Demand and Quantity Demanded

Topics: Supply and demand, Consumer theory, Inverse demand function Pages: 5 (1232 words) Published: June 19, 2012
Question 1

This article is talking about government has increased the sugar subsidy due to higher world prices, but not because of an impending general election. Government had no choice but must increase the sugar subsidy to prevent the rakyat from absorbing the higher cost. If sugar prices are increased, it will cost a domino effect on all good prices.

Supply is defined as amount of producers willing and able to sell at a given price. There is a direct/ positive relationship between price and quantity supplied. Positive relationship means that the two variables changes in the same directly. This concept can apply in this article because when government increases the sugar subsidy, the cost production of sugar will decreases. Hence, the supply of sugar will increase. This change will cause the supply curve shift to the right.

Suppy of Sugar

Price

The supply curve shift to right

Quantity Supllied

Secondly, elasticity is a measurement of responsiveness of people to changes in economic variables whereas elasticity demand is used to measure responsiveness of consumer to a price changes. Sugar is fairly elastic demand because there are only small changes in quantity purchased if the price of sugar increases without government’s subsidy. This is because sugar is a necessity to everyone and sugar has no much close substitute. Consumers are fairly not responsive to price changes of sugar and they will be forced to absorb the higher cost if government does not increase the subsidy of sugar.

The firm of producing/ selling sugar is defined as perfect competition market model. Pure competition is a market consists of many firms that each must accept the price set by the forces of market demand and supply. The sugar seller cannot decide the price themselves and unable to influence the price of sugar themselves. This is because their product, sugar is homogeneous; buyers are indifferent as to which seller’s product they buy. In other word, if the government does not increase the subsidy of sugar due to the world price increases, the firm cannot simply increase the price themselves because they are only price taker and this will caused they earn subnormal profit.

Cost Revenue

AC

MC

(Loss)

AR=MR

Quantity

Subnormal profit is occurred when the average revenue of a firm is lesser than the average cost. In this situation, the firm is facing a negative profit.

In my opinion, government should set a price ceiling to sugar price. Price ceiling is a regulation which imposed by the government that makes it illegal to charge a price higher than a specified level. A price ceiling is normally set below the equilibrium price and it has a powerful effect. Price ceiling will prevent the rakyat to absorb the higher cost. Increase in price of sugar will cause a domino effect of other food price as mentioned in the article. This is because sugar is used as an ingredient to produce another foods for example cake, biscuit, coffee and some more. If the subsidy of sugar does not increased by the government, inflation will happen and this may caused economic slump.

Question 2

Demand is the amount of goods or services consumers willing to purchase at a given price. Demand curve is a downwards sloping curve. There are two types of demand in the economy, which are individual demand and market demand. Individual demand is the demand of an individual only whereas the market demand is the demand of the whole society. Demand can be change along the demand curve or shifting left and right.

The changed in quantity demanded is the movement along the demand curve, it is cause by the change in the market price. Quantity demanded and price both has a negative relationships. As the price of a product increases, quantity demanded of the product will decreases and as the...