What High Prices for Tea and Coffee - Essay Example

Question 1: a) The price of a mobile phone falls A decrease in the price of mobile phones will not cause a shift in the demand curve. Instead, it will cause an expansionary movement along the demand curve. A decrease in price from P to P1 will increase the demand of mobile phones from Q to Q1. This change in the quantity is solely based on the change in price. An increase in price, however, would have depicted a contractionary movement causing the quantity demanded to fall (Bamford, 2002). b) Everyone expects the price of a mobile phone to fall next month. Buying may either be delayed or rushed depending on price expectations of future. In this case, where prices are expected to fall next month, demand for mobile phones in the current month will be postponed hence causing demand to fall from D to D1. The quantity demanded will decrease from Q to Q1 causing the price to also fall from P to P1. However, next month, when prices are anticipated to fall, people will spend more on mobile phones due to lower prices causing the demand curve to shift on the right. This will result in an increase in the quantity demanded followed by an increase in price. c) The price of a call made from a mobile phone falls  A fall in the price of a call made from a mobile phone will cause the demand of mobile phones to increase as the usage of mobiles will now become comparatively economical. Consumers will prefer mobile phones over other substitutes; in this case, landline is the closest substitute, due to lower prices of call made from a mobile phone. This change will shift the demand curve to its right causing the quantity demanded of mobile phones to rise as shown in the graph above. d) The price of a call made from land-line phone increases  Due to an increase in the price of a call made from land line, the demand for landline phones will decrease. People will shift to cheaper alternatives, in this case, mobile phones. Since using the land line is now comparatively costly, people will tend to switch to mobile phones to avail lower prices. This can also be described as the relationship between substitute goods in which one prefers to shift to an alternative due to increase in prices of the existing commodity or service (Powell, 2000). Therefore, demand for mobile phone will again shift to the right as depicted in the diagram above (Q to Q1). d) Does any event (or events) illustrate the law of demand? Explain.  Yes, part (a) of this question illustrates the law of demand as the quantity of mobile phones demanded was solely affected by the decrease in price of the mobile phone itself. Law of demand can be best described as the inverse relationship between price of the good and quantity demanded (Anderton, 1995). Assuming that all other factors are held constant (ceteris paribus), the increase in price of a good or service will decrease consumer demand for that particular good or service and vice versa. There are two reasons for this law that are known as the income effect and the substitution effect. The effect of an increase or decrease in price on quantity demanded occurring from the buyer being better off or worse off as a result of the price change is best described as the income effect (Sloman, 1997). On the other hand, the effect of a change in price on quantity demanded taking place due to switching to or from alternative or substitutes products is known as the substitution effect. The above event, where the price of a mobile phone falls, depicts the law of demand because when the price falls, quantity demanded for that good or service increases and vice versa. Question 2: a. An increase in average household income  An increase in average household income means that a person’s purchasing power has risen assuming that inflation is held constant. An increase in the real income will enable consumers to spend more on goods and services, in this case cars (Gillespie, 2002). People now have the ability to buy more cars causing the demand curve of cars to shift to the right. Thus, the quantity demanded of cars will increase from Q to Q1 as seen above. b. A steep rise in petrol price  In terms of demand, complement goods are those that are usually bought together to offer maximum satisfaction (Lipsey & Harbury, 2003). Two complements are said to be jointly demanded, for example, car and petrol. An increase in the price of a complement to car, which is petrol in this case, should cause demand for cars to fall as illustrated above. As the demand curve shifts inwards, quantity demanded of cars falls from Q to Q1 along with a decrease in price from P to P1. c. An increase in the price of cars  In the case of an increase in the price of cars itself, the demand curve will not shift inward or outward. The shifts are only caused by external factors such as income, taste, prices of related commodities, so on. Instead, there will expansions and contractions caused by the change in price which will be depicted through movements along the demand curve. Since the price of cars is increasing, the movement along the curve will be contractionary which means as price increases from P to P1, quantity