Bussines Accounting - Essay Example

However, with the shift in the supply curve the quantity supplied falls. On account of this leftward shift the equilibrium supply falls to St and the equilibrium price moves up to Pt. The demand for cotton remains intact and the supply curve shifts upward. The unchanged demand and the fall in supply mean that the price of cotton will increase (The University of North Carolina, n.d.). Due to the fall in supply and unchanged demand of cotton the supplier will now charge a higher price for lesser quantity of cotton.

This explains the rise in the price of cotton due to a fall in cotton supply of major cotton manufacturing countries. Scenario 2- An emergence in economy has a positive impact on demand. The emergence of the UK economy from the grip of the recent recessionary phase and the reported growth in the first three quarters of 2010 is a good sign for the market. It implies that there has been arise in the level of business activity. With the rise in the business activity the income of the people will move up thereby pushing up their demand for cotton.

On account of the increased demand and constant supply (assumed) the price of the cotton will move up. In the above diagram with the rise in demand for cotton from Q1 (old) to Q2 (new) the demand curve shifts from D1 to D2 however the supply remains constant at S1. As a result of the increased demand and constant supply the equilibrium price increases from P1 (old) to P2 (new). Therefore an emergence in the economy of UK will result in a rise in the price of cotton. Scenario 3- A rise in the price of crude oil from $40 per barrel at the time of the recent recession to $92 per barrel in the current market will exert an upward pressure on the price of cotton.

This happens because cost of crude oil is a ‘factor cost’ for the supplier. The rise in the cost of crude oil raises the transportation costs for the supplier. A rise in the factor cost raises the overall cost of the seller. As a result of the increased cost the seller lowers the supply of the goods as he is not willing to supply the same goods at an increased cost. In the above diagram the original supply was So and the original quantity that the supplier was willing to sell was Qo at the price Po.

However with the rise in any of the factor cost the supplier will lower the supply of goods. In the given scenario the supplier lowers the cotton supply on account of a rise in the transportation cost. Due to the fall in supply and the unchanged demand the price increases to Pt. This happens because same number of ‘buyers’ are chasing a lesser amount of goods (cotton) . Due to this the price of cotton increases to Pt. Therefore a rise in the price of crude oil increases the transport cost of the supplier thereby lowering the supply and creating an upward pressure on the price.

Scenario 4- A rise in Value Added tax in UK from 17.5% to 20% in January 4, 2011 will create an upward pressure in prices. The imposition of the value added tax creates an “inward shift in the supply curve”. This means that the supply curve shifts towards the left thereby raising the equilibrium level of prices and decreasing the amount of goods sold (Rensselaer Polytechnic Institute, n.d.). In the above diagram So is the original supply when the VAT was 17.5%. But with the rise in VAT to 20% the supply curve shifts leftward to So as the suppliers are now willing to sell lesser amount of