Economic Events and Economic Models a Micro-Economic Essay

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  • Subject: Economics
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Excerpt from Essay :

Economic Events and Economic Models

A Micro-Economic Event

An Analysis of the Motivations behind Kroes' Proposals

Price Controls: Dissenting Views

A Macro Economic Event

Probable Causes of Inflation

Probable Effects of the Increasing Inflation

Proposed Remedies

Economic events take place around us on a daily basis. An economic event could be a move by the government to stem inflation by regulating interest rates or even the imposition of price controls by relevant agencies in regard to certain products or services to either protect consumers or stimulate/encourage production. It is however important to note that in most cases, economic events either fall under micro-economics or macro-economics. In this text, I seek to bring out associations existing between real-life economic events and the various economic concepts as well as models learnt in class. In so doing, I will concern myself with two articles published in the dailies recently while seeking to explain how these articles relate to selected economic concepts.

Article 1: A Micro-Economic Event

According to Sexton (2010, p. 135), price controls are those measures undertaken by the government, the state or other relevant authorities to fix the prices of various services or even commodities at another price other than that which can be taken to be the equilibrium price. In bringing out the economic concept of price control (ceiling and floor), I take into consideration Kevin J. O'Brien's article, "Brussels Aims for Sharper Cuts to Mobile Roaming Charges" which appeared in the New York Times on 12th May, 2011. The article is attached alongside this text.

The article explores the proposals made by the telecommunications European commissioner Neelie Kroes to implement price controls (retail) in regard to the utilization of mobile internet during travel in a bid to lower or stem the mobile roaming charges in Europe. The draft, whose full implementation is expected by 1st of July 2014, will see a significant reduction in voice roaming charges from the prevailing high of 39 Euro cents to 24 cents. If successful, the proposal will see a price ceiling of 24 euro cents imposed on all voice roaming charges.

Essentially, mobile operators impose roaming charges on their clients who happen to surf the internet, receive or even make voice calls while in another country provided that other country happens to be within the EU. Hence effectively, roaming charges happen to be additional rates to the day-to-day calling tariffs. Further, it is important to note that the draft has spurred controversy with its proposal to implement consumer price limits in regard to internet usage roaming charges. As at the moment, no data roaming retail limits exist in Europe and as things currently stand, 2.50 euro cents are charged (on average) when it comes to retail data roaming for every megabyte downloaded. If Kroes' proposal sees the light of day, data roaming charges (retail) will be fixed at 50 euro cents for every megabyte downloaded. However, European Parliament's approval of the proposals is critical for the implementation of the same.

An Analysis of the Motivations behind Kroes' Proposals

Froeb and McCann (2007 p. 20) note that price controls can essentially be divided into two i.e. price floor and price ceiling. This is a position upheld by Taylor and Weerapana (2007 P. 81) who are of the opinion that price controls take the form of the highest price which can be leveled for a certain service or even good (price ceiling) or the lowest price which can be leveled for a given service or good (price floor). In the scenario presented above, it is clear that the proposals seek to set a price floor on both voice roaming charges as well as internet usage roaming charges. According to Musgrave et al. (2001, P. 48), there are a wide range of reasons why a government or any other relevant authority for that matter would seek to enforce a price floor or a price ceiling. According to the article I concern myself with in this case, the speeches Neelie Kroes has made in the past underline her view of the roaming charges in place being too high and hence her move to impose a price ceiling on the same could be said to be an attempt to protect the consumer. Gwartney et al. (2008, p. 87) are also of the opinion that in most cases, price ceilings are imposed to protect consumers. This is more so when it comes to rent control where the government may impose a price ceiling so as to cushion residents from increasing prices in regard to housing. In a number of cities in the United States i.e. California, rent controls have been apparent since sometimes in the 1970s when inflation levels were threatening to get out of hand (Gwartney et al. 2008, p. 87).

Though the discussion in this text is chiefly focused on the issue of price ceiling, it may also be prudent to make a mention of the price floor concept and what it constitutes. Wessels (2006, p. 43) defines a price floor as a government restriction as to how far prices should fall. Wessels further notes that for a price floor to have an impact, it should essentially be set above the prevailing price or equilibrium price. An equilibrium price can be taken as that price identifiable at the intersection of supply and demand (Mankiw, 2008, p. 77). In such a case where we have the price floor being set above the equilibrium price, surplus will be created.

Price Controls: Dissenting Views

It is important to note that though the European Commission (refer to the attached article under consideration) is in favor of price controls i.e. The imposition of a price ceiling so as to bring down the roaming charges in Europe in regard to mobile phones, there are those who are of the opinion that price controls could end up doing more harm than good. For instance, according to Baumol and Blinder (2008, p. 70), price controls are akin to restraining the mechanisms in play at the marketplace. In the case of a good, the imposition of a price ceiling could end up informing the shortage of that particular good as suppliers and producers alike register lower profit margins and possibly losses hence seeking to keep away from the market.

In our case scenario, though Neelie Kroes may be convinced that she is protecting consumers from the move by mobile operators in Europe to charge exorbitant rates in regard to roaming charges; placing caps on such rates could discourage some players in the marketplace and perhaps prevent other interested firms from making forays into the marketplace. This could in the long-term stifle not only innovation but also the competitiveness of the telecommunications market. This is a view well brought out by Baumol and Blinder (2008, p. 71), when they state that a price ceiling discourages investment in the affected market.

Article 2: A Macro Economic Event

Boyes and Melvin (2007) define inflation as increase (sustained) in the prices (average) of goods and services. In bringing out the economic concept of inflation, I will concern myself with Christine Hauser's text, "Raising Gas and Food Prices Push U.S. Inflation Higher" as it appeared in New York Times on 13th May, 2011.

The article in this case was in response to the sustained increase in the prices of essential commodities including grocery supplies as well as gasoline. Indeed, as per the projections of the Labor Department, the CPI rose by more than 3% in comparison to a previous year. This was essentially the biggest CPI leap in 12 months. CPI or Consumer Price Index seeks to measure price level changes in regard to purchases made by households. It is important to note that in the article (which is also attached herein), the commodities affected most by the price increases were gasoline and food. In the month of April, food prices registered a price increase of 0.4% while prices of energy were up by 2.2% in the same month. Further, in the month under consideration, the price of gasoline rose by 3.3%. The article goes ahead to note that as per the Labor Department's report, the price of energy has been on an upward trajectory rising by a whooping 19% in the last one year alone. A look at the presented figures paints a gloomy picture as the cost of living seems to continue climbing going forward.

Interestingly, quite a number of economists at that time were reportedly convinced that no action was likely to be undertaken by the Federal Reserve to stem the inflation i.e. through the extension of the quantitative easing program or by way of increasing interest rates.

Probable Causes of Inflation

It is important to note that based on the article presented in this case, it is not possible to tell the real cause(s) of the raising inflation. However, based on historical contexts, it is possible to speculate on the likely culprits of the high inflationary rate depicted in the Labor Department's report. According to Hall (1982,…

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