Analyzing The Fruit Industry: Demand, Supply, And Market Power

Phase 1

Phase 1

For the purpose of this report the chosen industry is fruit.

The demand for the industry is specified as

Q^D specifies demand and P is the price

The supply for the industry is specified as

Based on upon the market data demand is obtained as

The corresponding supply function is

Equilibrium is obtained where demand equals supply

At equilibrium,

In the specified demand function, own price is the primary factor affecting demand. The coefficient of price is negative which implies that demand increases with a decrease in price and decreases with an increase in the price. The intercept of the demand curve depends on the value of ‘a’ while the slop depends on the value of b. Apart from price, other factors influencing fruit demand include

Income of the consumers, taste and preferences, demand of the related industry like fruit juice and others (Fine 2016).

Demand elasticity one price above the equilibrium price

The price elasticity of demand at the price interval by the mid-point method of elasticity

The estimated price elasticity at one price above the equilibrium level is -0.84

Demand elasticity one price below the equilibrium price

The estimated price elasticity at one price below the equilibrium level is -0.6.

Phase 2

Equilibrium at t_-1

At t_-1, there is an increase in industry demand. Specifically demand curve shifts to the right. The supply however does not change in that period. The new equilibrium is obtained where new demand curve intersects the existing supply curve (Baumol and Blinder 2015).

Figure 1 : Equilibrium at t_-1

In the next period, with an increase in the industry demand the demand curve from DD to D₁D_1. The supply curve remains at SS. At time t_-1, the equilibrium shifted from E to E_1. The high demand increases both equilibrium price and quantity (McKenzie and Lee 2016). Equilibrium price increase to P₁ while equilibrium quantity in the market is obtained as Q_1.

Revenue is obtained by multiplying price with volume of sales. The new revenue is (P₁ *Q₁).

Equilibrium at t₀

In the next period that is in t₀, industry supply increases shifting the supply curve to the right. The new equilibrium is obtained from the demand curve at t-₁ and the new supply curve (Pouw 2017).

Figure 2: Equilibrium at t₀

At time t_0, increase in industry supply shifts the supply curve right to S₁S_1. The new equilibrium is at E_2, where new supply curve S₁S₁ cuts the demand curve at time t-_1. Corresponding to the new equilibrium price decreases to P₂ while equilibrium quantity increases to Q₂. The new revenue is obtained as (P₂*Q₂).

Phase 2

Phase 3

The name of the firm is Mildura Fruit Company (MFC). It is Australia’s largest packer and exporter of fresh Citrus. The company packs and sells fruits to Mildura and other regions of Australia. The company has six directors. Sunbeam Foods Group Limited solely owns the company (mfc.com.au 2018).

In the competitive market of New South Wales, the company will charge a price that equals marginal cost of production. In the competitive market though the firm can enjoy a supernormal profit in the short run but in the long run, there remains only normal profit (Cowen and Tabarrok, 2015).

In Queensland facing with monopolistic competition the company charge price determined from the profit maximization condition of marginal revenue equals marginal cost. Like NSW, here also firm can enjoy short run profit. Barrier free entry of new firms eliminate all the short run profit leaving only normal profit in the long run industry (Hill and Schiller 2015).

In the monopoly market of Tasmania, being the single seller the company has complete control over the market price it can easily charge and maintain the profit maximization price obtained as MR =MC (Goodwin et al. 2015). The monopolist firm then in the long run can enjoy a supernormal profit with highly restrictive entry in the market.

The main factor for difference in price for different market is difference in the industry demand and market power of the operating firms.

Phase 4

Deficit in the government budget caused by increase in government spending creates inflationary pressure in the economy. In order to reduce inflation, counteractive monetary policy is undertaken in the form of increase in interest rate (Bernanke, Antonovics and Frank 2015). The budget deficit thus has an effect of raising the interest rate.

An increase in interest rate means increase in the cost of borrowed capital. Investors now have to pay a higher return on the borrowed fund. This discourages private investment results in a decline in private investment.

The high interest rate means a higher opportunity cost holding money. Therefore, in response to increased interest rate household’s saving increases to get a higher return. This reduce the available income for consumption leading to a reduction in private consumption (Goodwin et al. 2015).

The business in NSW sells product only to consumer who work in private sector. Decline in private consumption causes a decline in the demand of Citrus for the company. As a results revenue and profit from business unit in NSW decreases. In order to increase demand, the company might reduce their price or might try to sell their product to other group of consumers.

In Tasmania, as the firm is planning to invest $X, it will now face a higher cost of investment. In order to recover the cost, it will charge a higher price than earlier.

In Queensland, the business remains relatively unaffected. As the company sells only a small proportion to the private sector citizen reduced private consumption does not have much effect on sales and profit.

Reference list

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave Macmillan.

Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.

Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.

McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs. Cambridge University Press.

Mfc.com.au. (2018). Our Story | Mildura Fruit Company – Packer & Exporter of Fresh Citrus. [online] Available at: https://www.mfc.com.au/en/our-story/ [Accessed 25 May 2018].

Pouw, N., 2017. An Introduction to Gender and Wellbeing in Microeconomics. Routledge.

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