demanded of cars will fall from Q to Q1. d. A closure of two big car manufacturing plants in South Australia  In the case of two major car manufacturing plants shutting down in South Australia, the production of cars and its parts is likely to decrease. When production decreases, the supply curve shifts to its left causing the quantity supplied to fall from Q to Q1 and price to increase from P to P1 as shown in the diagram above. e. An introduction of the robotics line for assembling the cars in most of the car manufacturing plants  Change in technology may cause the supply curve to shift either inward or outward. In the above mentioned scenario, introduction of the robotics line for assembling cars will shift the supply curve outwards because technological advances can fundamentally alter the cost of production. Lower cost of production means increased supply therefore quantity supplied by the producers will increase from Q to Q1 allowing the prices to fall from P to P1. Question 3: a) Draw a diagram to show the change in the coffee market that has resulted in higher prices for coffee.  With higher cost of production, firms tend to cut back on production. Cost of production could rise if wages, raw material prices, rents, or any other input prices rise. In the case mentioned above, increased rents, transport costs, milk prices along with price of coffee beans expected to rise caused the cost of production to escalate hence supply to fall from S to S1. The quantity supplied of coffee fell from Q to Q1 followed by an increase in price. b) Draw a diagram to show the change in the tea market that has resulted in higher prices for tea.  The higher the price of an existing good, the higher will be the demand for its substitute as people prefer switching to inexpensive substitutes or alternatives. For example, in the case above, the rise in price of coffee resulted in an increase in the demand of tea as tea is the closest substitute of coffee. A rightward shift in the demand for tea increases its quantity from Q to Q1 and also the price from P to P1. c) Explain the non-price determinants involved in the change in each market.  Price is not the only factor that determines the demand and supply of a commodity. Demand of a good or service maybe affected by the change in taste, number and price of substitute goods and complementary goods as well as consumer’s income. On the other hand, the supply of a good or service may also be influenced by the change in cost of production, profitability of alternative products and goods that are jointly demanded, expectation of future price changes and in some cases, unpredictable events or natural disasters (Begg, 1997). If people develop a taste for coffee, the demand of tea is likely to decrease. The demand curve for tea will shift to the left whereas the curve for coffee will move to the right. Moreover, if the price of coffee goes up, the demand for tea is expected to increase as tea will appear cheaper and is the closest substitute of coffee. However, if the price of milk or sugar increases, consumers will buy less of these items and hence less coffee as these items are usually consumed together. Also, if there is a rise in one’s real income, he is likely to buy coffee instead of shifting to other alternative regardless of the increase in the price (Case & Fair, 1996). Like demand, supply is not simply determined by price. An increase in the cost of production, in this case, higher rent and milk prices are likely to hinder the supply of coffee. Suppliers are expected to cut back on production when input prices increase. Other than that, reduction in the profitability of producing tea, due to a reduction in price, will cause suppliers to produce more of coffee as that will reap higher profits. Favorable weather conditions and future price expectations may also influence the supply of a good. d) Why would the writer suggest coffee drinkers might be thinking of switching to tea? The writer suggested that coffee drinkers might switch to tea because tea is the closest substitute available for coffee. As mentioned above, if the price of a particular commodity rises, for example coffee, people may not purchase that commodity any further. Instead, they are likely to shift their expenditure to its substitute which is obtainable at a comparatively lower price, i.e. tea. Moreover, people who consume caffeine habitually will prefer an option with same or lesser caffeine instead of any other decaffeinated hot beverage.    REFERENCES: Bamford, C. (2002). Economics: AS and A Level. United Kingdom: Cambridge University Press. Sloman, J. (1997). Economics, 3rd edition. Hertfordshire: Prentice Hall Europe. Gillespie, A. (2002). AS & A Level Economics. United Kingdom: Oxford University Press. Lipsey, R., & Harbury, C. (2003). First principles of economics, second edition. United Kingdom: Oxford University Press. Anderton, A. (1995). Economics, second edition. Oxford: The Alden Press Powell, R. (2000). A- Level Economics. Bristol: Bath Press. Begg, D. (1997). Economics, fifth edition. Bristol: Bath Press Case, K., & Fair, R. (1996). Principles of Economics, fourth edition. London: Prentice Hall. Read More