Microeconomics
The event
The Internal Business Time talks about the title, Asian Stocks Fall Ahead of US Presidential Election. The article asserts that the Asian stock markets exhibited a decline in their production on Monday, November 15 2012, even though there are encouraging reports about the economic situation from the US. The investors have taken caution with reference to the coming presidential election in US. The events following the decline in Asian Stock include the Japanese benchmark Nikkei declining 0.48%, Hong Kong’s Hang fell 0.47%, South Korean KOPSI Composite fell 0.55% while India’s BSE Sensex slipped 0.24%, and Chinese Shanghai witnessed a fall of 0.14% (Nagendra, 2012). The markets were on a weak note with the main cause relating to the decline in Wall Street Friday with subsequent effects of the US presidential elections outcome. This implies that the supply from this market has deviated considerably.
The significant elements in the event
The major element in the significant drop of the Asian stock is the pre-election events. The presidential election event represents an externality, which affect the production in the Asian market. Subsequently, the pre-election events have led to the reduction of supply in the Asian market because of the uncertainties related to the outcomes of the election. The US acts as a superpower and more or less like the controller of the world economy because of the contribution they have in the market. Any situation affecting the economy of the US will ultimately affect most of the countries all over the world hence the featuring decline in Asian stock. The heating presidential campaigns have caused the effect on the economic production of most countries since most people will only be concentrating on the results. The relationship between countries depends on the relationship between the presidents hence this form an important element in the decline of stock. Most of the companies are focusing on the outcome of the election; thereby, acting as a negative externality.
Event’s relation to policymakers
The policymakers in the market would have to consider the effects of the externalities in the operation of their businesses. This arises because the externalities, in this case the US presidential election, have led to the recognizable reduction of stock. The policymakers should be aware that the US elections could cause market failure if they do not consider adjusting the social costs of production. The businesses should be able to adjust during such externalities.
The suitability of the event
I chose this event because it illustrates on the effect of US presidential election on other countries. This is a unique type of externalities since it goes out of market boundary to other markets. Further, I am able to determine the impact of an externality in the production of a company. It is also interesting that the effects of pre-election event in US have almost affected the Asian companies. The event educates on the need for business to consider the externalities in their daily production. The reduction in stock, which implies the reduction in supply, shows that prices will increase thereby reducing the demand towards the company.
Relevant theories
The demand and supply theories can help in understanding the issue. This is because the event relate to the supply of products to the market by the companies; consequently, any effect in the supply and demand will be explained by the demand and supply theories. The theory states that an increase in prices will reduce the demand while the same (increase in prices) will lead to the increase in supply with other factors kept constant. However, the theory has shortcoming in understanding the issue because the event illustrates that there is no effect of the theory on the decline in stock. The presidential elections, and not the prices, have caused the fall of supply in the Asian countries.
The long-term effects
The long-term effects of the decline in stock include a declining demand for the products of the company. This arises as the result of subsequent supply by the companies thereby making the companies to increase their prices. The increase of prices is a quest by the companies to offset their production cost. The increase in prices will make most of consumers deviate from using the products or go for other substitutes. Another long-term effect is the failure of the companies in the global market. The failure will occur because competitors of the companies will be having a chance of producing more products that can substitute the expensive products (from companies).
The relevance of the event
This event fit with the topic about externalities. It represents the effect of negative externalities in the production of a company. The Asian Companies have witnessed a fall in their production because of the effects of presidential elections in US that act as the externalities. For the solution to this problem, there is a need for the government of the Asian countries to internalize the externalities as discussed in the topics.
Reference
Nagendra, Satya, (2012). Asian Stocks Fall Ahead Of US Presidential Election. Retrieved on 5th November 2012 from: http://www.ibtimes.com/asian-stocks-fall-ahead-us-presidential- election-858988
