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The Concept of Income Elasticity of Demand for Wheat - Assignment Example

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This paper focuses on wheat prices. It changed between 2001 and 2011 due to the forces of supply and demand. Other factors that explain wheat price change are the rapidly increasing costs of oil prices and the continuing devaluation of the US dollar…
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The Concept of Income Elasticity of Demand for Wheat
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Download file to see previous pages The price of wheat is also affected by the weakening US dollar because this will mean a decline in the purchasing power of a dollar. The U.S. dollar is a world trading currency; meaning all prices of commodities are linked to its price, and devaluation would have a great impact on international trade. In anticipation of devaluation, all countries will immediately raise their prices.  Commodities such as wheat, oil, coffee, etc. will now set their price records to protect their investments.  Farmers know that the dollars they are receiving for the wheat are declining in purchasing power, so they have to adjust their prices in anticipation for the devaluation; that is why we have a higher price of wheat now. As an example, if the US dollar declines by 30% and the farmer have $1 million in wheat, his million dollars will now be able to buy $700,000 worth of goods or services, so he lost $300,000 in purchasing power. The price of wheat is also affected by the weakening US dollar because this will mean a decline in the purchasing power of a dollar. The U.S. dollar is a world trading currency; meaning all prices of commodities are linked to its price, and devaluation would have a great impact on international trade. In anticipation of devaluation, all countries will immediately raise their prices.  Commodities such as wheat, oil, coffee, etc. will now set their price records to protect their investments.  Farmers know that the dollars they are receiving for the wheat are declining in purchasing power, so they have to adjust their prices in anticipation for the devaluation; that is why we have a higher price of wheat now. As an example, if the US dollar declines by 30% and the farmer have $1 million in wheat, his million dollars will now be able to buy $700,000 worth of goods or services, so he lost $300,000 in purchasing power. Identify the factors that determine the demand for goods and services in general? Consider how these factors affect the demand for wheat.  In general, determinants of demand are income, tastes, prices of related goods and services, expectations and the number of buyers. We know that if we lower the price of a good without altering its quality or quantity, people will flock to you to buy as this the law of demand.  We will illustrate the law of demand by example in demand for wheat.  The law of demand applies to a well defined good – the wheat.  Then the second phase indicates that people must not only want to purchase the wheat but must be able to purchase the wheat in order to be counted as part of demand. But although willing, the consumer is not able at the price of $111.00, so buyer thinks of something else to replace the need for wheat. The next step is to think of the price and quantity demanded; that is as the price rises, the quantity demanded falls, and as the price falls, the quantity demanded increases.  What are the major factors increasing the demand for wheat? [Make sure you use the concept of income elasticity of demand for wheat (Ardy, 2010, p. 5). The factors that increase demand for wheat are price, price of substitute goods; preferences, population, and income.  These factors are discussed in the following paragraphs. Price.  As the price of wheat increases, assuming that all other factors remain equal, fewer people would demand wheat.  The demand slope is downward-looking. As the price of wheat increases, people would naturally avoid consumption and look for substitute products that they would value more. The price of substitute goods.  A substitute product is a good or service which may be bought instead of another when the price of the latter changes or if it becomes unavailable. For instance, the increase in wheat price will increase in the demand for corn, potatoes and rice and other staple food.  If a substitution is easy and viable, the demand for wheat is lessened, so in this manner, demand is positively related to the price of substitutes. Preferences. Porter’s 5 Forces of Analysis (QuickMBA) considers looking for substitute products as switching. For the reason for rising costs, people would turn to substitute products like corn, potatoes, and rice.  ...Download file to see next pagesRead More
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