Effects of EACH on the Market for Coffee - Essay Example

?Question 10 Marks) how EACH of the following situations will affect the market for coffee. In other words, in your answer for EACH of the five situations given, you need to state whether the demand curve for coffee will shift to the left or right, or whether the condition will cause the supply curve for coffee to shift to the left or the right. In addition, please provide a brief explanation of the changes in the equilibrium market conditions. a. A severe frost destroys much of the Brazilian crop. b. Coffee is shown to cause cancer in laboratory experiments on mice. c. The price of tea declines sharply in production/consumption. d. Coffee prices are expected to rise rapidly in the next few months. Indicate the immediate Effect. e. Workers in the coffee industry form a trade union and succeed with claims for higher Wages. Answers: a) When a severe frost destroys much of the Brazilian crop the supply curve of coffee will shift to the left. It is assumed that the demand will remain the same. Therefore the market equilibrium will shift to the left. b) If coffee is shown to cause cancer in laboratory experiments on mice it is expected that the demand for coffee will fall down sharply. The supply for coffee is assumed to remain the same. The demand curve will shift to the right and the new market equilibrium will also shift to the right. c) If the price of tea declines sharply the demand for coffee is expected to fall. The demand curve will shift to the left and the equilibrium point will shift to the left. d) If the price of coffee is expected to rise in the next month, the demand for coffee will rise immediately. Therefore the demand curve will shift rightwards and the market equilibrium point will shift to the right. The other conditions are assumed to remain unchanged. e) If the workers in the coffee industry form a trade union and succeed with claims for higher Wages, then the price of coffee will rise. In that case the demand will fall and the curve will shift leftwards and the market equilibrium point will also shift to the left in situation of ceteris paribus. Question 2 (10 Marks) With the aid of diagrams explain in your own words how the decisions of households to purchase and the decisions of firms to supply eventually combine to establish the price and quantity that is exchanged in the market. In your explanation you must refer to aspects such as: Demand, wants, needs and desires Determinants of demand and supply Demand versus quantity demanded Movement along versus shifts of the curves Equilibrium Price and Quantity Surplus vs. Shortage. Answer: A market is a place where buyers meet sellers. The households purchase the products of their needs from the sellers in the market and the sellers charge their price. The determinants of demand and supply are the price of the good, the price of the substitutes, the income of the consumers, and the anticipated price level of the future and tastes of the consumers. An increase of demand can take place if the income of the consumers rise, the price of the product itself falls. The following diagram shows the demand supply analysis of the chosen product. In this case it is assumed that the market is competitive and so the demand curve is horizontal. In this case a parallel shift in the supply schedule leads to lower demand (Michigan State University, n.d. p. 1). The quantity demanded has fallen to Q1from Q0. The price is remaining the same in the market. A leftward shift of the supply schedule lead to fall in quantity demanded. The following diagram provides a clearer picture. In this case the supply curve shifted to the left while the demand curve remained unchanged. The initial equilibrium in the market has fallen as a result. The new equilibrium quantity is at a higher level than the initial one while the new equilibrium price is at a lower level than the initial one (University of Pittsburg, 2012, p. 2). The point where the demand by the consumers is matched by the supplies of the producers is regarded as the equilibrium point. The following diagram describes the equilibrium point. The point where the demand curve cuts the supply curve is the equilibrium point. In this case the equilibrium quantity is q* while the equilibrium price is p*. The following diagram describes the concept of surplus vs shortage. When the demand excess the supply of the market there is shortage. Surplus occurs when supply exceeds demand of the market. It is assumed that there is ceteris paribus. Question 3 (10 Marks) The table below shows some cost price information for a monopoly firm. Assume that the total fixed cost is $ 30. Answer: a) Q Variable Cost Fixed Cost Total Cost Marginal Cost Price/ unit ($) Total Revenue Marginal Revenue AVC ATC Total Profit 1 $1 $ 30 $ 31  -  $45  $ 45  -  $ 1  $ 31  $ 14 2 $3 $ 30  $ 33  $ 2 $40  $ 80 $ 35  $ 1.5  $ 17.5  $ 47 3 $6 $ 30  $ 36  $ 3  $35  $ 105  $ 25  $ 2  $ 12  $ 69 4 $10 $ 30  $ 40  $ 4  $30  $ 120  $ 15  $ 2.5  $ 10  $ 80 5 $15 $ 30  $ 45  $ 5  $25  $ 125  $ 5  $ 3  $ 9  $ 80 6 $21 $ 