Price Demand curve Supply Curve
Quantity demanded
Fig 1.0: demand and supply curve diagram source researcher’s compilation.
The demand for a commodity is defined as the quantity of that item the buyers are willing and able to buy at a given price in a given period. Supply, on the other hand, is the amount of the commodity the suppliers are willing and able to supply to the market at a given market price in a given period (Karl, Fair and Ray 1999).
The law of demand explains that an increase in price will lead to a decrease in the quantity demanded while a decline in prices will lead to an increase in the amount required. The law of supply, on the other hand, states that an increase in the price of a commodity will lead to an increase to the quantity supplied by the supplier while a decrease in the rate of a product leads to a reduction in the amount the supplier is willing to provide (Mankiw and Taylor2011).
Various factors have been proofed to impact on a market price of a commodity; the same factors, therefore, affect the price of lavenders in the Australian market. These factors include; government policy, changes in the rate of substitutes, changes the cost of production, quality of the product and the economic policies. The government of Australia has a responsibility of regulating the business practices of the country. Any firm operating within the organization has to follow laid down procedures. The government policies which can affect the price of lavenders include export and import policies (Hamid and Hosseini 1995). Lavender seeks to achieve increased market share through reaching to other parts of the world. The import duty imposed by the government can be favorable or unfavorable. When the import policy is desirable, the prices of lavender will be low, but when the import duty is high, the cost will be transferred to the customers, therefore, making it expensive. Another factor is the economic policy; a favorable financial situation makes the consumer have much money to spend. When the purchasing power of the consumer is high, they become less sensitive to price changes. To take advantage of this situation lavender producers may increase the prices of the commodity. The cost of production of lavenders in the country has been noted to be escalated; this leads to high prices for the product. When the cost of production reduces this will lead to a reduction in the price but when the cost increases the price will continue to rise. There are other flowers produced in the country when these product prices have lowered the demand for lavender in the country increases leading to a decrease in the price to attract more customers. Equilibrium can be acquired by matching; the quantity demanded with the amount supplied. To achieve this, the producer must understand the price elasticity of their customers. By following this, they will set a favorable market price which will boost the demand and therefore matching demand with supply. Another factor which may lead to a price change of the product is the increased investment in product improvement (Marwala, Tshilidzi; Hurwitz and Evan 2017). High product quality translates to high prices for the product.
Q2
Based on the aspect of price elasticity of demand the demand seems to inelastic. Demand is said to be increasing despite the high cost of production which translates to high prices for the product. The increase in demand may be attributed to the quality of the lavender produced. The high prices of the product don’t affect the demand the product. The CEO notes that the product demand is mainly local, this shows that the locals are not sensitive to the escalated prices.
Q 2 (b).
Since the Australian demand seems not to be elastic due and the price changes seem not to affect the demand. Lavenders are considered a luxury product since the target market is mostly the tourists (Cohen,1983) The demand will continue to increase, despite the increase in prices, this will transform to high revenue for lavender firms.
Q 3
The major cost involved in operating lavender firms include; disease control cost-the other firms operating in the country suffer losses due to disease affecting their crops which doesn’t happen to Laverne’s crops. To ensure that their crops do not suffer the same fate, therefore, the firm must have invested heavily in disease control mechanisms (Fleetwood and Steve 2014). Another cost involved in the operation is the expansion cost. The firm has plans to expand its production to meet its current demand this expansion has some tied in costs. These costs include irrigation scheme development cost.
Q 3 (b)
The law of diminishing returns states that an increase in a factor of production increases production at a declining rate. The law, therefore, suggests that continuously increasing of a single factor of production will reach a point whereby its impact to production will stop to be felt. As the firm continues to invest in product diversification, it will reach a point where improving product quality will be impossible. At this point, therefore, the firm will start experiencing diminishing returns on factors of production.
Avi J. Cohen (1983) The Laws of Returns Under Competitive Conditions: Progress in Microeconomics Since Sraffa (1926)?”, Eastern Economic Journal. 9 (3)
Fleetwood, Steve (2014). Do labor supply and demand curves exist? Cambridge Journal of Economics. 38 (5): 1087–113.
Hamid S. Hosseini, (1995). Understanding the Market Mechanism Before Adam Smith: Economic Thought in Medieval Islam. History of Political Economy .27(3), 539–61
Karl E.; Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.
Mankiw, N.G.; Taylor, M.P. (2011). Economics (2nd ed., revised ed.). Andover: Cengage Learning.
Marwala, Tshilidzi; Hurwitz, Evan (2017). Artificial Intelligence and Economic Theory: Skynet in the Market. London: Springer.
References