Econ Essay

Assignment #2: Applied Writing Exercise

Question 1 (Supply and Demand)

According to the daily telegraph, prices will increase in tomatoes due to flooding and frost which has affected four key areas up Australia's east coast, with those surviving in limited supply due to delayed plantings.

The “law of supply” is the rule that price and quantity have a “direct” or “positive” relationship. Which means that as the price of units rises, consumers are less inclined to pay for goods or services and as price drops, more so. The “law of demand” states that the price of units and their quantity are inversely related (as the price rises, less consumers are willing to purchase a good or service, the quantity drops and vice versa). In the context of demand, if we disregard all other variables, there is a distinct negative relationship between price and quantity.

The graph displays an increase in the price of tomatoes, signified by “P” to “P1”. “P1” is higher on the demand curve (less demand from consumers). The increase in price shows a shift along the demand curve to the left, signifying less quantity demanded. A change in quantity demanded is always brought on by a price change.

The reason for the price rise was due to the floods and frost which affected four key areas across the east coast of Australia, causing a delay in seed planting of tomatoes which meant quantities of tomatoes decreased in supply. Which is indicated by the supply curve shifting to the left (“S” to “S1”). If the suppliers had not increased prices, they would not be meeting the full demand (“Q2”) and subsequently maximizing their revenue.

The “equilibrium price” is the price that is at the meeting point of quantity demanded and quantity supplied (the market clearing price). This is the most effective point and price will usually drift to the equilibrium. The new equilibrium price of the gas and electricity market is the meeting of “P1”, “S1” and “Q1” (quantity demanded). The new...