30  $ 51  $ 6  $20  $ 120  -$ 5  $ 3.5  $ 8.5  $ 69 7 $28 $ 30  $ 58  $ 7  $15  $ 105  -$ 15  $ 4  $ 8.2  $ 47 8 $26 $ 30  $ 56  -$ 2  $10  $ 80  -$ 25  $ 3.25  $ 7  $ 24 9 $45 $ 30  $ 75  $ 19  $5  $ 225  $ 145  $ 5  $ 8.3  $ 150 10 $55 $ 30 $ 85   $ 10 $0   -   -  $ 5.5  $ 8.5   - List and briefly discuss the characteristics of a monopoly market. Answer: b) A monopoly is said to exist when there is only supplier in the market. Thus monopoly is characterized by lack of competition. Size of the business is immaterial in characterizing monopolies. A small business unit also may have the monopoly power. When there is only one firm in the market it is quite unlikely that it would accept the market price. It will have the potential to recognize the influence it can have on the market and set the price accordingly. It will choose that level of output which will maximize the profits. One can view as the monopolist choosing the price and allowing the consumers to choose the quantity they wish to buy or the monopolist can limit the quantity and allow the consumers to decide the price they wish to pay (Central Washington University, 2003). The firm has the power to set the price i.e. the firm is the price maker. Barriers to entry exist in the market of monopoly. The products of the market can be differentiated. There are no barriers to entry and perfect information exists in the market (Stakelberg, 2010, p. 3). A natural monopoly is said to exist when high initial costs is associated with the starting a business. In some cases it is most efficient for the production process to be concentrated on a single firm. Since it is efficient to continue with natural monopolies the governments or the authorities regulate the operative ones to enhance the welfare of the consumers. Absolute monopoly occurs when a single seller operates in the market and there are no close substitutes. A monopolist maximizes its profits by producing at the point where marginal revenue equals marginal cost. The monopolist can accrue maximum revenue at the point where marginal revenue is zero. Normal profit occurs at the point where average cost equals average revenue. In the monopoly market the seller acts as the price maker while the buyer is the price taker. The entire market demand curve is faced by the monopolist and profits persist both in the long and in the short run. c) Using the numbers from the table and Excel, draw a diagram showing how a monopolist makes a decision regarding production levels and price. Identify the level of output, price and profit under the monopoly market structure. Answer: c) The monopolist will produce at MR=MC in order to maximize profits. The monopolist will produce 5 units of output. The profit of monopolist will be $ 50. The price will be $ 25 per unit. Question 4 (10 Marks) Graph Australia’s Gross Domestic Product, levels of unemployment and inflation from 1993 to 2010 (hand drawn or Excel graph(s). Answer: 2) The following graph depicts the Gross Domestic Product of the country in the selected period (Asian Development Bank, 2011). Years GDP Unemployment rate Inflation 1993 448376 10.9 1.80% 1994 471037 9.7 1.90% 1995 499505 8.5 4.60% 1996 531970 8.6 2.60% 1997 559206 8.4 0.30% 1998 591510 7.7 0.90% 1999 622866 6.9 1.50% 2000 663810 6.3 4.50% 2001 708919 6.8 4.40% 2002 759028 6.4 3% 2003 804261 5.9 2.80% 2004 865271 5.4 2.30% 2005 926447 5.0 2.70% 2006 1001440 4.8 3.50% 2007 1091633 4.4 2.30% 2008 1185740 4.3 4.40% 2009 1255241 5.6 1.80% 2010 1284670 5.2 2.80% The following diagram shows the unemployment rate over the years. The following diagram shows the inflation rates over the years. Answer. 3) It can be said from the above graphs that the GDP of the country kept on increasing in the period under consideration while the level of unemployment kept on falling. Therefore it can be stated that the economy is stable during the period and is on the path of growth. The inflation has been inconsistent over the period. Therefore steps can be taken so as to keep the level under control. Reference Asian Development Bank, 2011. “Key indicators of Asia and Pacific 2011”. [pdf]. Available at: http://www.adb.org/sites/default/files/KI/2011/pdf/AUS.pdf. [Accessed: 28th September, 2012]. Stakelberg, H. 2010. “Market Structure and Equilibrium”. [online]. Springer, USA. [Accessed: 27th September, 2012]. Central Washington University, 2003. “Market Structures: Monopoly”. [online]. Available at: https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=11&ved=0CH0QFjAK&url=http%3A%2F%2Fwww.cwu.edu%2F~dhedrick%2FEcon%2520201%2FPowerpoints%2FEcon%2520201%2520Fall%25202003%2520Week%25208b%2520Monopoly.ppt&ei=lryLT4POKZDOrQeeucnNCw&usg=AFQjCNHuJgwfOTaEPt8MySTopwqniL9vkA. [Accessed: 28th September, 2012]. Michigan State University, n.d. “EQUILIBRIUM PRICES”. [pdf]. Available at: http://www.bus.msu.edu/econ/brown/pim/pdffiles98/eq98.pdf. [Accessed: 28th September, 2012]. University of Pittsburg, 2012. “LAW OF MARKET EQUILIBRIUM”. [pdf]. Available at: http://www.pitt.edu/~mgahagan/LawofMarkets.pdf. [Accessed: 28th September, 2012]. Read More