Economics

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Question 26

1: Define the term ‘equilibrium price’:

The price at which quantity demanded by consumers and the quantity of goods and services supplied by firms is the same.

3: With the help of an appropriate diagram and the information in extract B, explain why the world price of sugar changed in 2009:

The price of sugar rose to $0.40 per kilo in 2009 - this is shown in the extract as it states that in 2009 prices in New York and London rose by 52% to its highest in almost three years. The diagram below shows how the inward shift of supply caused by poor crop harvests and India’s %40 fall in output of sugar affected the price of sugar due to its scarcity, leading to the %52 rise in price of sugar.

Another factor that could have had an effect on the price of sugar would have been in 2008 there were poor crop harvests that year – this led to a low level of supply in 2008 which raised the price of sugar due to its scarcity. This poor harvest would have had something to do with the land quality –this may have affected the harvest in 2009.

Supply constraints also had an effect, as due heavy rainfall the Columbian crop was damaged – the rain also washed away some of the roads used to transport the products from the field to the market. So whatever crop the farmers managed to save from the rain was then prevented from reaching market, this would have contributed to the price rise in a way similar to the diagram above.

India is a main producer of sugar, so much so that its sugar output is a critical factor in determining the world price of sugar. India’s output was forecast to fall by %40 so only 15million tonnes of sugar would have been produced in the growing season – this is well below India’s sugar consumption of 23million tonnes a year. This would mean that India wouldn’t be inclined to export much of its sugar as there’s already a deficit of supply in its own country. Although, with this large fall in supply there’ll most likely be a rise in...
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