Explain the Changes Regarding Price and Quantity Discussed in the Paragraph Starting “Dazzled by…” in 2011 and 2012 (so Far) Using a Different Diagram for Each Year. Also Explain Why, Using Economic Analysis, the

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1. Explain the changes regarding price and quantity discussed in the paragraph starting “Dazzled by…” in 2011 and 2012 (so far) using a different diagram for each year. Also explain why, using economic analysis, the article links cotton, food, and fuel.

During 2011 many farmers swapped their food crops for cotton crops. This could be shown using a PPF (Production Possibily Frontier) diagram. A PPF diagram illustrates what an economy can produce using the given resources (in this case cotton crops and food crops). Opportunity cost also comes into play. The opportunity cost of cotton crops is not being able to supply food crops. As we can see in this diagram during 2011, farmers swapped the food crops for cotton crops, which increased the supply for cotton crops and dcreased the supply for food crops, justifying the change in the shape of the curve. Food crop

Food crop

Before 2011
Before 2011

2011
2011

Cotton Crop
Cotton Crop

In 2011 the price of crops also peaked due to floods in India, Australia and Pakistan, economically, supply decreased due to natural and miscellaneous factors. The flooding caused a decrease in supply causing the supply curve to shift inwards. This can be seen in the diagram below. P

P2
P1
S2
S1
D
0
Q1
Q2
P
P2
P1
S2
S1
D
0
Q1
Q2
As we can see the flood caused supply to shift inwards (S1 to S2), causing the price to increase (P1 to P2), as less crops are available at the given price level.

During 2012, price is forecast to fall due to the laws of diminishing return. This states that as a quantity of a good increases, in this case the supply of cotton crops, the marginal utility derived from that good decreases. Marginal utility is defined as the change in total satisfaction resulting from the consumption of one more unit of that good. This basically means that as the supply of cotton crops increased the quantity demanded at first followed equilibrium however as the cotton crops carried on increasing the value of the cotton crops eventually decreased to the consumer. The price change of cotton crops can also be shown on a Supply/ Demand diagram. Q

P
0
Q1
Q2
P1
P2
S1
S2
D
Q
P
0
Q1
Q2
P1
P2
S1
S2
D
Supply has shifted out due to ‘farmers jumping on the bandwagon’ and swapping food crops for cotton crops causing supply to shift out (S1 to S2), however this has caused price to fall (P1 to P2) Cotton, Food And Fuel are all linked in the article because they derive from crop. This is known as composite demand, another example of this would be cattle, milk and leather.

2. Explain why, in a mixed economy, the concepts of scarcity and opportunity cost are important for firms. Illustrate your answer with examples. Also explain two other concepts that are important to firms in their decisions on price and quantity

Scarcity is when the economy has limited resources thus cannot produce all the goods consumers want, this is where opportunity cost occurs. Opportunity cost is defined as the foregone opportunity of using a used resource elsewhere. A mixed economy is when an economy contains a mix of the free market and command systems.

Opportunity cost is important as some firms may have limited resources. As seen in the context, farmers had to swap food crops to cotton crops, in order to be able to supply more cotton crops; they were not able to do both. Thus it is important for firms to correctly analyse which market was more profitable; in this case the cotton crops were more profitable so farmers accepted the opportunity cost of not being able to produce as many food crops. Q

P
0
Q1
Q2
P1
P2
S1
S2
D
Q
P
0
Q1
Q2
P1
P2
S1
S2
D
In a mixed economy competitive markets have the incentive to be efficient as there is a high amount of competition. Therefore in being efficient you can lower the price of the good and increase supply as shown in the diagram. As we can see in the diagram when a firm is efficient, the cost...
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