SHRADHA JOSHI|11632202 ECO511

Assessment 3 – Problem Question

ECO511 – Economics for Business

Shradha Joshi
Student ID – 11632202
13th April 2019

SUBMITTED TO - MR. MARUF MOSTAFA

Question 1:

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Demand and Supply and Non-Price Determinants:

Demand:

Law of demand defines demand as total amount of quantity for a particular product
or service all consumers in the market are willing to buy at certain price. According to
law of demand the demand is based on requirements, wants and ability to pay.
Amount paid by the buyer against product or service is regarded as price and total
quantity demanded at that price is demand. Quantity demanded will change with
change in and for majority of products there is an inverse relationship between price
and quantity demanded. The commodity for the demand is coffee and Figure 1
represents a demand graph of coffee and it shows a downward sloping demand
curve which means that the demand of coffee is expected to decrease with increase
in price and demand for coffee will increase with increase in price.

Figure 1

Supply:

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Supply according to economics law of supply is the total amount of quantity of a

product or service all suppliers are willing to supply at a particular price. For majority
of products and services the quantity supplied to the market change if price is
changed and in normal situations quantity supplied increase as a result of increase
in price and decrease as result of decrease in price. Supply curve on graph of supply
and price is upward slopping representing a direct relationship between supply and
price. Figure 2 shows a supply graph of coffee under the assumption that all other
variables remains constant. The supply graph of coffee shows that the quantity of
coffee supplied will increase if there is an increase in price and quantity supplied is
expected to decrease with decrease in price.

Figure 2

Demand and Supply Equilibrium:

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Economics law of equilibrium suggest that market equilibrium of a product or service

is achieved by market forces of demand and supply. At equilibrium point the quantity
demanded of coffee will be equal to quantity supplied of coffee in the market at a
particular point, price at that point is known as equilibrium price and quantity is the
equilibrium quantity. Figure 3 shows the equilibrium of demand and supply of coffee.

Figure 3

Non-price Factors/determinants Affecting Demand for Coffee:

According to laws of economics price is not the single determinant of quantity
demanded there are many other factors like income levels, future expectations, taste
& preferences, prices of other goods and demographic characteristics & population.
These factors can cause a shift in demand curve.

Income Level of People:

One of the major factors which can influence the demand of coffee is the income
level of the buyers. Income level directly influence the purchasing power of and it is

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normally expected that increase in income will result in more demand and vice versa.
Normally the demand for coffee is directly related to income and results in positive
shift of demand curve towards right. On the other hand, if income level declines it
would result in a decline in demand of coffee which means that demand curve will
shift towards left.

Figure 4
Taste and Preferences:

Another factor which influence the demand is sense of taste and preference of
consumers. buyers can have important consequences for demand. Consumption of
coffee is mainly due to its aroma and taste which have result in strong preference of
coffee over other drinks in Australia and demand has grown by more than 5% per
annum in recent years. A positive change will result in more demand and demand
curve will shift towards right and decrease in preference will move the demand curve
towards left. For coffee I believe the taste and preferences are on superior side.

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Figure 5
Population and future Expectation:

The population size of the economy directly affects total number of consumers and in
turn demand is directly influenced by demographic characteristics. Demand can
show a positive or negative shift due to increase or decrease in population and their
buying behavior and expectation. Buyers’ future price expectations affect the amount
that will be bought. According to Mankiw and Taylor, (2011) consumers are
speculative and are expected to demand more if future price is expected to increase
as they are inclined to consume coffee at the minimum cost. Australian demand for
coffee is on steady growth due to adoption of coffee drinking culture.

Figure 6
Price of other Goods or Service:

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Price of replacement and supplementary products indirectly influence the demand of

product. For coffee increase or decrease in price of tea will influence the demand as
it is a direct substitute. Decrease in price of tea will result in decrease in demand for
coffee and demand curve will towards left and increase in price of tea will increase
the demand of coffee and demand curve will shift toward right. For complementary
products to coffee like doughnuts price may also influence the demand of coffee as
both will be consumed in conjunction.

Figure 7

Figure 8
Non-price Factors/determinants Affecting Supply for Coffee:

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There are multiple determinants other than price of product on supply including
number of sellers & competition in the market, cost of production, government taxes
& subsidies, natural events & climate change, change or development of technology,
expectation of Suppliers. These factors can shift the supply curve inward or outward.

