Economics

Assignment details | Course code: ECON1008 | Course name: Principles of Economics | Assignment no.2 | Due date: Week 8 | Assignment topic (as stated in the Course Information Booklet): | Student Declaration | I declare the work contained in this assignment is my own, except where acknowledgement of sources is made.I authorise the University to test any work submitted by me, using text comparison software, for instances of plagiarism. I understand that this will involve the University or its contractor copying my work and storing it on a database to be used in future to test work submitted by others.I understand that I can obtain further information on this matter at http://www.unisa.edu.au/ltu/students/study/integrity.asp | Student Signature: | Date: 25 April 2011 | LODGING YOUR ASSIGNMENT ) | Attach this cover sheet to your assignment and submit via AssignIT on your myUniSA course page. | OFFICE USE ONLY | Date received: | Received by: | Academic staff member: | Assessment/grade: | Date recorded and dispatched to student: | Recorded and dispatched by: | 1. Assuming a competitive market, explain with the aid of a market model how the price and quantity of Easter eggs is established. Market model above is a display of balance between both the supply of Chocolate Easter eggs and the demand for Chocolate Easter eggs. According to Jackson (2007), the equilibrium point of this market model is indicated by the intersection point of the supply curve and demand curve of the product mentioned. We can then witness both the equilibrium price and quantity in the Easter egg market through applying the concept as stated earlier. Jackson (2007) also points out that whenever the demand increases, it will bring an effect to the supply, thus the market price will be affected as well. With other things being equal, an increase in demand will cause both price and quantity increment. As we can see in the supply and demand model below, the demand curve is shifting towards the right due to a increase demand of the product, moving the initial curve (D1, D1) towards a new curve (D2, D2). Both the price and quantity increased as well as the price moves from the point P1 to P2 and quantity of the product from Q1 to Q2. This causes a new equilibrium price to appear at the equilibrium point of (Q2, P2) from the previous (Q1, P1) due to the change in the supply curve reacting towards the increase of demand. A new price changed according to supply and demand is the manifestation of the equilibrium between increase in price and increase in quantity of the Easter eggs D1 D2 D2 D1 P2 P1 2. Assuming pure competition, explain and clearly discuss the factors causing rises in the price of Easter eggs compared to the previous years. Please be sure to discuss and clearly illustrate the equilibrating process. According to Collier (2006), there are two main reasons that have caused the rise in the price of Easter eggs. These reasons played an important role in influencing the changes of supply and demand of supply for the chocolate manufacturing company which one of them is Cadbury. Changes in the supply of cocoa and sugar are the first major factors that have created a big impact on the supply of chocolate globally. As mentioned by Cadbury’s spokesman Daniel Ellis, an increase in cost of Cocoa by 150% and Sugar by 120% in the past 3 years indicates that raw materials prices are going up. Consequently, suppliers will have to produce the Easter eggs at a higher cost and these cost are bring upon the consumers instead by hiking up the prices of the product. Another factor that is affecting the demand and supply of the Easter eggs is due to its preference at this current period of time. Mr Ellis stated that demand of the chocolates have soared during the world downturn since chocolate was considered a comfort food in times of economic stress. Consumer’s preference towards chocolate due to current situation around the world has caused demands to increase and shifting the demand curve towards the right. This should not have been likely to happen since increased in the prices of chocolate would have lowered the demand of chocolate, causing the supply to take a downturn as well. However, due to the fact that people around the world are having a preference towards chocolate and not seeing it as a luxury item, the demand towards it had not been affected by the increase of its prices. That is why there is almost a similar increase in both quantity demanded and prices due to these factors, which in turn maintaining the supply and demand of the product. This proofs that there is still an equilibrating process even though prices are going up, it is offset by the constant increase of demands which eventually creates a balance between quantity in supply and in demand. S1 Q 0 D1 D2 D1 S2 S2 S1 In the model above, the intersection between the supply curve and the demand curve for the product indicates the equilibrium point. 3. Explain why you think the demand for chocolate Easter eggs is likely to be elastic or inelastic and comment how the rise in price will impact the value of the supplier’s revenue. I think that the Price Elasticity of Demand for Chocolate Easter eggs is Inelastic or relatively inelastic. Price inelasticity of demand happens when a price change has little or no effect on the demand of a good or service. One major reason that contributes to the inelasticity of Chocolate Easter eggs is due to the fact that consumers are treating chocolates as a necessity, as suggested in the article that people are using chocolate as a comfort food during the times of stress and economic crisis, instead of the luxury goods that they are perceived to be. This causes consumers to be less price-sensitive as these goods are deemed to play a more significant role than it used to be rather than just a luxury treat, which consumers are more willing to pay for it than usual. Besides that, Easter is a cultural festival that is celebrated at most parts of the world and Easter eggs are part of the tradition during the celebration of this festival. Therefore the demand for Chocolate Easter eggs will certainly be there as long as the celebration is concerned, in which prices will certainly play a small insignificant role in determining the demand for this festive product. Since Easter eggs are demand inelastic, an increase in its selling price would not offset the quantity of the product sold because consumers are still buying at the same amount disregarding the price. Therefore this will lead to increasing supplier’s revenue due to the fact that supplier’s are selling at a higher price compared to previous times. Furthermore they will not be bearing the burden of increased cost of production compared to the manufacturers and at the same time enjoying the benefit of having the same amount of sales as before even with the higher sell price. Conclusion is, a market which its product’s quantity demand is inelastic, a price increase will bring in an increase in revenue. Reference Collier, K and Sun, H 2010, Easter egg prices rise by around 5 per cent over last year, viewed 22 April 2011 Jackson, J and McIver, R and Bajada, C 2007, Economic Principles 2nd edition, McGraw-Hill, Sydney.