Applied Economics Task A

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AppliedEconomics

TaskA

WhyDo Many People Buy Larger Houses When They Retire and Their ChildrenLeave Home?

Inmost cases, people tend to purchase larger houses, when they retireand their own children leave home. Through applying the principles ofmicroeconomic theory, these phenomena can be explained. One of themicroeconomic theories that can be used to explain this behaviorentails the theory of demand. According to the theory of demand,people will tend to demand more when they have more purchasing powerwithin their limits. Upon retirement, people have more resources tospend because they get paid their benefits. When they receive thebenefits, they tend to have more resources in their pockets that theycan use in purchasing what they could not initially purchase thismakes them spend more because they have the purchasing power. Thus,this makes them purchase larger houses that they could not purchaseearlier because they did not possess a lot of income to spend inpurchasing larger houses.

Anotherreason that makes people to purchase larger houses, when they retireis due to fewer burdens that they have during the retirement age. Theless the burden, the high the chances of spending in commodities.Prior to people becoming aged, they usually have a lot of burdens,which make them spend a lot of resources. For example, they have theburden of taking their kids to school to acquire proper educationthat can assist them in becoming responsible citizens in the future.However, the spending burden tend to become fewer during retirementsince all the children become independent, while their parents nowbecome dependent. This implies that the retirees tend to have lessspending burden. As such, they tend to purchase larger houses becausethey possess more resources to spend, but with limited spending.Besides, people tend to spend more resources in purchasing largerhouses because they have increased sources of income. When retiring,most people will have already adventured in most ventures that bringin incomes. Therefore, they tend to have more incomes that they canuse in purchasing anything that they desire. Hence, they can affordlarger houses during this time.

Onthe other hand, when people retire and purchase large houses, most oftheir children leave home. This can be accounted for by the decreasein the dependency of the children towards the parents. At the age ofretirement, most children do not depend on their parents because mostof them earn their own income. As such, they see no need of stayingwith their parents and so they leave home.

TaskB

Theprice of aluminum has not been constant, but has been fluctuating.One of the reasons for the fluctuating aluminum prices is due to thechanging supply and demand of aluminum. Sometimes the demand foraluminum is so high such that the prices tend to shoot high, whilesometimes the demand goes down making the price of aluminum decline.In the transport industry, aluminum was not commonly used butautomobiles were entirely made up of steel. However, in the recentpast, passenger cars and trucks that are light are now made up of asignificant amount of aluminum. This increase in the use of aluminumhas increased the demand for aluminum in the automobile industry,leading to a rise in the price of aluminum. In the constructionmarket, a change in the demand of aluminum has also led to thefluctuating prices rather than the prices remaining constant.Increased use of aluminum in the construction industry has led to anincrease in the price of aluminum, while a decrease in the use ofaluminum in the construction industry has led to a decline in prices.

Emergingmarkets are also a contributor in the fluctuating prices of aluminum.Aluminum has been mostly used in the developed countries, while it isconsumed less in the developing countries (Lambet al, 2012. Pp. 74). However, as more countries are becomingdeveloped, there is an increased use of aluminum a move that has ledto a slight increase in the prices of aluminum. Since some developingcountries have not adopted the use of aluminum, the demand foraluminum has stayed at slightly lower levels, leading to aluminumfetching weak prices. Besides, the energy costs have also contributedto the fluctuating prices of aluminum. The prices of crude oil arenot constant because they tend to rise and fall depending on the gasprices. Since smelting of aluminum needs a constant and vast supplyof electricity, the total cost needed in the smelting process isremarkably large due to energy costs. This is an implication that incase the energy costs increase emanating from the rising oil prices,the price of aluminum also increases. Because this energy keeps onfluctuating, the prices of aluminum also keep on fluctuating.

Supplyof aluminum has also played a part in the fluctuating prices ofaluminum. High supply of aluminum in the market has led to a declinein the price of aluminum. The high supply of aluminum has affectedthe price of aluminum because as the supply is increased, peopledemand less of the aluminum. Through controlling the amount ofaluminum to be found in the market, the price of aluminum has beencontrolled to attractive levels. Lack of the government control ofthe aluminum market has affected the price levels of aluminum in themarket. Another reason for the fluctuating market price of aluminumemanates from investment in the aluminum. When there is highinvestment in the aluminum, people tend to focus more on theinvestment which push the price levels of aluminum up. On the otherhand, when the investment in aluminum is low, fewer individualsbecome attracted to the investment and this affects the price ofaluminum as it pushes the price levels down.

Economicperformance is also exceedingly critical in the fluctuating prices ofaluminum. During bad economic times, prices of almost everything arepushed up. This is because the number of commodities that can bepurchased by the currency used in the economy is few. During thistime, the price of aluminum is high because the purchasing power ofthe currency is decreased. On the other hand, when the economy isperforming well, the price of aluminum shoots up which is anindication of a healthy economy. Therefore, the performance of aneconomy is exceedingly critical in determining the pricing ofaluminum as the economy grows or expands, the price of aluminum goesup, but when the economy shrinks, the price of aluminum decreases.

Worldprices are also critical in determining the price level of aluminum.The world economy has to act as a determinant of the aluminum pricesbecause the world economy usually dictates how much a commodity isworth, depending on the performance of the dollar in the globaleconomy (WorldBank,2009. Pp. 4). When the performance of the dollar is strong comparedto a certain currency, there is a high likelihood that the price ofaluminum will go down. This is because the strength of the dollar onthe other currency is an indication that the currency is performingweakly in the economy. On the other hand, when the global price ofaluminum is high, the price will still be high in other economies.The same case applies, when the aluminum prices are low in the globaleconomy.

