Economics in Context - Essay Example

Economics in Context a) Initial supply-demand curve Scenario Price Quantity In this scenario there is a clear indication of a drop in the supply side because of crop failures. This indicates a shift in the supply curve, which basically translates into a higher price for each quantity on the graph. It also means a lower quantity. Scenario 2 Price Quantity In this case there is an increase from the demand size, because there is an overall increase in the demand (at every price) there is a shift in the demand curve.

There is an overall increase in the equilibrium price and quantity. Scenario 3 Price Quantity This scenario indicates that both supply and demand have increased, however demand has increased more than the supply thereby changing the equilibrium point which is now reflecting a higher price of tea. There is an overall increase in the price and quantity. Scenario 4 Price Quantity There is a decrease in the price and quantity of the product because sugar and milk are complementary products.

As the supply-demand theory explains ‘if the price of a complementary good increases then the demand for the good will fall. This will result in a leftward shift in the demand curve of any complementary good’(Biz/ed team 2010, Spotlight on the theory: Demand Curve, Movements) Overall the trend has been of increasing prices in the tea market. This means that increased prices of sugar and milk have not played a significant role in lowering demand. Scenario 5 Price Quantity Obligation to follow fair trade policies has resulted in increased cost of production, thereby causing a decrease in supply as producers shift to other activities.

This translates into a higher quantity at a lower price. The overall increasing price of tea in reality indicates that the other factors excluding the fourth one were more relevant in shaping the price of the product. b)Elasticity of demand The elasticity of demand price is becoming more inelastic for tea. This can be explained by the fact that rising tea prices have not deterred tea demand and have been accompanied by increased tea demand. Tea is a stable drink in the diets of many and is catching on in many countries like China and it has relatively few alternatives (only real one being coffee) which makes the demand inelastic.

Another reason for the inelastic demand is that tea consumes a low percentage of the consumer’s income making them less sensitive to its price changes.(Price of Tea, Economics Help). This seems unlikely but an exception might exist for consumers who treat teas as a luxury, their demand would be price-elastic. c) Elasticity of supply The elasticity of supply price would tend to be inelastic. This is because although an increase in price should create more incentive for suppliers statistics show that this has not happened at least in the short run.

At the moment for example supply is being outstripped by demand. Also irrigation, weather conditions and land shortages make it hard to increase tea production.( Rahman Lutfur Mohammad ‘Imapct of price and other factors on tea in Bangladesh: Sources of variation and Disparity over Vision) In the long run however supply is likely to respond to the tea pressure. It has been estimated by the FAO that supply will eventually rise in the coming time, which means that other then the increase in supply due to improved weather conditions newer suppliers will enter the market or existing suppliers will devote more resources to tea production. d) Problem in the short run If suppliers rush to meet the gap, a negative situation may arise from them.

An increase in production will mean a lowered price and quantity. Because demand is insensitive, it will be slow to respond, maybe creating over-supply in the market and pushing prices really slow. e)In the long run however suppliers will gradually increase the production and this will first resolve the situation of excess demand and then gradually balance out with the increasing demand for tea. i)Price lowering in 2010 The situation in 2010 will ease because there will be a greater increase in supply accompanied by a smaller increase in demand.

This will relieve the demand pressure that hs been keeping tea prices up and will result in lowered prices. ii)Another factor that might help lower price might be a drop in coffee prices. Because coffee is a substitute product a drop in coffe prices would mean lower demand for tea. This lower demand would ease the demand pressure(cause a left shift of the curve) and result in decreased prices. iii)A rise in price could be a good thing because of the price elasticity of demand for tea it could mean increased revenues for suppliers.

References: Biz/ed team 2010, Spotlight on the theory: Demand Curve, Movements, Biz/ed Team, Cengage Learning EMEA, Cheriton House, Andover, Hampshire SP10 5BE, viewed 23 February, 2010, . Biz/ed team 2010a, Spotlight on the theory: Supply Curve, Movements, Biz/ed Team, Cengage Learning EMEA, Cheriton House, Andover, Hampshire SP10 5BE, viewed 23 February, 2010, . Biz/ed team 2010b, The Market Mechanism, Biz/ed Team, Cengage Learning EMEA, Cheriton House, Andover, Hampshire SP10 5BE, viewed 23 February, 2010, .

Clarke, H., 2009, High tea prices: Better weather conditions mean prices should stabilize in 2010, Food and Agricultural Organization of the United Nations, Viale delle Terme di Caracalla 00153 Rome, Italy, Viewed 23 February, 2010, . Osborne, Hilary, 2009, Tea Prices to Rise 15%, Viewed 23 February, 2010, . The Tea Market: a background study 2002, draft paper downloaded from on 23 February, 2010. Thomson Reuters 2010, Tea price to stabilise in 2010: weather better –FAO, Thomson Reuters, One North Dearborn Street, Suite 650, Chicago, IL 60602, USA, Viewed 23 February, 2010, .

‘Price of Tea’ Economics.help September 2nd, 2009 Viewed 3rd March, 2010, http://www.economicshelp.org/blog/economics/price-of-tea/ Rahman Lutfur Mohammad ‘Imapct of price and other factors on tea in Bangladesh: Sources of variation and Disparity over Vision’ BRAC University Journal, Vol. IV, No. 1, 2007, pp. 9-11 Viewed 3rd March, 2010, http://74.125s.153.132/search?q=cache%3AluMpX-DO2QgJ%3Adspace.bracu.ac.bd%2Fbitstream%2F10361%2F261%2F1%2FImpact%2520of%2520price%2520and%2520other%2520factors%2520on%2520tea%2520in%2520Bangladesh.

pdf+price+elasticity+of+supply+in+tea&hl=en&gl=pk Make Trade Fair (2001) Tea Market – http://www.maketradefair.com/assets/english/TeaMarket.pdf