Demand and supply in the Sweets cane market

Q1. (a) The cost of auto parking might include real real estate costs, electricity costs, watchmen costs etc. These costs wouldn't decrease by fall in price of car parking permit. It's only a change in insurance plan of campus to make parking available for more people. With this lowering, the institute might still make more earnings if the number of parking autos increased is offset by the decrease in parking permit cost. This would by natural means depend on the purchase price elasticity of the demand for parking; but the bottom-line is that change in cost of car parking is more of a policy decision without effect on the price of parking.

(b) Drought in Australia has reduced the wheat output and therefore the wheat being exported to USA has been reduced. This lack of wheat anticipated to reduction in import has shifted the entire wheat resource curve folks towards kept on the demand-supply graph and hence leads to upsurge in price. Thus the price increase incentivizes the US farmers to produce more to bridge the demand-supply difference. Overall, this might gain the farmers of US and Australian farmers might lose some of their talk about of income.

Q2. (a) (i) Price on Y-Axis and Quantity (demand) on X-axis.

The upsurge in demand of espresso has shifted the Demand curve from D1 to D2. So even at same demand (around 9) the price has increased from 19 to 25 (in short term).

In the permanent the purchase price and amount would alter to a new equilibrium point i. e. the intersection point of the curve S & D2. Although we would also see a rise in the 'source' due to higher margin in espresso but that is clearly a different game altogether.

(ii) Price on Y-Axis and Quantity (demand) on X-axis.

The lack of bananas is a direct impact of the devastation brought on to the agriculture by the north Queensland floods. This causes a leftward switch of the Banana Resource curve (S1 to S2). This led to increase in Banana prices.

Q2 (b) The price elasticity would not be same for a place like Perth as compared to Australian outback. This is because, there are many factors engaged which affect the price; the significant ones here being as follows -

Luxury products discuss a high elasticity of demand

Also goods which form a significant part of the consumers budget have higher elasticity when compared with other goods

Since, the demographics of the two places are different hence; you will see difference in the purchase price elasticity of demand for calls made from cell phones in two parts.

Q3. (a) (i) Calculating Peter's marginal reap the benefits of ice-cream as shown below -

Litres of ice-cream

Willingness to pay

Marginal benefit

0

$ 0

1

$ 10

$ 10

2

$ 17

$ 7

3

$ 22

$ 5

4

$ 25

$ 3

5

$ 27

$ 2

6

$ 28

$ 1

(ii)

The demand desk for Peter is as follows

Price

Demand

4. 67

6

5. 40

5

6. 25

4

7. 33

3

8. 50

2

10. 00

1

Price on Y-axis (dollars); Quantity on X-axis (litres).

(iii)

Now at $5 per litre of ice-cream, Peter would buy approx. 5 litres of ice-cream.

Q3. (b) In a market, there is a demand and a resource curve defined for every good/service. The source curve defines the price a maker is willing to simply accept for confirmed amount of good/service to be provided. The demand curve shows the determination of the buyer to buy a good/service at a given price. The intersection between the Demand and offer curve is known as the equlibrium point and it defines the equilibrium quantity and equilibrium price.

Producer Surplus is actually the difference between the equilibrium price defined by the marketplace and the lowest price the manufacturer is willing to accept because of its goods. The higher the difference between the two prices, larger is the maker surplus.

surplus2

As is seen from above, the area above the source curve i. e. the purple line, below the equilibrium price and still left to the intersection point is known as the Developer Surplus.

Example: Assume the Demand and offer curves are the following

D = 32 - 4P

S = 3P - 5

The graph for the same would be as shown below -

Surplus_correct

Blue shaded part signifies the consumer surplus; whereas the grey shaded part represents the maker surplus for the given set of equations.

Now, the equilibrium price is at D = S.

i. e. 32 - 4P = 3P - 5

P ~ $ 5. 29 & Q ~ 10

Now, the cheapest value the producer is eager to agree to be $ 1. 67; nevertheless the producer is obtaining $ 5. 29. The difference in these quantities creates the Developer Surplus.

Q4. (a) Deadweight Loss - It is the inefficiency induced by some action, such as tax, price control buttons etc, which brings about market distortion and eventually a net reduction in communal welfare. The loss is actually because of the transactions that could took place but were prevented by the market distortion.

Taking the example from previous question and imposing a duty on goods, would lead to a lack of consumer surplus and manufacturer surplus. This reduction would actually consist of Government Earnings from the taxes and the deadweight loss.

deadweight loss

In the graph above, the areas shaded in the following colors are -

Blue Consumer Surplus

Yellow Administration Revenue from tax

Purple Deadweight loss

Red Maker Surplus

Now as apparent from the graph, the fees has the following effect on the market - the effective price received by suppliers decreases and the price being paid by customers raises. This discourages the incident of exchange of the good/service in the market. Hence, in better interest of society the federal government is more likely to impose duty on alcohol when compared with luxury cars.