Theprices of intermediate commodities and finished goods are remarkablyimportant in determining the price of aluminum. When the market forintermediate commodities and finished goods is favorable, there is anincreased demand for the use of the aluminum in making thecommodities. This increases the price charged to aluminum.Alternatively, when the market for the intermediate commodities andfinished goods is not favorable, there is a declined demand for theuse of aluminum. This affects the price of aluminum since it has aneffect of decreasing the price levels of aluminum. Since intermediatecommodities and finished goods will always attract differing pricesdue to different circumstances, the price of aluminum has to alsofluctuate depending on the resultant effect of the intermediatecommodities and finished goods.

Furthermore,the fluctuating price levels of aluminum can be as a result of thefuture expected market for aluminum (www.metalradar.com). The futuremarket is very important in determining the price levels of thealuminum. In case the future market for aluminum is expected to havedeclining prices, less individuals will have a demand for purchasingaluminum for trading in the London Metal Exchange (Bain &ampEconomist Newspaper Limited,2013. Pp. 84). This will push the current price of aluminum in theLondon market down, where aluminum will only attract low prices.Alternatively, when the expected market for the aluminum is projectedto become favorable in the future, then more people will tend to holdaluminum for trade in the metal exchange. As this demand increases,it tends to shoot the current price of aluminum up. Thus, the futureexpectation of market of aluminum has the responsibility of causingan increase and decrease in the level of price of aluminum in themetal market.

Inaddition, the fluctuating market price can be associated with theinterest rates prevalent in the economy. Low interest rates usuallykeep price level of commodities down, diamond included, while highinterest rates interest rates are known to keep the price level ofcommodities high. Since the interest rates keep on changing, pricelevels of aluminum in the metal exchange market has been fluctuatingtoo. This can be indicated by the changing trend of aluminum pricesin the London Metal Exchange amid 2008 and 2014, where instances ofhigh interest rates show high prices of aluminum and low aluminumprices indicated by the low interest rates in the market. Moreover,the inelastic demand and supply of aluminum is responsible for thefluctuating aluminum prices(Anyadike,2002.Pp. 54). The inelasticity of aluminum implies that large increases inprice may generate slightest changes in the inventory levels. Sinceit is difficult to obtain accurate information concerning inventoryin the businesses dealing with aluminum, meager changes may bedifficult to detect in the market. Therefore, it is difficult tomonitor and maintain inventory levels of aluminum flowing in themarket, which is critical in producing equilibrium (Labys,2008. Pp. 48). Hence, when in the market, it is cumbersome to producean equilibrium price in the metal exchange market. Multipleequilibriums usually result, when dealing with the aluminum market,which implies that price levels of aluminum have to keep onfluctuating.

IllustrationShowing Price Elasticity of Demand

Price

P1

P2

D1 D2

Q1Q2 Q3 Quantity Demanded

D1in the illustration shows inelastic demand curve, while D2 showselastic demand curve.

IllustrationsShowing Normal Equilibrium and Multiple Equilibriums

NormalEquilibrium

Price S

p* E

D

Q*Quantity demanded

PointE is the equilibrium point with Q* as the equilibrium quantity and P*as the equilibrium price level.

Multipleequilibriums S

Price

S D

Quantitydemanded

Conclusion

Pricesof aluminum in the London Metal Exchange have been indicating greatfluctuations, which can be attributed to different key reasons. Oneof the key reasons for the much great fluctuation in the aluminumprices entails the emerging markets for aluminum. Aluminum has beenmostly used in the developed countries, while it is consumed less inthe developing countries. However, as more countries are becomingdeveloped, there is an increased use of aluminum a move that has ledto a slight increase in the prices of aluminum. Another key reasonfor the great fluctuation in aluminum is the difficulty in monitoringand maintaining inventory levels of aluminum flowing in the market,which is significant in producing equilibrium. When in such a market,it is cumbersome to produce an equilibrium price in the market, whichleads to multiple equilibriums. This results to great pricefluctuations in the market. Besides, the performance of the economyis of immense concern because worse economic times translate to weakprices of aluminum, while better economic performances have recordedan increase in the price of aluminum. The recovery of the economyfrom worse to better does not support the equilibrium of thealuminum, which leads to large fluctuations.

ReferenceList

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AluminumLME Prices. Retrieved fromhttps://ycharts.com/indicators/aluminum_lme

Anyadike,N. 2002,&nbspAluminium:The Challenges Ahead.Burlington: Elsevier Science.

Bain,C., &amp Economist Newspaper Limited. 2013,&nbspGuideto commodities: Producers, players and prices, markets, consumers,and trends.

King,J. R. 2001,&nbspTheAluminium Industry.Burlington: Elsevier Science.

Labys,W. C. 2008,&nbspModelingand forecasting primary commodity prices.Aldershot: Ashgate.

Lamb,C. W., Hair, J. F., &amp McDaniel, C. D. 2012,&nbspEssentialsof marketing.Mason, Ohio: South-Western Cengage Learning.

LondonMetal Exchange- Aluminum. Retrieved fromhttp://www.metalradar.com/aluminium-lme

RudolfWolff &amp Co. Ltd.,1991,&nbspWolff`sguide to the London Metal Exchange.Worcester Park, Surrey, England: Metal Bulletin Books.

WorldBank,2009,&nbspGlobaleconomic prospects: Commodities at the crossroads.Washington, D.C: World Bank.

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