Great Stagflation (New York: Academic Press, 1979); Otto Eckstein, The Great Recession Amsterdam: North-Holland, 1979); Mark E. Rupert and David P. Rapkin, "The Erosion of U.S. Leadership Capabilities," in Paul M. Johnson and William R. Thompson, eds., Rhythms in Politics and Economics (New York: Praeger, 1985)
² Quoted in Walter LaFeber, Russia, America, and the Cold War (New York, 2002), p. 292.
³ See the January 2, 2004 article by BBC News Online world affairs correspondent Paul Reynolds "US ready to seize Gulf oil in 1973" at [http://news.bbc.co.uk/1/hi/world/middle_east/3333995.stm].

- Energy crisis
- Supply shock
- Oil boom
- 1979 energy crisis
- Oil price increases of 2004
- Hubbert peak
- Boycott
- Embargo

External links

- [http://earth.prohosting.com/~jswift/engdahl.html#Kissingers%20Yom%20Kippur Kissinger's Yom Kippur oil shock]- Article that claims that the 1973 energy crisis was orchestrated by the U.S.
- [http://www.futurecrisis.com Global Oil Crisis Updates and Energy Information Resources]
- [http://observer.guardian.co.uk/business/story/0,6903,421888,00.html Saudi dove in the oil slick] - Sheikh Ahmed Zaki Yamani, former oil minister of Saudi Arabia gives his personal account of the 1973 energy crisis. Category:1973 Category:Energy crises Category:History of the petroleum industry Category:Arab-Israeli conflict

Scarcity

FIFO

FIFO is an acronym for First In, First Out. This expression describes the principle of a queue or first-come, first-served behavior: what comes in first is handled first, what comes in next waits until the first is finished, etc. Thus it is analogous to the behaviour of persons "standing in a line" (preferred in American English) or "queueing" (preferred in Commonwealth English), where the persons leave the queue in the order they arrive. A priority queue is a variation on the queue which does not qualify for the name FIFO, because it is not accurately descriptive of that data structure's behavior. Queuing theory encompasses the more general concept of queue, as well as interactions between strict-FIFO queues. The expression FIFO can be used in different contexts.

People

- For queues of people, see queue area.

Computer science

Data structure

In computer science this term refers to the way data stored in a queue is processed. Each item in the queue is stored in a queue (simpliciter) data structure. The first data to be added to the queue will be the first data to be removed, then processing proceeds sequentially in the same order. This is typical behavior for a queue, but see also the LIFO and stack algorithms. A typical data structure will look like struct fifo_node ; class fifo (For information on the abstract data structure, and an implementation in scheme, see Queue. For details of a common implementation, see Circular buffer.)

Pipes

In computing environments that support the pipes and filters model for interprocess communication, a FIFO is another name for a named pipe.

Electronics

FIFOs are used commonly in electronic circuits for buffering and flow control. In hardware form a FIFO primarily consists of a set of read and write pointers, storage and control logic. Storage may be SRAM, flip-flops, latches or any other suitable form of storage. For FIFOs of non-trivial size a dual-port SRAM is usually used where one port is used for writing and the other is used for reading. A synchronous FIFO is a FIFO where the same clock is used for both reading and writing. An asynchronous FIFO uses different clocks for reading and writing. Asynchronous FIFOs introduce metastability issues. A common implementation of an asychronous FIFO uses a Gray code for the read and write pointers to ensure reliable flag generation. FIFOs may generate various flags that indicate the status of the FIFO such as full, empty, almost full or almost empty.

Accounting

In accounting, FIFO is a common method for recording the value of inventory. It is appropriate where there are many different batches of similar products. The method presumes that the next item to be shipped will be the oldest of that type in the warehouse. In practice, this usually reflects the underlying commercial substance of the transaction, since many companies rotate their inventory. See also LIFO in this context.

