MOD003327 Economics For Business

MOD003327 Economics For Business

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MOD003327 Economics For Business

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MOD003327 Economics For Business

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Course Code: MOD003327
University: Anglia Ruskin University

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Country: United Kingdom

Question:

Supply and demand diagrams explain the relationship between supply, demand and price. Which is what this assignment is about.
Your assignment should explain what equilibrium is using a supply and demand diagram.
Your assignment should explain what leads to a change in demand.
Your assignment should explain what leads to a change in supply.
Your assignment should explain what impact these changes in supply and demand will have on price.
You should use supply and demand diagrams to illustrate the impact of changes in supply and demand upon price.
You should not provide numerical supply and demand schedules. You should not explain the impact that price has on demand and or supply as this theory is assumed.
While your assignment must include theory 20 marks of this assignment is awarded for applying supply and demand theory to the good the task is about.
LEARNING OUTCOMES
LO 1: Understand the language of economics
LO 2: Know the basic methodology and models used in this area and their application to real-life situations
LO 3: Demonstrate the ability to analyse hypothetical and / or real world situations that occur in our economy

Answer:

Introduction
Market, can be defined, in the conceptual framework of economics, as the place where the buyers and the sellers of different commodities engage in mutual interactions and negotiations to decide on the aspects like those of the demand, supply and prices of the concerned commodities and services (Hildenbrand 2014). There remain different exogenous and endogenous factors which have considerable implications on both the demand and supply aspects of different commodities and services and which influence the level of commodities produced and sold, which in turn have implications on the price levels of the same (Findlay and Warren 2013).
The equilibrium situation in the market, thus, usually refers to that condition, where the demand and the supply forces reach to a mutually agreed situation, that is, the equilibrium in a market, in general is a situation where the demand for the concerned commodity is same as that of the supply of the same and level of price and also the quantity of the concerned commodities or services in this condition are known to be the equilibrium price and equilibrium quantity of commodities and services respectively (Frank and Cartwright 2013).
In this context, the concerned essay tries to examine the cheddar cheese market in the United Kingdom, specifically concentrating on the components affecting the supply and demand of the concerned commodity in the United Kingdom and on the inter-relationship between the demand, supply and the price of cheddar cheese in the market of the United Kingdom. The concerned essay also tries to analyse the aspects of demand, supply and price dynamics in the cheddar cheese market, using the conceptual framework of economics, like that of demand-supply analysis and equilibrium in market and other related concepts.
Cheddar Cheese Market in the United Kingdom
Cheese is one of the most consumed commodities in many countries of which the United Kingdom is one of the primary ones. Different types of cheese are parts of the daily and normal diet of the majority of the population of the country and thus, the commodity can be termed as a normal necessity in the country (Irz and Kuosmanen 2013). As can be seen from the following figure, the sales of different variations of cheddar cheese in the market of the United Kingdom are as follows:

Figure 1: Sales of different variants of cheddar cheese in the United Kingdom
(Source: Statista.com 2018)
As is evident from the above figure, the sales of mature, extra mature and mild cheddar cheese in the market of the UK are considerably high, which in turn indicates towards the higher demand for these types of cheese in the concerned market (Burgess 2012). Since cheddar cheese is a normal necessity, so the demand for the same is comparatively inelastic, which in turn implies that the demand for the same does not change in the same proportion as that of the change in price and in general the rise in price decreases the demand by a smaller amount (Yang, Li and Delios 2015).
Demand Supply Dynamics in the Cheddar Cheese Market in the UK
The conditions of the quantity and price of the cheddar cheese in the market for the same in the United Kingdom, can be explained with the help of the demand and supply conditions of the same, for which it is crucial to understand the demand and supply concepts and the graphical representation of the same and the concept of equilibrium in the market. As cheddar cheese in the United Kingdom is a normal necessity, therefore, the demand for the same will have a negative relationship with the price of the same, that is, with the increase in price demand will decrease and vice versa and the relationship is bilateral (Vel?ovská and Sadílek 2015). On the other hand, with the increase in price of cheddar cheese the supply of the same is expected to increase and vice versa, which in turn indicates the presence of a positive relationship between the price and supply of the concerned commodity, in the market of the UK (Lea 2016). This in turn, indicates towards a negatively sloped (less elastic) demand curve and a positively sloped supply curve in the cheddar cheese market of the concerned country, which can be seen with the help of the following figure, showing the demand-supply dynamics:

Figure 2: Demand, Supply and Equilibrium conditions in the Cheddar cheese market in UK
(Source: As created by the author)
The above demand-supply diagram shows that, the equilibrium condition occurs in the cheddar cheese market in the United Kingdom, at the point where the demand and the supply of the same equate with one another, that is at the point (E0), where the demand and supply curves intersect each other (Boland 2014). This in turn, indicates towards the equilibrium price and quantity of the same to be (P’) and (Q’) respectively, in the cheddar cheese market of the United Kingdom.
Factors affecting demand as well as supply in the cheddar cheese market in the UK
There remain different factors which affect the supply and also the demand of different commodities in the markets in general. Some of these factors act as catalysts for increasing the demand or supply while some of the same lead to fall in the demand or fall in the supply of the same, which in turn affect the average price levels in the market (Rader 2014). Keeping this aspect into consideration, the concerned essay tries to analyse the factors which affect the demand as well as the supply of cheddar cheese in the market, which thereby, is expected to  influence the price of the same in the cheddar cheese market in the UK.
General factors affecting the demand and supply curves
In a generalised framework, there remains various exogenous as well as endogenous factors which affect the demand and supply of commodities. These factors are as follows:
The supply of commodities is affected by common factors like that of the prices of the inputs, technological progress, size of the market, policies and strategies taken by the government, expectations, natural conditions, price of related goods, availability of inputs as well as the transport and infrastructural aspects (Varian 2014). On the other hand, the demand for a concerned commodity or service is usually determined by price and also non-price factors like that of income levels, taste and preferences of the customers, price of the related goods (substitutes and complements), level of competition and expectations of the consumers. Keeping this into consideration, the factors having influences on the demand and supply as well as the price levels of cheddar cheese in the UK market are discussed as follows.
Factors affecting demand for cheddar cheese in market of UK
There remain various factors which affect the demand and thus the price level of the cheddar cheese in the market. Some of these are as follows:
Income of the population of UK
One of the primary factors affecting the demand for cheddar cheese in the market of the United Kingdom is that of the income of the population of the concerned country. In general, the increase in the income of the majority of population of the country is expected to increase the demand for the consumption of cheddar cheese in the market of the United Kingdom, the effects of which can be seen to be as follows:

