Based on the Jakarta Post article on the 8th October 2012, the author, Ha Jiming has stated that ever since the 1970s, China has been renowned as the “World Factory” due to its low labor cost and superior manufacturing capabilities. This can be seen on a lot of products if you check the manufacturing label and see the words “made in China”. This production section of China is the main source of economical profit for China as at the end of year 2011, the manufacturing sector accounted for over 32% of China’s GDP and China also possessed the largest share of global trade at 10.6% which is 2.4% higher then US’ 8.2% which is according to the world bank.
As
we all know, China has been a mass producer of goods for international trades.
Thus China had been the “World Factory” for several decades due to its low
labor cost while being superior in terms of production output. This clearly
shows that China possesses both Comparative Advantage and Absolute Advantage
over other countries when it comes to economical growth. Each of these
advantages that China has over other countries is present due to the fact that
China’s labor cost is low. This means that they perform the activity of
producing goods with a lower opportunity cost compared to anyone else. In
addition to this, China also has the Absolute Advantage over other countries
due to the fact that they are able to produce a higher level of output compared
to others. However, a country that has such an advantage over others can not
retain both advantages at once due to the massive economical growth. Over the
course of 30 years, China’s advantages in production became unsustainable due
to its increasing labor costs and unstable number of laborers. Due to the
change that laborers have had an increase in minimum wage by 19.7% China has
lost its Comparative Advantage over other countries. The opportunity cost to
perform a certain activity within China which involved laborers have increased
dramatically thus losing the advantage.
However,
due to the increase in the labor wage, the citizens of China have begun
spending more in their daily lives. Being able to now afford luxury goods and
high end products such as perfumes, branded goods, and clothing that costs a
fortune, citizens of China now expend their income on such materialistic
goods. Not only has that, the citizens
of China also begun to spend more frequently on services such as
telecommunication, tourism and travel, education, healthcare and even
insurance. For the sudden increase in expenditure on these there will be a need
to upgrade the services and goods consumption which will in turn provide room
for development for other sectors.
In
addition to this, due to all the excess spending on goods, the sudden surge of
demand has greatly indented the supply of the country. Chinese citizens have
already emerged as major customers of worldwide branded goods which have had an
increase of 20% of total purchases and this value is expected to rise. Chinese
citizens now even prefer to eat meat rather then the usual rice grains. Also,
in order to produce 1 kilogram of cow meat, 14 kilograms of rice grains would
have to be used to feed it which would require the sector which produces the
rice grains to supply more rice grains to the farmers who tend to cows.
Moreover, due to the sudden demand in meat which in turns the sudden
skyrocketing demand of grain, the supply of grain would not be sufficient
enough at the moment this the prices of rice grains have increased
dramatically.
This
shows how the concept of supply and demand can be seen. In a given marketing
situation, if the supply of a product is higher than the demand of the product
then the price of the product would have to be lowered. This also applies in
the other way as in if the demand of a product is higher than the supply of
that given product then the price of that particular product would be high. If
I were to sell pizzas for a school carnival I would first require a supply of
pizzas. Let’s say I had only 20 slices of pizzas for sale but 50 of my
classmates and friends wanted to buy it for lunch I would have to increase the
prices of my pizza in order to curb the shortage of my pizzas. That being said
my friends definitely would not be happy with me but they will still buy it
from me due to hunger. This concept works the other way around as well. If I
were to sell 20 pizza slices but only 5 of my friends wanted to buy it because
they eat it everyday and I overcharge, I will have to reduce the prices of my
pizzas to prevent a surplus of supply. My friends in turn would take note of
the opportunity and buy the pizzas for a lower price. Sadly I am unable to use
friendship as an excuse to overcharge. An example of graph is shown below.
Despite
the concept of supply and demand, there is also a case where by prices on
certain items and goods do not affect the demand for it. This concept is called
price elasticity. Price elasticity is defined as the responsiveness of the quantity demanded of a good to a change in its
price when all other influences on buying plans remain the same. If the demand
for a good is inelastic, a large increase or decrease in the price of that good
would not change the quantity demanded of that good. You can take note of it
that price elasticity applies to goods that are needed such as food and living
space. If I sold a pencil for $2.00 each as the normal market price and decide
to sell it at $2.10 instead people would not buy the good from me since they
can buy it elsewhere. This means that the demand for my pencil is elastic.
However, if I were a major supplier of a much needed good such as sugar and
salt and the usual price for it is $5.00 for 1kg and I decide to overcharge for
my own profit and change it to $10.00 per kg instead, the demand for my salt or
sugar would drop only by a little since restaurants and other sectors of
businesses need both salt and sugar to sell food. Hence, the demand for my salt
and sugar is inelastic.
By Daniel Ong
By Daniel Ong
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