As energy prices increase the demand for Manufacturing will decrease.
Energy is the underpinning of all modern society, as our economy and society would grind to a halt without gasoline, electricity, and other similar forms of energy. Since energy plays such an important role in the nation’s economic health, it’s such an essential that despite its scarcity and high demand, we all have to use for our mere survival too and thus indispensable. These amongst other reasons make energy have an inelastic or relatively inelastic price, elasticity of demand (measure used in economics to show the responsiveness, of the quantity demanded of a good or service to a change in its price). For instance, the price elasticity of demand of oil is -0.4 and that of car fuel is -0.25 in the short run and -0.64 in the long run.
Bearing this in mind, energy being a vital input in manufacturing is that quite challenging to manage especially in the wake of increasing energy prices. For instance, in the fourth quarter of the 2008 USA fiscal year—when the cost of energy was quite high ($147.30 for a barrel of oil)—the manufacturers had a tough time in balancing production and profitability. For instance, the investment in industrial equipment further declined to -0.19 from -0.12 in the third quarter. It is also in this period that unemployment hit a high of 6.1 percent. This arose as manufacturers tried to cut down on costs of production thereby laying off workers and producing less as compared to other periods as they tried to cover up for the increased cost of energy.
Also during this time, some industries had to close down due to their unprofitability –an aftermath of increased energy prices. In the long run, there is low demand and low supply of output since manufacturers increase their products prices as the consumers lack money (due to unemployment) to purchase at the prevailing market prices. This leads to a decline in the demand for manufacturing.
“WASHINGTON (AP) — Two important economic reports delivered bad news about unemployment and wholesale prices.
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