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Microeconimics Simester Assignment - Essay Example

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MICROECONOMICS 200 ASSIGNMENT SEMESTER 1 2012 Part A i) Demand refers to the quantity of goods or service that consumers desire to have at a given price. The law of demand says that as price of a product goes up, its quantity demanded falls, with other things held constant…
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Microeconimics Simester Assignment
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Microeconimics Simester Assignment

Download file to see previous pages... The factors that commonly influence demand conditions (with other things held constant) are, changes in tastes and preferences, income of people influences the demand of normal and inferior goods, changes in the size of population, weather, changing expectations and prices of other related goods such as substitutes and complements. Changes in these factors will shift the demand curve. As the demand for bio-fuels increase, this will result in a higher level of production of bio-fuels. Bio-fuel usually use both corn and sugar as inputs where the yield of these crops is utilized in the production process (Vidal n.d.) As a result of an increase in demand of the bio-fuel, a substantial rise was reported in the demand of corn. Corn is now required as a source of food as well as an input for bio-fuel production. The image shows the increase in price as a result of the increase in demand of crops. The previous demand used to be D1 which was added with the demand of crops for bio-fuels and this resulted in the new demand curve D1+D2. This graph also shows how an addition to the demand has resulted in the increase of prices of crops to PC*. If the increased demand is not addressed by added production, then the prices rise because the market forces come into play and determine the market prices (AmosWEB n.d.). The above graph shows that the supply curve does not shift and merely extended and as a result the prices have increased. ii) Supply refers to the quantity of a product that the producers are willing and ready to produce at a given price. The graph below shows supply function. The supply function is upward sloping. This is because the greater the price, the greater will be incentive to produce more and hence the supply will increase. Changes in supply curve can occur because of a number of reasons such as change in technology, the cost of producing other goods and services such as substitutes, taxes and subsidies, changes in input costs, number of producers in the market and weather. Change in these factors causes the supply curve to shift. In this case, since the product under consideration is corn which is an agricultural product, it is a difficult task to enter the industry of producing corn because there is often a limitation of land availability. The optimum solution seems to improve the agricultural and conversion technology. If there is an improvement in the seed quality, then it will result in a greater yield which will increase the supply. Also, there is often wastage in the conversion process but this wastage can be controlled if a new technique and technology is introduced. This will result in added supply available for consumption and thus the overall supply increases. As the supply increases in this case, the prices of the crops will go down. Here, the image on the right shows that the increase in demand has shifted the curve towards the right, even the supply curve is shifted to the right because of improvement in production techniques. This increase in supply is greater than the increase in demand and has helped to keep the price down despite the increase in demand. In our case, the supply of the crop has increased as a result of an improvement in agricultural and conversion technology and this will result in keeping the prices lower. iii) The bio-fuels are the new addition in the oils industry throughout the world. The formulation of ethanol has addressed the growing concerns of ...Download file to see next pagesRead More
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