Congestion

Congestion is a state of excessive accumulation or overfilling or overcrowding. This general definition is broadly correct across all uses of the word. However in specific contexts the word has a more precise definition and usage. ---- In telecommunication, the term has the following meanings: #In a communications switch, a state or condition that occurs when more subscribers attempt simultaneously to access the switch than it is able to handle, even if unsaturated. #In a saturated communications system, the condition that occurs when an additional demand for service occurs. Sources: Federal Standard 1037C and MIL-STD-188 ---- In medicine and pathology the term is used to describe excessive accumulation of blood or other fluid in a particular part of the body, such as nasal congestion. ---- See the traffic congestion article for a discussion of congestion in transportation. ---- In electric power transmission it means the inability to supply an area with the cheapest available generation due to a binding constraint on the point to point transmission route. Some plant or equipment could be causing the constraint due to thermal overload or security limits being potentially breached.

Black market

The black market is the sector of economic activity involving illegal economic dealings, typically the buying and selling of merchandise illegally. The goods may be themselves illegal, such as the sale of prohibited weapons or the illegal drug trade; the merchandise may be stolen; or the merchandise may be otherwise legal goods sold illicitly to avoid tax payments or licensing requirements, such as cigarettes or unregistered firearms. It is so called because "black economy" or "black market" affairs are conducted outside the law, and so are necessarily conducted "in the dark", out of the sight of the law. Black markets are said to develop when the state places restrictions on the production or provision of goods and services that come into conflict with market demands. These markets prosper, then, when state restrictions are heavy, such as during prohibition or rationing. However, black markets are normally present in any given economy.

Black market price

As a result of an increase in government restrictions, black market prices for the relevant products will rise, as said restrictions represent a decrease in supply and an increase in risk on the part of the suppliers, sellers, and any and all middlemen. According to the theory of supply and demand, a decrease in supply—making the product more scarce—will increase prices, other things being equal. Similarly, increased enforcement of restrictions will increase prices for the same reason. Goods acquired illegally can take one of two price levels. They may be less expensive than (legal) market prices because the supplier did not incur the normal costs of production or pay the usual taxes. Alternatively, illegally supplied products may be more expensive than normal prices, because the product in question is difficult to acquire and may not be available legally. In the former case, however, most people are likely to continue to purchase the products in question from legal suppliers, for a number of reasons:
- The consumer may feel that the black market supplier conducts business immorally (although this criticism can extend to legal suppliers too).
- The consumer may—justifiably—trust legal suppliers more, as they are both easier to contact in case of faults in the product and easier to hold accountable.
- In some countries, it is a criminal offense to handle stolen goods, a factor which will discourage buyers. In the latter case of a black market for goods which are simply unavailable through legal channels, black markets will thrive if consumer demand nonetheless continues. In the case of the legal prohibition of a product that large segments of the society view as harmless in spite of its legal status, such as under alcohol prohibition in the United States, the black market will prosper, and the black marketeers often reinvest profits in a widely diversified array of illegal activity well beyond the original "harmless" item. Black market prices can be reduced by removing the relevant legal restrictions, thus increasing supply. People who advocate this may believe that governments should recognize fewer crimes in order to focus law enforcement effort on the most treatable dangers to society. However, this can be seen by some people as the equivalent of legalizing crime in order to reduce the number of "official" criminals—in other words, a concession that in their view only makes matters worse. Alternatively, the government could attempt to decrease demand. However, this is economically out of fashion and not as simple a process as decreasing supply.

Examples of black markets

The Prohibition period in the early twentieth century in the United States is a classic example of black market activity. Many organized crime groups took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sales. Since much of the populace did not view drinking alcohol as a particularly harmful activity that ought to be legally banned, illegal speakeasies prospered, and organizations such as the Mafia grew tremendously more powerful through their black market activities distributing alcohol. Another classic example is Burma under the rule of Ne Win. Under his "Burmese Way to Socialism", the country became one of the poorest in the world, and only the black market and rampant smuggling supplied the people's needs. Nowadays in many countries, it is argued a "war on drugs" has created a similar effect for drugs such as marijuana, heroin and cocaine. Despite ongoing law enforcement efforts to intercept illegal drug supplies, demand remains high, encouraging organized criminal groups to ensure their availability. While law enforcement efforts often capture distributors of illegal drugs, the high demand for such drugs ensures that black market prices will simply rise in response to the decrease in supply—encouraging new distributors to enter the market in a perpetual cycle. Similarly, since prostitution is illegal in many places and yet market demand for the services of prostitutes remains high, a black market usually develops. Black markets can also form near when neighboring jurisdictions have substantially different tax rates on similar products. Products that are commonly smuggled to fuel these black markets include alcohol and tobacco. Black markets flourish in most countries during wartime. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity. Due to severe shortages of consumer goods, black markets thrived in communist Eastern Europe and the Soviet Union.

