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1. Assuming cherries are sold in a perfectly competitive market; use the supply and demand diagram to describe, ceteris paribus, what it means by a ‘bumper growing season’ and its impact on equilibrium price and quantity. In your discussion make sure to explain the process of moving to the new equilibrium output and price.

2. Use a supply and demand diagram to explain the impact of the changes in the cherry prices on two related markets. In your discussion specify your assumptions and explain the equilibrating process in the related market in terms of the new equilibrium output and price.

3. (a) Using the determinants of price elasticity of demand, discuss whether you think the price elasticity of demand for cherries are to be inelastic or elastic?

(b) Based on your discussion of elasticity, Illustrate and analyse the effect on total consumer expenditure in the cherry market following the price falls. 

Features of Perfect Competition

Cherries are sold in a market that is perfectly competitive in nature. Perfect competition is a specific market structure in which there are several firms offering a homogeneous product. As there is freedom of both entry as well as exit along with perfect information, business concerns are expected to acquire normal profits (Baumol and Blinder 2015). The level of prices is also at a comparatively low level owing to competitive pressures.

Primary features of perfect competition:

- There are many firms operating in the specific market

- There is freedom of entry as well as exit (Iossa and Martimort 2015)

-All the firms produce an identical or else a homogeneous product

-There is subsistence of perfect knowledge

Diagrams explaining perfect competition

 

Figure: Perfectly competitive market (equilibrium supply and demand)

(Source: Nicholson and Snyder 2014)

In this case, the industry price is primarily ascertained by supply and demand interaction that necessarily leads to an equilibrium price Pe. As can be seen from the diagram above, the individual business concern can maximise output at Marginal Revenue=Marginal Cost=Quantity 1(Q1). Essentially, in the long run, business concerns are expected to arrive at normal profits.

Impact of bumper growing season on equilibrium price and quantity

As per the given case, it can be said that supply has increased owing to the bumper growing season while demand is supposedly static. The changes in supply are primarily owing to bumper growing season. Given the said demand for cherry, the supply curve shall shift downward. Consequently, the price of cherry decreases and the quantity enhances (Rader 2014).

 

Figure: Showing increase in supply, demand remaining same

(Source: Rader 2014)

As mentioned in the figure above, the supply-curve shifts downward with increase in supply. This is to say, the inital supply curve S moves to the new equilibrium S1. Considering S as well as D as the supply curve and demand curve respectively, they intersect at equilibrium E and institute OP as price and OQ as quantity. With increase in supply and given amount of demand, the supply curve S makes a shift downward to S1 and the new equilibrium is formed at E2. Consequently, the price of the product (in this case cherry) declines from OP to OP2 and the quantity demanded increases from the level OQ to OQ1 (Varian 2014).

2.Alteration in the market price of cherries can exert influence two associated markets that deal with cherry. These two different markets are labour market and complementary market. Owing to excessive cherry production, there is requirement for more labours to pick fruits. This consequently has escalated the demand for labours (Elsner et al. 2014). Also, this increase in labour demand can lead to increase in wage further. In essence, this can be explained using the diagram showing rightward shift of the demand curve for labour. 

Diagrams explaining perfect competition

 

                                                                                                     Figure: Alteration in labour demand

                                                                                                      (Source: Elsner et al. 2014)

The diagram presented above shows change in labour demand in the cherry market. The increase in demand for labour has been reflected using the rightward shift of the demand curve. Since of workers has remained same, enhancement in labour demand (that is to say from Q0 to Q1) has directed the way to increase in wage (that is from W0 to W1). Therefore, decrease in cherry prices because of excessive production led to increase in wages of labour that is at a fixed level of supply. 

Essentially, the influence of price alteration can also be elucidated using complementary products market. In case of different complementary products, alteration in cherry prices has directed the way to alteration in overall quantity demanded of different complementary products specifically in the same direction. That is to say, an enhancement in cherry prices can show the way to decrease in demand for complementary products (Rafieisakhaei et al. 2016). However the opposite situation can also occur in case if cherry prices decrease. Say, cakes that contain cherry can be taken into account as a complementary product of this specific item. Therefore, decline in cherry prices enhance the demand particular product and in consequence enhance cake demand. In this regard, it can be hereby supposed that different other factors can also influence demand for particularly cake, such as own price, level of income and preferences as well as tastes of consumers remaining constant (Cashin et al. 2014). This implies that cake demand can vary when prices of cherry change. A diagrammatic representation of the above concept is hereby presented below: 

 

Figure: Showing alteration in demand for various complementary goods of cherries

(Source: Attanasio and Pistaferri 2016)

From the above figure it can be here by mentioned that decline in cherry prices has assisted increase in demand for cakes (that is to say from Qfo to QfI), at the time when price of complementary product remains stable. This refers to the fact that people demand higher amount of both cherry as well as cake prices decline.

Effects of Price Changes in the Market

3.1.Price elasticity enumerates the degree and extent of responsiveness of demand of a product is to an alteration in level of price. Price is said to elastic when demand decreases with increase in the price of the product (Attanasio and Pistaferri 2016). In order to measure the value of price elasticity of demand, supposed that all other factors affecting the demand of product remain same. Therefore elasticity of price can be regarded as alteration in quantity demanded divided by alteration in price (Chen 2017). According to the given case, it can be approximated that the total amount of the fruit cherry has increased by approximately 20% as the mean production of the fruit is around 15000 tons for the past few year. However, currently the amount enhanced to roughly 18000 tons. Furthermore, the increase in supply shows the way to decrease in price of cherries by roughly 10 to 20 percent. 

Price elasticity=20%/20%.

Therefore, price elasticity of cherries=1

Therefore it can be here by stated that percentage of alteration in quantity demand for the fruit cherry and percentage alteration in price of the fruit has remained at the same value to say 20%. In itself it can be here by mentioned that price elasticity of demand for the product under deliberation is unitary elastic (Attanasio and Pistaferri 2016). This implies that total amount of change in price and quantity demanded for the product is the same.

2.Since the price elasticity of the fruit is equal to 1, it can be said that price decline has led to increase in same amount of quantity demanded (Attanasio and Pistaferri 2016). As in the current year cherry production has significantly increased, price of the fruit has also decreased buy a huge amount. This in turn at the consumers to purchase this product at a low price. Again this decline in price showed the way to increase in consumption expenditure in case if demand of the consumers for cherries increase at this low price. Subsequently this also leads to increase in total income of the nation. Therefore consumers can acquire surplus value from market. 

References

Attanasio, O.P. and Pistaferri, L., 2016. Consumption inequality. Journal of Economic Perspectives, 30(2), pp.3-28.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.

Chen, H., 2017. The Effect of Life Cost to Consumer Expenditure Behavior. International Management Review, 13(1), p.85.

Elsner, W., Heinrich, T. and Schwardt, H., 2014. The microeconomics of complex economies: Evolutionary, institutional, neoclassical, and complexity perspectives. Academic Press.

Iossa, E. and Martimort, D., 2015. The simple microeconomics of public?private partnerships. Journal of Public Economic Theory, 17(1), pp.4-48.

Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.

Rader, T., 2014. Theory of microeconomics. Academic Press.

Rafieisakhaei, M., Barazandeh, B. and Tarrahi, M., 2016, May. Analysis of supply and demand dynamics to predict oil market trends: A case study of 2015 price data. In SPE/IAEE Hydrocarbon Economics and Evaluation Symposium. Society of Petroleum Engineers.

Varian, H.R., 2014. Intermediate microeconomics with calculus: a modern approach. WW Norton & Company

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