Macro-economical Side of World Price of Wheat - Assignment Example

Micro Economics Use a demand and supply model to explain how world events "had contributed to the shortage" and the rise in the world price of wheat The price of any good is determined by so many factors, majority of which are outside the control of an individual producer/marketer. Among the various factors, demand and supply are the prominent factors that are likely to affect the price fixed by manufacturer/marketer. Normally, when a good has high demand with a given supply, the price for the same tends to come up and when it is demanded by a few, the price tends to come down. But, it is to be noticed that this relationship between price, demand and supply do not hold good always. There are exceptions to this general rule. However, in the case of commodities that are normally consumed, this rule can be applied. It can be therefore, inferred that demand and supply are two opposite extremes of the same phenomenon and when it comes together (it is necessary), the price is determined, called the equilibrium price. This equilibrium price ensures that quantity demanded is just equal to the quantity supplied at any time point and this decides the price of that good (Forget 1999, p. 141). In the context of hike in the price of enriched wheat flour in Malaysia, the following demand- supply model is suggested. Price Determination is a function of both demand and supply The price of wheat here is determined by the forces of quantity demanded and supplied. The quantity of wheat supplied at any time is the amount of wheat that the suppliers are ready to offer at a certain price. Similarly, the amount of quantity of wheat demanded by consumers implies the quantity that consumers are ready to purchase at a certain price. When both demand and supply interact together at a point, the price is determined. This situation is known as equilibrium price. This situation gets affected when there is a mismatch between quantity supplied and demanded. At this juncture, the quantity demanded does not coincide with what is offered by suppliers and thereby the price reaches at disequilibrium. This price disequilibrium gets adjusted by either a price cut or a price hike as the case may be and eventually reaches the price equilibrium. The major reason put forward here for the inevitable price hike is the shortage of wheat in the home market. When there is a shortage of an essential good, the demand for the same would increase as a certain amount of the good is consumed daily. Therefore, when there is shortage in the supply of wheat in the country, the demand for wheat flour increases and naturally there is an adjustment of price. However, this economic problem can be overcome by shifting the consumption of wheat from enriched wheat to normal wheat. The price of normal wheat will not be affected much as it is abundantly available. Hence, the authorities can proceed with stabilizing the price at a level where the consumers in the home market will not be harmed much. Explain the determinants of the price elasticity of demand as they apply to the demand for wheat. Use your conclusions about the price elasticity of demand to explain what they imply about the revenue that Australian wheat farmers are likely to receive as a consequence of the poor harvests in Australia Price Elasticity of Demand of a good is commonly understood as the degree to which the consumers respond to a change in price. If the consumers are highly responsive that they demand more of the good, when there is a price cut, the good id said to have price elasticity. It is measured by a coefficient. When the coefficient is high, the good is highly elastic and vice versa (Hoag 2006, p. 102). In the case of wheat in Malaysia, the determinants of its price elasticity can be explained as below: Number of substitutes: - If the wheat has large number of substitutes to be consumed by buyers, then it will be easier for them to shift from enriched flour to its alternatives. Here, the point o be noticed is that the substitutes to be a determinant of price elasticity of demand, must be very close to the enriched flour. Therefore, closer the substitutes of wheat available in the market, greater would be its price elasticity of demand. Degree of necessity: - The second important determinant of price elasticity of demand is the degree of necessity or importance of the given good for the consumers. If the good is a necessary item, the demand would not be affected by a price change. This implies consumers do not purchase more of a necessary when its price come down. In other words, necessary goods have inelastic price elasticity of demand. Here, since wheat is a necessary item, the demand for the same will be inelastic to a price change. Price of the good as a proportion of income: - This implies that the price elasticity of a good is decided by how big is the product's share in one's budget to purchase. It is also known as disposable income. One's disposable income reserved a product determines its price elasticity. If the disposable income share for a product is large, then the product's price elasticity will be high. Since the wheat accounts for only a small portion of a Malaysian consumer, the wheat is price inelastic in the country. It can, therefore, be concluded that the enriched wheat in the Malaysian market price inelastic because of the absence of all the above determinants. Therefore, a price hike will not affect the demand for wheat flour in the country and the same will not harm the farmers in Australia. Of course, the farmers in Australia may be affected by poor harvest, but they will be received improved price for the harvested quantity as they are highly tagged in the market. Governments often impose price controls in situations where rises in the world price impose hardship on domestic consumers. Use the model you have developed in Q1 above to analyse the impact on the wheat market of a price control imposed at the original price of US$220 per tonne. In your answer you should analyse how distortions in the market caused by the price ceiling are resolved When the consumption of enriched wheat flour is shifted from imported wheat to normal wheat, the demand for the same would decline and the price will not be hiked. The price control as suggested by government may impose restrictions on the import of wheat from foreign countries. The government has the power to control the goods imported from another country to be sold in the home country. However, it has to take care of the impact of such price restrictions on the wheat market. The price control will adversely affect the wheat market in the country and eventually the world over, sometimes, the price of wheat may be affected. From the original price of US$220 per tone, the price of wheat in the country has increased by 70%. This creates a lot of distortions in the market as the government put control over price of wheat. Therefore, it is better to paradigm shift from the consumption of enriched wheat to normal wheat and thereby the problem can be solved. References Forget, Evelyn L., 1999, The Social Economics of Jean-Baptiste Say: Markets and Virtue, illustrated, Routledge, 1999 Forget, Evelyn L., Samuel Hollander and Sandra Peart, 2001, Reflections on the Classical Canon in Economics: Essays in Honor of Samuel Hollander, llustrated, Routledge, 2001 Hoag, Arleen J., 2006, Introductory Economics, illustrated, World Scientific, 2006 Knoop, Todd A., 2004, Recessions and depressions: understanding business cycles, illustrated, y Greenwood Publishing Group, 2004 Malthus, Thomas Robert, 1836, Principles of Political Economy Considered with a View to Their Practical Application: Considered with a View to Their Practical Application, 2: W. Pickering, Read More