The Demand and Supply Curves Diagram
Quantity demanded
Fig 1.0: demand and supply curve diagram, source researcher’s compilation.
Figure 1.0 above represents a demand and supply curve in a competitive market, from the diagram quantity demanded increase as the price of a commodity decrease. Amount supplied, on the other hand, increase with an increased rate and decrease as the price of commodity decrease. The equilibrium point is the point where the quantity demanded equals the amount supplied at a given rate referred to as an equilibrium price.
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).
A competitive market set up is the kind of market with a high number of producers/sellers and many buyers. There is no single party which can control the market forces such as setting the prices or supply of the product.
Various factors have been proofed to impact on a market price of a commodity; the same elements, 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 (Mankiw and Taylor2011). 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
Price elasticity of demand is defined as to how the consumers respond to price change of an item. When an increase in price causes a decrease in the demand the demand is termed as elastic price demand while if a demand of an item is not affected by price changes the demand is said to be an inelastic price demand. Price elasticity of demand is influenced by various determinants these include; availability of substitutes to the product, purchasing power of the consumer, nature of community among others.
Based on the aspect of price elasticity of demand for lavender in Australia therefore, the demand seems to price 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. The inelasticity of demand on the case of the lavender product attributes to the fact that lavender is a termed a luxury since it’s a product for tourists.
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 plants 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 rising of a single input of production will reach a point whereby its impact to production will become insignificant. 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.
References
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