Natural Events & Climate Change:

Natural events like drought, extra rains & storms and bug invasion can significantly
influence the plantation and growth of coffee plants and so supply of coffee beans.
Recent climate change has resulted in unfavorable weather conditions and results in
decline of production of coffee. For example, 2014 drought in brazil results in loss of
almost 25% crops and results in decline in supply and an escalation in price of coffee
(Futures, 2014).

Figure 9

Number of Sellers & Competition:

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Overall supply available in a particular market or economy is dependent on number

of manufacturers and suppliers in the market and level of competition among them.
Increase or decrease in number of sellers of coffee will influence the overall supply
of coffee. Increased number of sellers will shift supply curve of coffee to right and
vice versa. Number of suppliers will influence the level of competition as we expect
more suppliers with wide open competition in the market (Lewin, n.d.).

Figure 10

Development of Technology:

One of the major non price determinant of quantity supplied in the market is
development of manufacturing and agricultural technologies. More enabled
technology used in growing and production results in improved production of coffee
which results in a right shift in supply curve (Garuma at al, 2015).

Change in Cost of Production:

According to Garuma at al, (2015) total amount of quantity supplied is largely
dependent on current production cost and expectations of future production cost. A
change in factors of production like labor cost or fertilizer cost will alter the cost of
making coffee and will directly affect the overall supply of coffee in the market an

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increase in cost will shift supply curve to left and a decrease in cost will shift supply
curve to right.

Figure 11

Conclusion:
Finally, we can conclude that different non price factors can influence both demand and
supply of the coffee. Following the market laws of demand and supply different factors will
determine the quantity demanded and supplied in the market and coffee prices. The market
for coffee will stay at equilibrium until factors demand or supply or both change due to
determinant factors.

Question 2:
Potential Consequences of Price Ceiling Imposition on Energy Markets:

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Demand and supply:

Normally the prices of products and services are determined based on interaction of
market factors of demand and supply. Under the normal circumstances the
consumers are willing to buy more if price is reduced and supplier is willing to supply
more quantities at higher prices. Price of product, consumer preferences, availability
of substitute, income of consumers and nature of product plays a vital role in
determining the demand whereas factors like available technologies, cost of
production, government intervention & regulation, competition and preferences of
supplier will determine the supply of the product or service. The market price is
normally determined by the dynamic interaction of buyers and sellers in the market.

Figure 12
Imposition of Price Ceiling on Energy Markets:
Prices set by the framework of demand and supply are the equilibrium price but often
it is not considered as best price due to controversies surrounding in establishment
of prices and quantities. Often government is required to intervene to set the price at
a level which is not too high or too low for some basic and necessary products like
electricity. According to economist organizations and consumers will react on
government action of using price controls. When government intervene, it sets price
ceiling or floor depending on whom they want to protect.

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How and when to intervene in a market to set prices in an important question for the
government as it will mean that prices will be set by government rather than by
market forces. Setting the prices above market equilibrium will means nothing to
buyers and suppliers unless suppliers wants to increase price to the level set by
default market price. DMO Price set below market price will definitely create a strong
impact on the suppliers and may create a short of supply in the market and it
became difficult for the government to regulate prices for necessary goods like
electricity.
Price Ceiling and Floors:
A price ceiling sets a maximum price allowed which will prevent prices going beyond
a certain level. A price floors sets the lowest price to prevent prices dropping below a
certain level. Government may have to intervene by price control and setting the
ceiling or floor prices to ensure manage excess demand over supply and excess
supply over demand. A price ceiling above the market equilibrium price determined
with market forces of demand and supply will have no effect on the market as
prevailing market price is below ceiling price as shown in figure 13. A price ceiling
set below current equilibrium price will result in surplus of demand or shortage of
supply so here government have to intervene to ensure that sufficient supplies are
available in market to meet the essential demand.

Figure 13

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If the price floors are set below equilibrium price it will have no effect on market price
but if price floor is set above market equilibrium price it will create a surplus of supply
over demand as shown in figure 14.

Figure 14

What is DMO Default Market Offer Price:

New rules for the price regulations have been laid down by Australian Energy
regulator (AER) for electricity retailers of NSW, South Australia and South-East
Queensland. New rules will enforce new mandatory electricity retail code 2019-2020
and will set a retail price cap for electricity which retailers can charge on default
contracts enabling consumers to compare these prices against reference price. AER
will be responsible for setting annual price cap called default market offer price
(DMO price). Retailers are allowed to set different prices of electricity within the
annual cap for that particular level of electricity consumption. Default market price
will be reviewed on annual basis by AER who is responsible for monitoring and
regulating the prices of electricity in Australia.

