Economics and Marketing Commodity - Assignment Example

Name Student Id Lecturer’s Name Date Question 1 Part one I disagree with the statement because the two products are substitutes. The rule of substitute goods states that when the price of one commodity increases the demand of the other commodity increases because consumers tend to purchase the other product (Frank, 2008). The decrease in demand of beef due to price increase will result to the increased demand of pork as a substitute good. This can be explained that people are shifting to the consumption of pork and abandoning consumption of beef (Taylor, 2006). This can be explained by the high price of beef as compared to the price of pork. There has been measurable decrease in the quantity demanded of beef. The people of Australia are shifting their demand from beef to the consumption of pork. This has also resulted to many farmers rearing pigs so as to cater for the growing demand (Frank, 2008). Apart from the price of the substitute goods there are other factors that will lead to change in demand of a given commodity. This factors include, level of income of consumers. This factor explains that when an individual income goes up their purchasing power also increases (McConnell, & Brue, 2008). Therefore, they will either purchase more of a commodity there are used or they will purchase products they were initially foregoing because of limited income. The decrease in income of consumers affects demand negatively because the purchasing power they initially possessed has been drastically reduced (Frank, 2008). Therefore, they will purchase less of a certain product they were purchasing more when their income had not reduced. Therefore, in this case the reduction in demand of beef can be explained by reduction of consumers’ income (Taylor, 2006).. Consumer tastes and preferences Changing of consumer tastes and preferences has significant effect on the demand of a given product. There are factors which can lead to the change of tastes and preferences, the factors include persuasive advertising. In this case there has been vigorous advertisement of pork and its related products (McConnell, & Brue, 2008). This has made pork a popular product in the country and this has led to people shifting from beef to pork. This persuasive advertisement that has been taken by Australian Pork Limited this is to enlighten people on the options they have apart from taking pork. This has tremendously increased the consumption of pork among the people of Australia. The tastes and preferences of consumers are not related to price because the price of pork has been on the rise. The taste and preferences of consumers are biased because when they prefer product they do not consider the substitutes and the price of that commodity (Taylor, 2006). Number of buyers The number of buyers of a given product highly influences the demand of a given product. This means that the increased number of buyers of a given commodity will result to an increase in demand of that commodity (McConnell, & Brue, 2008). The decrease in number of consumers of a given product leads to a reduction in demand. In this case there has been an increase in number of pork consumers in the country has led to increase in pork demand. There has been decrease in number of beef consumers and this has led to reduction in demand. Future expectations In any case where consumers expect the price of a given commodity to increase in future they will tend to purchase more when the price is low and if they expect the prices to decrease they will purchase less of a product. The consumers might be expecting to have their incomes increase in future and this will affect their purchasing power because they will tend to wait for the income increase (Samuelson, 2001). Part two According to the article price and preferences has been the factors affecting the quantities of pork and beef. The reason behind this is that they influence the consumer decisions. The consumer decisions are influenced by the purchasing power they possess on a given good or its substitute. There is an assumption that consumers any to maximize utility of any commodity they are purchasing. This means that a consumer will purchase a commodity that has a lower price as compared to the substitute good which is more expensive. This well explained by use of the substitution effect which the resulting change from increase in price of one product while the price of the product is constant or reduced. The consumer theorem states that the level of consumption will reduce one there is an increase in price of a commodity. This is referred as substitution effect. This explained that the consumer cannot purchase a product they cannot afford and therefore, they will move to the substitute good which price is lower. Substitution effect is the movement along the curve. The diagram below shows the price change of beef (good Y) and constant price of pork (good X). The increase in price of beef will reduce budget constraint of consumers to BC1 and this will make the consumer to move to the highest indifference curve possible. This indifference curve is shown in the diagram as I1 and this will shift the consumption of pork from Y2 to Y1 and that of Pork will shift from X2 to X1. If the price of beef reduces there will be a shift from BC3 to Bc2 which means that more of commodity Y from be purchased. This means that there will be a shift to indifference curve I2 from I3. There are assumptions underpinning this argument and they include that the consumers aim is to maximize their utility (Samuelson, 2001). This means that the consumers will work to purchase more with the income they have. This explains the reason behind the shift from the product with the increased price to the one with relatively low price. The other assumption is that the consumers fully understand their preferences. This means that the consumer will be able to decide if presented with two different bundles of different combination of goods without any difficulties. There is also the assumption that the indifference curves are always smooth and convex to the origin as it is the case in the diagram above. Question 2 Part 1 The supply has been affected by the drought but the demand has continued to increase this has led to