Supply and Demand effects, economics

Essay by mscou1College, UndergraduateB+, September 2006

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Q1(a) Using an appropriate economic model, explain, ignoring price elasticity for the moment, how the price of wine grapes is established, assuming a perfectly competitive market. Discuss the dominant factors relevant in determining the likely price elasticity of demand and supply for wine grapes.

In a perfectly competitive market which would 'presume large numbers of independently acting buyers and sellers interested in exchanging' (Jackson, MckIvor, 2005, p56) the grapes, the major issue is an over surplus or over supply of grapes.

From this we can establish that the quantity supply of grapes is exceeding the demand quantity of buyers. If we assume the fact that both the supply and demand curves (below) represent quantity responses to all possible prices for the grapes, or that the quantities consumers buy depends on price alone, we understand the price reduction of the grapes.

This model analyses the effect of a change in supply on price, assuming demand is constant.

As the supply of wine grapes increases, the new intersection point (E) of supply and demand on the verticle 'y' axis (price) is less. (S1, S1 - S2, S2)

Understanding how a surplus of the wine grapes can affect the price of the product, we can also 'measure how responsive or sensitive, consumers demand of quantity is to a change in the price of a product, known as price elasticity'. Assuming a perfectly competitive market we can better determine the major factors affecting the price elasticity of demand and supply. From the information given, we can see that the price for premium quality grapes has dropped by as much as $1000/tonne. We can presume the buyer demand considering the substantial drop in price is relatively unresponsive and that the demand for the grapes is inelastic, - 'large price changes result in only small...