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Economic principles - Essay Example

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ECONOMIC PRINCIPLES By Instructor Institution Location Date Question 1 The prices of tomatoes are expected to rise because the supply has reduced. The reduction in supply of tomatoes happens because frost and floods destroy the crops; therefore, tomato is a very delicate plant, which can be easily destroyed by frost and flood…
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Economic principles
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Economic principles

Download file to see previous pages... The shift in supply curve upwards as shown in the diagram below will results to increase in price of tomatoes from P1 to P0. On the other hand, the quantity supplied will reduce from Q1 to Q0. The equilibrium price and quantity shifts to P0 and Q0 as a result of shift in supply curve upwards. Henderson (2008) claims that the equilibrium price and quantity of tomato is determined by the interactions between demand and supply. There are several factors, which determine changes in equilibrium position. They include shift in the supply and shift in demand curve, which may shift the demand curve either upwards or downwards. Figure 1: the diagram shows the new equilibrium price and quantity as a result of upward shift in the supply curve which is caused by reduction in supply of tomatoes Question 2 (a) According to Johnsen (2002), price elasticity refers to the degree of responsiveness of the demand for a particular good or services to the changes in the price of goods or services in question. Moreover, determinants of price elasticity refer to the factors that cause price elasticity. There is a host of factors, which affects the price elasticity. The factors include the presence of substitute, expected changes in price, amount of income, necessity, duration, and brand loyalty. Availability of substitute implies that increases the price elasticity because a slight difference in price would result into consumers shifting base to a rival product, which are cheaper. However, the same condition does not apply if the goods are not close substitute. Tomatoes have close substitutes such as onions and green paper. As such, if the prices of tomatoes increase due to reduction in supply, the consumers will shift to the close substitutes. The other determinant of price elasticity is level of income. Kiley (2011) assert that when the consumers have a considerably high level of income then it implies that they are less sensitive to changes in price. On the other hand, if the level of income is low then the consumers are very sensitive to changes in prices hence any slight change in price would result to consumers buying less of the product. This situation implies that despite the fact that the prices are expected to rise because of the eminent shortage, some consumers with high income will still buy tomatoes because they have low price elasticity. Necessity is yet another determinant of price elasticity; products such as food staff are basic good hence they have low price elasticity. On the hand, luxury products have high price elasticity hence consumers will buy less of the product if the price increases. Tomato is a basic good hence; it does not have high price elasticity (Klein, 2003). The other factor that affects the price elasticity of goods is duration. In the short term, the price elasticity is low while the reverse is true in the long run. The justification for this trend emanates because in the short term, the consumers have not adequately adjusted to the changes in the market. However, in the long run, the consumers have had adequate time to adjust to changes in the market and as such, they are in a position to exhibit high price elasticity. The fact that the issue of shortages of tomatoes in the market has lasted for quite some time, it means that price elasticity is also high since the consumers are responding adequately to high tomato prices, which is occasioned by the shortage of tomatoes in the ...Download file to see next pagesRead More
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