increase in prices of sorghum. This explains that when there is an increase in demand the prices goes up if the supply remains constant or if it is reduced (Samuelson, 2001). The diagram explains the rise in demand which has resulted from a strong price. The low supply has led to an increase of price from P1 to P2. This has not discouraged consumption and it has led to increase in demand from D to D2 and quantity demanded has shifted from Q1 to Q2. The price increase has been as a result of shortage of sorghum and its demand is increasing. The shortage in supply of the grain means that the customers will be willing to pay higher prices for the available quantity in the market. The suppliers of the grain will be selling at a higher price because the customers have no option because production of grain feed must continue. In case the supply reduces further there will be an increase in prices and the demand will continue to go high or there will be shift to substitute goods. This might be hard because even the substitute goods depend on the natural factors such as weather and climate. The prices will rise further if the grain consumers will anticipate a low supply in future. This means that they will be willing to purchase the available quantity in the market. Part 2 The derived demand of sorghum in Australia will be price inelastic because the change in price will not have a large effect on the quantity demanded of sorghum (Goodwin, & Ackerman, 2009). The reason behind this is that sorghum must be demanded not for its own use but because of the products it is used to produce such as feeds. Price elasticity of demand measures the responsiveness of quantity demanded which results from a change in price. The price elasticity is always negative for many products (Goodwin, & Ackerman, 2009). The price elasticity of demand is determined by the willingness of the consumers to postpone the immediate purchase or consumption of a given good due to an increase in the price of the product. If the consumers can be able to postpone the purchase or consumption o9f a certain product the price elasticity of such a product will be price elastic and if the consumers must purchase the product even if there the price goes up the price elasticity is considered to be inelastic. The goods that have close substitutes are considered to have high price elasticity because a slight change in price of the product will lead to consumers shifting to the substitute good. The products with no substitutes are said to be price inelastic because the consumers must purchase them therefore, an increase in price will not affect the quantity demanded by the consumers. Therefore, high substitution effect is a key determinant of price elasticity. In this case sorghum must be purchased because of the products it is used to produce. Part 3 Price elasticity of supply is the responsiveness of the quantity supplied to a change in price. The price elasticity of supply for sorghum in Australia will price elastic because the producers will produce less if the prices goes down and they will tend to produce more if the prices goes up (Ruffin, 1988). The elasticity of supply can be explained by various factors which include mobility of factors of production, when the factors of production are readily available the price elasticity of supply is said to be elastic. The reason behind this is that producers can which to the production of sorghum when the demand is high and turn to other products when there is no demand for sorghum. Therefore, price elasticity of supply of sorghum is elastic. This can also be explained by how the products are stored, when the products can be stored for a long time there price elasticity of supply is said to be elastic because the producers can increase the supply when the price goes up (Pindyck, 2001). The supply is more elastic in the long run because all factors of production can be utilised to increase the supply of a produced good but in the short run it is only labour which can be increased. Therefore, increase in price of sorghum is inelastic in the short run because little can be done to increase the supply in the market. Part 4 Cross elasticity of supply is the responsiveness of the supply of a given commodity to a price change of another commodity. In this case sorghum can have a cross elasticity of supply with millet (Pindyck, 2001). This means that supply of sorghum will increase if price of millet increases. The assumption behind this is that all other factors remaining constant. If the two products are treated as perfect substitutes high production of one product will lead to a low production of the other (Sullivan, & Steven, 2003). In this case cross elasticity will positive meaning that a change in price of millet will lead to change in quantity supplied of sorghum. The main factor behind this is factors of production. An increase in price of sorghum will lead to an increase quantity supplied of the product. This will lead to a decrease in supply of millet; the reason behind this is that the two products are competing for the same factors of production (Sullivan, & Steven, 2003). Therefore, farmers will tend to produce more of sorghum and they will be foregoing the production of millet. The farmers will use more land to produce sorghum and they will also use more of their labour force in the production of sorghum. This will increase the level of elasticity as long as the price of millet stays down (Wessels, 2000). References Case, K & Fair, R, (1999). Principles of Economics (5th ed.). London: Prentice-Hall. Frank, R, (2008). Microeconomics and Behavior (7th ed.). London: McGraw-Hill. Goodwin, N, & Ackerman,W, (2009). Microeconomics in Context (2nd ed.). New Jersey: Sharpe McConnell, C, & Brue, S. (2008). Economics: Principles, Problems, and Policies (11th ed.). New York: McGraw-Hill. Pindyck; R, (2001). Microeconomics (5th ed.). London: Prentice-Hall. Ruffin, R. (1988). Principles of Economics (3rd ed.). Illinois: Scott, Foresman. Samuelson, N, (2001). Microeconomics (17th ed.). Sydney: McGraw–Hill. Sullivan, A, & Steven M. (2003). Economics: Principles in action. New Jersey: Pearson Prentice Hall. Taylor, J, (2006). Economics. London: Cengage Learning Wessels, W. (2000). Economics. New York: Barron's Educational Series. Read More