External link

- Discussion of trading on the communist black market by a former smuggler: http://www.raelynnhillhouse.com/secrets/bmarket.php
- [http://www.waronjunk.com War on Junk: Black Market Satire]
- [http://economics.about.com/od/demand/ss/black_market.htm The Effects of a Black Market Using Supply and Demand]

Military

A military or military force (n., from Latin militarius, miles "soldier") has seen many different incarnations throughout time. Early armies may have been just men with sharpened sticks and rocks, through time they have included advancements such as men mounted on horses, men wielding swords and other metallic weapons, the bow and arrow, siege weapons, to the advance of the musket which form the roots of the armed force of most nations we know today. In modern times people use vehicles and guns. While military can refer to any armed force, it generally refers to a permanent, professional force of soldiers or guerrillas—trained exclusively for the purpose of warfare and should be distinguished from a sanctioned militia or a levy, which are temporary forces— citizen soldiers with less training, who may be 'called up' as a reserve force, when a nation mobilizes for total war, or to defend against invasion. The term military is often used to mean an army. The doctrine that asserts the primacy of a military within a society is called militarism.

Meaning of the word

:Also see: Armed forces As an adjective, "military" is a descriptive property of things related to soldiers and warfare. It also refers to such context dependent terms such as military reserves which may indicate an actual unit deployable on command or the general sense, of a Nation States reserve troops available to or eligible for duty in its armed forces. In formal British English, "military" as an adjective [http://www.opsi.gov.uk/si/si2003/20030636.htm refers] more particularly to matters relating to an army (land forces), as opposed to the naval and air force matters of the other two services. In American English, "military" as an adjective is more widely used for regulations pertaining to and between all the armed forces like military procurement, military transport, military justice, military strength and military force.

Military procurement

Military procurement refers to common regulations and requirements for a ship or a detached unit to requisistion and draw on a base's facilies (housing, pay, and rations for detached personnel), supplies (most commonly food stocks or materials, and vehicles) by the service running a primary base; e.g. Army units detached to or staging through an air base, a vessel calling at a port near an army or air base, an army unit

Rationing

Rationing in economics

Military rationing

Civilian rationing

Medical care rationing

Emergency Rationing

Sources

See also

External links

Scarcity

Market

Marketplaces and street markets

Wholesale markets

See also

Economic markets and marketspaces

See also

Supply and demand

Demand

Supply

Simple supply and demand curves

Effects of being away from the equilibrium point

Demand curve shifts

Supply curve shifts

Market "clearance"

Elasticity

Vertical supply curve

Other market forms

An example: Supply and demand in a 6-person economy

Decision making

History of supply and demand

Criticism of Marshall's theory of supply and demand

Special cases of a supply curve

See also

External link and references

Incomes policies

1973 energy crisis

Origins of the 1973 world oil shock

World competition over resources

The fall of the dollar

Founding of OPEC

The Yom Kippur War

Arab oil embargo

Chronology

Immediate economic impact of the embargo

Price controls and rationing

Conservation and reduction in demand

Search for alternatives

Macroeconomic effects

Perception of the oil industry

Effects on international relations

Decline of OPEC

Notes and references

Related articles

External links

Scarcity

FIFO

People

Computer science

Data structure

Pipes

Electronics

Accounting

See also

Congestion

See also

Black market

Black market price

Examples of black markets

See also

Compare

External link

Military

Meaning of the word

Military procurement