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Micro Economics College - Essay Example

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The price of any good is determined by so many factors, majority of which are outside the control of an individual producer/marketer. Among the various factors, demand and supply are the prominent factors that are likely to affect the price fixed by manufacturer/marketer…
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Micro Economics College Essay
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Micro Economics College

There are exceptions to this general rule. However, in the case of commodities that are normally consumed, this rule can be applied. It can be therefore, inferred that demand and supply are two opposite extremes of the same phenomenon and when it comes together (it is necessary), the price is determined, called the equilibrium price. This equilibrium price ensures that quantity demanded is just equal to the quantity supplied at any time point and this decides the price of that good (Forget 1999, p. 141). In the context of hike in the price of enriched wheat flour in Malaysia, the following demand- supply model is suggested.
The price of wheat here is determined by the forces of quantity demanded and supplied. The quantity of wheat supplied at any time is the amount of wheat that the suppliers are ready to offer at a certain price. Similarly, the amount of quantity of wheat demanded by consumers implies the quantity that consumers are ready to purchase at a certain price. When both demand and supply interact together at a point, the price is determined. This situation is known as equilibrium price. This situation gets affected when there is a mismatch between quantity supplied and demanded. At this juncture, the quantity demanded does not coincide with what is offered by suppliers and thereby the price reaches at disequilibrium. This price disequilibrium gets adjusted by either a price cut or a price hike as the case may be and eventually reaches the price equilibrium. The major reason put forward here for the inevitable price hike is the shortage of wheat in the home market. When there is a shortage of an essential good, the demand for the same would increase as a certain amount of the good is consumed daily. Therefore, when there is shortage in the supply of wheat in the country, the demand for wheat flour increases and naturally there is an adjustment of price.
However, this economic problem can be overcome by shifting the consumption of wheat from enriched wheat to normal wheat. The price of normal wheat will not be affected much as it is abundantly available. Hence, the authorities can proceed with stabilizing the price at a level where the consumers in the home market will not be harmed much.

Explain the determinants of the price elasticity of demand as they apply to the demand for wheat. Use your conclusions about the price elasticity of demand to explain what they imply about the revenue that Australian wheat farmers are likely to receive as a consequence of the poor harvests in Australia
Price Elasticity of Demand of a good is commonly understood as the degree to which the consumers respond to a change in price. If the consumers are highly responsive that they demand more of the good, when there is a price cut, the good id said to have price elasticity. It is measured by a coefficient. When the coefficient is high, the good is highly elastic and vice versa (Hoag 2006, p. 102). In the case of wheat in Malaysia, the determinants of its price elasticity can be explained as below:
Number of substitutes: - If the wheat has large number of substitutes to be consumed by buyers, then it will be easier for them to shift from enriched flour to its alternatives. Here, the point o be noticed is that the substitutes to be a determinant of price elasticity ... Read More
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