Australian Competition and Consumer Commission (ACCC) wants AER to ensure

that consumers are protected against any unjustifiably high prices set by many
energy suppliers in different markets. AER have to act to set DMO price to guard
customers against paying excessive prices charged by electricity distributors.
Normally DMO price will be based on annual usage of energy and in accordance
with the regulations. DMO is reference price applicable to residential customers and

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small businesses and retailers are required to provide comparison of their prices
offered against DMO reference prices. DMO is price ceiling for the rate of electricity
not the maximum amount of bill which is dependent on amount of electricity
consumed by consumer.

It is important that when government adopt a policy of price control through DMO it
need to ensure that the prices set are below current equilibrium prices but at the
same time it needs to ensure that supply will flow smoothly because setting a price
below will take the suppliers away from supplying the electricity. As the electricity is a
necessary product the demand for the product will not boost significantly due to
decrease in price therefore AER.s regulated price will create a newer balance in the
market as shown in the graph below.

Figure 15

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Under the AER, s regulation retailers are required to keep their prices below DMO
price and formulate tariffs ensuring that customers are not in worse position than
before by maintaining current standing offers that are below DMO prices. DMO price
must give considerations to change in interest cost, forecast changes in production
and distribution to not create a negatively impact on retailers.

Conclusion:
It is observed that price restrictions normally have a negative implication on
performance of market and it may result in supply space created by participants. To
achieve the goals, it is necessary that Default offer price must be acceptable by both
consumers and retailers. Setting DMO price will not restrain the consumers from
shopping around and looking for the best to minimize their bills. We can conclude
that equilibrium price is purely based on economic factors and conditions and price
ceiling is a legally allowed maximum price, therefore, It is necessary for the regulator
to ensure that price ceiling would not create a shortage.

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References:
Garuma, H., Berecha, G., & Abedeta, C. (2015). Influence of Coffee Production
Systems on the Occurrence of Coffee Beans Abnormality: Implication on Coffee
Quality. Asian J. Of Plant Sciences, 14(1), 40-44.
https://dx.doi.org/10.3923/ajps.2015.40.44
Pinkasovitch, A. (2011). Introduction To Supply And Demand | Investopedia. [online]
Investopedia. Available at:
https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp
[Accessed 30 Aug. 2016].
Coffee in Australia. (2016). Euromonitor.com. Retrieved 1 September 2016, from
https://www.euromonitor.com/coffee-in-australia/report
Industry leaders discuss future coffee trends. (2016). BeanScene Magazine.
Retrieved 1 September 2016, from
https://www.beanscenemag.com.au/articles/view/industry-leaders-discuss-future-
coffee-trends
Lewin, B., Giovannucci, D., & Varangis, P. Coffee Markets: New Paradigms in Global
Supply and Demand. SSRN Electronic Journal.
https://dx.doi.org/10.2139/ssrn.996111
The Top Factors that Move the Price of Coffee. (2016). Futuresknowledge.com.
Retrieved 1 September 2016, from
https://www.futuresknowledge.com/news-and-analysis/softs/the-top-factors-that-
move-the-price-of-coffee/
Essays, UK. (November 2018). The supply and demand of coffee. Retrieved from
https://www.ukessays.com/essays/economics/the-supply-and-demand-of-coffee-
economics-essay.php?vref=1
Australian Energy Regulator (AER)
https://www.aer.gov.au/
Australian Energy Regulator, (2019). Final Determination Default Market Offer Prices
2019-20 April 2019.
https://www.aer.gov.au/system/files/AER%20Final%20Determination%20-
%20Default%20Market%20Offer%20Prices%20-%20April%202019.pdf

Retail electricity prices review - Determination of default market offer prices 2020-21
https://www.aer.gov.au/retail-markets/retail-guidelines-reviews/retail-electricity-
prices-review-determination-of-default-market-offer-prices-2020-21

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Coursey, D.L., Smith, V.L., 1983. Price controls in a posted-offer market. American
Economic Review 73 (1), 218–221.
Hossain, M. (2005). Price Control Regulation of Privatized Utilities in the United
Kingdom. The Singapore Economic Review. 50(01), 69-92.
Giannakis, D., Jamasb, T., and Pollitt, M. (2005). Benchmarking and Incentive
Regulation of Quality of Service: An Application to the UK Electricity Distribution
Networks, Energy Policy, Vol. 33, Issue 17, November, 2256-2271.

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