Q4 (b) Now, here the Price of something is add up to the Average Adjustable Cost. The price is decided as of this value as fixed cost is actually a sunk cost and hence it is not taken up in the computation of product prices. So at equilibrium, the businesses are essentially offering at the average variable cost and simply able to cover up their costs and having zero revenue.

Since, the fixed costs aren't taken in computation and everything the businesses are almost on zero margin gains, hence the loss they are really bearing is actually the preset cost itself.

profit

In brief run, it is possible that some organizations could make some economic income as shown in body above. However in the long term, this income is not lasting. The organizations eventually would be making only some normal profit but zero economical profit, as apparent in graph where the demand curve is tangential to the average cost curve.

300px-Economics_Perfect_competition

Case Study

Introduction

Sugar Industry is one of the closest paragons of perfect competition in real life. With innumerable makers of sugars over the markets and with almost negligible scope of differentiation between your products, the sweets industry is essentially a price-taker.

Concept: Perfect Competition

As we know, in perfect competition the firms make no earnings as they hardly cover their changing costs. In the long run the firms end up making deficits (economic reduction) which is equal to the Set Costs of the company. The graph below also exhibits the same principle. We can note that the demand of sweets is set from the first graph (Demand-Supply graph for the glucose industry) by equating Sindustry to Dindustry. The demand determined from here is then carried to the next graph (Demand-Supply graph for an individual organization) where Demand is add up to the Marginal Income or Average Earnings or Price of sweets. The demand, even as see from second graph is flawlessly flexible and any upsurge in price by the company would result in lack of market share to the organization. Now, the equilibrium amount for the company would be chosen the basis of MR=MC strategy, as this would lead to profit maximization. Now at the equilibrium variety calculated the purchase price for the item is less than its Average Total Cost. This is where we see that effectively the company is making monetary losses. Another example for such industry could possibly be the low priced airlines industry in India.

perfect competition

Figure - http://welkerswikinomics. com/

One thing to be observed here is that the problem is not always like this, often there would be no motivation for a player to enter the marketplace. In the brief run, some organizations do make normal income plus some even supernormal gains; but everything depends on the position of the short-term cost curve. As show in the below graph, this firm has short run cost curve such that the marketplace price widespread is more than its cost. However, over time all these factors normalize and all firms are at the same pedestal.

profit

Canegrowers: As an association

In a perfect competition, all the producers are always low on margins and facing a stiff competition. So, it doesn't makes business sense for a person firm to expend money on increasing sales; as there is absolutely no guarantee of attaining any material income progress given the large numbers of suppliers and purchasers. Moreover the info being free and symmetrical would never let the company charge any amount greater than the market price. Hence, in that scenario it's in the best interests of all the suppliers to pool their knowledge & resources and work out on the procedure of increasing their profits by lowering their costs. This contributes to building of industry associations, which is designed to work in the best interests of the industry. Canrgrowers is one such relationship of sugarcane suppliers which works for the glucose industry and is aimed at sustaining the profitability of the producers and sustaining the glucose industry all together.

Canegrowers: As an activity force

The Canegrowers as a link is in charge of the introduction of techniques that assist the sugar companies in getting the maximum return out of their crops. These techniques are an integral part of the 'quality assurance' activities they embark on on the behalf of providers all together. As identified in the training video, the techniques used are polar technology and new-infrared Spectrophotragpy. These techniques are being used extensively to measure the glucose content in the sugarcane juice (using various pre-calibrated parameters) and enhance the outcome of the manufacturers. Also any impurities in the drink are washed away ensuring that the sugars itself is not squandered along the way.

This way not only would they better the quality of glucose they produce, they would also improve the amount of sugars produced. By growing new and improved ways of removing pollutants, Canegrowers is supporting the industry in decreasing their varying costs and increasing their margins.

Sugar Industry Elasticity

The elasticity of a product depends on several factors. Let's first enlist the major factors that contribute to the elasticity of the product -

Availability of Substitutes

Amount of Income allocated to devote to the commodity

Necessity of the product

Time Span

Now, we will assess these factors regarding sugar industry and try to measure the elasticity of sweets industry.

Availability of Substitutes: This by themselves is one of the major factors of elasticity and it virtually defines the fate of a item. Taking sweets as something we find that sugars has high elasticity as there are substitutes available for sugar such as jaggery. So if the price tag on sugar rises (ceteris paribus) then people would tend to change towards jaggery to satisfy their need for sweet inducing item. Also, there are a few man-made sweeteners available in market which can to an extent become a sugar substitute. Whereas, if the price of sugarcane itself rises then there may possibly be little change in the consumption of sugar or jaggery. This is because there are no real substitutes for sugarcane and folks might not be ready to give up their sugary needs. So, we see a product within an industry might be stretchy but the industry as a whole itself is not stretchy.

