Using the Demand and Supply Model, Explain How Equilibrium Price and Quantity of Bananas Are Being Determined in a Competitive Market.

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great demand: (Wynne,2011).we can conclude banana is more like a necessity for consumers so that the demand for banana tend to be inelastic(Ed<1).Which means a given percentage change in price is accompanied by a relatively smaller change in the quantity demanded(Jackson et al,2009P.73).When price increase from P3 to P2 in graph 3(a),the quantity demanded for banana only drop a realtively smaller amount from Q3 to Q2,and total revenue is price multiplied by quantity.Hence the revenue is actually increased when price go up.This is illustrated in graph 3(a),the area Q3P3 is the total revenue when price of banana is P3,is obviousely smaller than the total revenue Q2P2 when price increase to P2.

While as the article says,the price will get to a point that buyers will start seek for alternatives(Wynne,2011).If banana price keep increasing from $12/kg,consumers will find many other cheaper substitutes like mango or strawberry.What’s more,the higher price will be more relative to consumers’ budget,and people will find other suitable fruit replace banana during a longer time.Combine all the factors,the price elasticity of demand will pass unit elastic(Ed=1,which the revenue will be the highest point shown in graph3(b)) and convert to elastic(Ed>1),the percentage change in price results in a larger percentage change in quantity demanded(Jackson et al,2009P.73).The total revenue shown in the graph is area P1Q1 when price rise to P1,that is smaller than the revenue area P2Q2.Total revenue experience decline as illustrated in graph3(b).So the total revenue for farmers will decrease when price rise to P3.

4．Explain and illustrate what would happen if the government were to impose a price ceiling at $8/kg in the market for bananas. Suggest some measures that the government can take to overcome any problems created by the ceiling price.

Graph 4

A price ceiling is the maximum legal price a seller may charge for a product or service(Jackson et al,2009P.83).According to the article that quantity of bananas decreases a lot, the new equilibrium price Pe in graph4 could be larger than the ceiling price $8/kg.So at the relative lower price $8/kg consumers are willing to buy more amount (Q2)of banana,on the other hand,suppliers don’t want to devote much resources to banana at this price,only Q1quantity of banana will be supplied.Since there will be a shortage indicated by the distanceQ2Q1.Normally the competition among consumers will bid up the price,while now this become ineffective.So there would be a persistent shortage of banana.

Measures:

1. Government could take out some budget to subsidise suppliers to encourage them to produce more quantity of bananas that will satisfy consumers desire.

2. Another way is to open local market to the global and import bananas from other countries to increase the quantity supplied in Australia.

3. There still one way is to send each consumers certain amount of banana coupons ,this will restrict the number of banana costomers can get and ensure everyone will get bananas,but this is only used in some emergency situations,personally I don’t think government will adopt this method.