Please help me with the following questions about supply, demand, and market equilibrium.
The growing popularity of Japanese cuisine in Australia is driving up demand for speciality rice in southern New South Wales.
While the Riverina and Murray Valley specialises in medium grain rice production, premiums on short grain Japanese style rice is helping to drive grower interest.
Earlier this month, SunRice announced a higher price for the 2014 Koshihikari crop grown in the region.
The company's chairman Gerry Lawson indicated it'll be calling on growers to increase the area planted to the variety later this year.
With markets in Canada, the UK, South East Asia, South Korea and now Russia, SunRice hopes the industry can triple production for sushi rice in the next three years.
Craig Young, the company's senior marketing manager, says its wants to improve the sushi experience from paddock to plate.
"We're researching and working across the whole business to make sure that we're always improving and understanding what our customers want.
"So we're working with some sushi chefs on understanding their needs and what they look for, so we can make sure we incorporate that into our process, whether that be in breeding, growing, milling or storing."
Peter Snell, senior rice breeder with the NSW Department of Primary Industries, is working on two new lines in the breeding program and says they're showing some promise.
1, Using the demand/supply model explain the change happening in the market for short grain ‘Koshihikari’ rice. Make sure you explain the equilibrating process on prices and output of the change. [5 marks]
2. Using the demand/supply model, explain the impact on prices and output on the medium grain rice market stemming from the likely response from rice growers? Make sure you explain the equilibrating process on prices and output of growers’ response. [5 marks]
3. Given your answer in question 2, and assuming the demand for medium grain rice is inelastic, use the demand/supply model to explain what will happen to total expenditure on medium grain rice stemming from producers’ response. [5 marks]
4. Assume the government is concerned about prices rising too high for consumers and decides to introduce a price ceiling scheme. With the aid of appropriate diagram show the effect of a price ceiling scheme along with the problems associated with such policy. [5 marks]
There are two things happening in the market for this kind of rice: demand has risen and supply will rise if SunRice gets its way. In the short term, the price of the rice will increase as demand rises and supply stays the same. As more farmers start to grow this type of rice, supply will rise. We cannot tell whether the price will rise in the long term because we do not know how much supply will rise relative to demand. However, we do know that the quantity supplied (output) will rise in the long term.
Since demand for this kind of rice is growing, the price that farmers can get for the rice is rising. This is likely to cause them to supply more rice. This will increase the output of the rice. When supply rises, the price of the rice should drop. However, this assumes that demand stays constant. If demand rises along with supply, prices can remain steady or even increase. So, if demand is constant, prices will drop when output rises, but if demand increases, prices might stay the same or even rise.
If demand for a product is inelastic, people will not change their buying habits very rapidly in response to a change in price. They will continue to buy roughly the same amount (depending on how inelastic demand is) even as prices rise or fall. If demand is very inelastic, we might see a change like the one in the link below. As supply rises, prices fall. Because demand does not rise very quickly (due to its inelasticity), consumption does not rise enough to offset the decline in price. The total amount spent in this market actually declines even as farmers are producing more rice.
The effects of a price ceiling can be found in this link. A price ceiling will tend to create shortages. This is because it will set a price that is below equilibrium. At that price, consumers will demand more rice than farmers are willing to provide. (Of course, if demand is very inelastic, this effect will be minimized.) If there is a shortage, there will not be as much rice available as people would like to consume at the price level mandated by the government.