Amount of Income allocated - Sugars being truly a daily utilization product could have a monthly budget allocated to it. With

Necessity of product - Although this might be based upon the demographics of the spot but talking generally the need of sweet can't be done away with and hence there would continually be demand because of this product.

Time Span - Much longer is the purchase price change for something, higher the elasticity would be for it. For example for once you may buy sugars at high price but if you visit a permanent change in the price for sweets then you might eventually change to jaggery.

Hence, the concept of elasticity of demand is an extremely useful strategy in understanding the demand for sweets in the short run as well as long run.

Sugar Industry - Factors impacting Source & Demand

Sugarcane growing is an extended process (taking 1. 5 to 24 months from planting to harvesting); so depending on weather and also dependent on many natural hazards such as floods, tornados etc. and the impacts of pests and diseases. This type of abrupt changes can critically alter the way to obtain sugar and hence the price of glucose in market (especially international market) fluctuates very frequently.

Talking about international market, there are two major factors that influence the purchase price -

International trade is a very small proportion of total development and intake of world

Protection policies adopted by some European nations, US, Japan etc.

To decrease the uncertainty of prices, glucose futures and options are quickly exchanged in derivatives market and major chunk of the item is sold through these contracts only. This reduces variability in the 'place' prices of the sugars in market. Also, specific providers are shielded from this price fluctuation by entering into long-term contracts to market a significant proportion of their productivity. ("The Australian Glucose Industry", Industry Commission, 1992)

The factor to be considered from supplier aspect while considering for the equilibrium price and volume is mainly the price tag on production of sweets. Apart from that, the technology developed to boost the output and other logistics costs, form the major chunk. Then it will depend on the interactions between suppliers and customers to decide after the equilibrium price and amount. Since, the manufacturers are price-takers hence only some organizations can't influence the price of the sugar in market. Also because the demand at strong level is properly stretchy hence any upsurge in price by one distributor would lead to zero amount sold for that buyer. Speaking at a business level, the demand for sugar is almost inelastic and the once the equilibrium price is come to from then on no individual company can demand more than that price (as shown in graph above).

Australian Glucose Industry

In Australia, the major locations where glucose is cultivated are New South Wales, Queensland and American Australia. It's cultivated majorly in the high-rainfall seaside areas or river valleys of the locations. This industry is one of the most crucial rural companies of Australia, with the total size of $ 1. 5 - $ 2. 5 billion. (www. cranegrowers. com)

The information for the industry are -

Cane production = 32 - 35 metric ton

Raw Glucose = 4. 5 - 5 metric ton

Number of Cane Plantation Businesses = 4000

Number of Sugars Mills = 25

Value of Development = $ 1. 5 billion to $ 2. 5 billion

Australia is one of the most significant exporters of natural glucose with 80% of the raw sweets produced being exported to Asia & US.

The glucose market of Australia is similar to other global sweets market structure i. e. it's near perfect competition. Because of poor creation techniques and success the industry noticed a decline in mid 2000's.

Industry Structure

The industry has large network of varied types of organizations. This network is essentially meant to support the industry in areas like R&D, marketing, infrastructure development etc. These organizations can be divided into peak bodies, federal agencies, research and development companies and grain marketing organizations (www. anra. gov. au). The organizations are -

Peak Physiques -

Australian Cane Farmers Federation

Cane Growers

NSW Cane Growers Association

Ord River Canegrowers Association

Cane Harvestors

Millers

Rural Sectors Research and Development Corporation

Government systems -

Commonwealth Scientific and Industrial Research Organisation

Department of Agriculture, Fisheries and Forestry

Australian Quarantine and Inspection Service

Australian Bureau of Agricultural and Tool Economics

Bureau of Rural Sciences

Research and Development Institutes -

BSES

Sugar Research and Development Firm (SRDC)

Cooperative Research Centre for Sustainable Sugar Production

Environmental Challenges encountered by the Industry

The major environmental obstacles confronted by Australian Sweets Industry are -

Irrigation and Drainage

Soil Management

Dangerous goods and chemicals (licensing for energy storage in excess of 10000 L)

Fertilizer Management

Herbicide Management

Waste Management

Ecology and Conversation

Current Situation of the Industry

The Australian sweets industry is currently under the recovery stage after it noticed a drop in profits and production going back 4-5 years. A turnaround in the sugarcane plantation and sweets creation is expected in 2010/11. This is expected majorly as a result of rising glucose prices worldwide and advanced seasonal conditions for sugarcane plantation. ABARE reported sugarcane prices for 2009/10 to be around AUD 509/MT, which was around 52% higher than previous year. It is expected to go even higher in 2010/11. Here are a couple of graphs which depict the industry scenario as of this moment.

Source - ABARE Data

The shape below shows the decrease of area under plantation of sugarcane over the years. The 2010/11 body is the expected area to be covered, in case it happens then this would be the single largest percentage increase in the sugarcane plantation area in ten years.

Source - ABARE Data

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