Figure 3: Demand increase for cheese due to rise in income of the population
(Source: As created by the author)
As the above figure shows, due to the increase in the income, the demand for cheddar cheese is expected to increase in the UK, which in turn leads to the shift in the equilibrium from E0 to E1, where both the quantity of cheddar cheese as well as the price of the same are expected to increase (Cowell 2018). On the other hand, with the fall in the income of the population of the country, the demand for cheddar cheese is expected to fall which in turn is expected to shift the demand curve inward, thereby decreasing the price and the quantity in the new equilibrium.
Price of the related goods (Substitutes and Complements)
The prices of related goods of cheddar cheese also have considerable impacts on its demand. If the price of substitute good of cheese (like that of butter or margarine) decreases, then the demand for the same tends to rise in such situation. This is expected to make people substitute cheese with the same, which in turn, in all probability, decrease the demand for cheddar cheese in the market, the effects of which can be seen to be as follows in the market:

Figure 4: Decrease in demand for cheese due to increase in demand for substitutes
(Source: As created by the author)
Because of the fall in the demand for cheddar cheese, as a consequence of an increase in the demand for its substitute commodity (like butter), the new equilibrium is expected to come down from E0 to E1, thereby decreasing both the quantity as well as the price of the same in the new equilibrium situation (Marschak, Glennan and Summers 2013).
On the other hand, the demand as well as the price of cheddar cheese in the UK market are also expected to depend on the price of the complementary products like that of wine, as people tend to consume wine and cheese together. Thus, when the price of wine falls, the demand for the cheddar cheese is expected to increase, which thereby, is expected to raise the consumption of cheddar cheese also, in the concerned market, thereby leading to an increase in the demand for the same, the effects of which can be seen to be as follows:

Figure 5: Increase in demand for cheese due to increase in consumption of wine
(Source: As created by the author)
Thus, in this condition also, the price as well as the quantity consumed of cheddar cheese are expected to increase, in the new equilibrium in the concerned market in the United Kingdom (Marschak, Glennan and Summers 2013).
Preference patterns of the consumers
The demand and the price levels of cheddar cheese in the United Kingdom also depend considerably on the preference patterns of the consumers in the country. For instance, in the recent period, there exist increasing awareness regarding the effects of consumption of fatty and unhealthy foods, which in turn has been leading a significant share of the population of the developed countries, like that of the UK, to shift towards consumption of healthier foods (Bauer 2018). This, if true, is also expected to reduce the demand for cheddar cheese as the same contains considerable amount of fat. This in turn, is expected to have the following implications in the cheddar cheese market of the concerned country, shown by the following diagram

Figure 6: Decrease in demand for cheese due to increased health awareness
(Source: As created by the author)
In this context, due to the fall in the demand for the same, the new equilibrium shifts towards the point where the price as well as the quantity demanded of cheddar cheese decrease than the initial condition (Tahir, Ghazali and Agil 2017).
Apart from the factors which affect the demand of cheddar cheese, there also remain several crucial factors which have considerable implications on the level of supply of cheddar cheese in the United Kingdom, thereby affecting the level of price of the same in the concerned market. Some of these crucial factors can be seen to be as follows:
Costs of inputs
The supply of cheddar cheese depends considerably on the costs of the inputs, primarily like that of milk since it is the main component of cheddar cheese. If the price of milk increases, then the cost of input for the production of cheddar cheese also increases which in turn leads to the fall in the supply of the cheddar cheese in the United Kingdom, which shifts the supply curve for the same leftwards, the implications of which can be seen to be as follows

Figure 7: Decrease in supply of cheddar cheese due to increase in price of milk
(Source: As created by the author)
The fall in the supply of cheddar cheese leads to a shift in the equilibrium from E0 to E1, which in turn leads to a rise in the price and a fall in the quantity consumed of the same in the market of the United Kingdom as due to the rise in the price less people will be able to afford the same.
Technological Progress
Another crucial aspect which influences the level of supply of cheddar cheese in the United Kingdom, is that of the technological advances in these aspects. Generally, technological advancements in the production of different commodities lead to more efficient and cost-effective production of the same, which is also the case for cheddar cheese production. An improvement in the technological aspects of cheese production, is expected to increase the supply of cheddar cheese at the same cost of production, the effects of which can be seen with the help of the figure as follows:

Figure 8: Increase in supply of cheddar cheese due to increasing technological progress
(Source: As created by the author)
The technological improvements are expected to increase the supply of cheddar cheese, which in turn is expected to shift the supply curve rightwards, thereby leading to increase in the quantity consumed of the same and also a simultaneous fall in the price of cheddar cheese in the market of the United Kingdom (Riley 2012).
Government policies
The supply level and the price of a product, in turn, depend considerably on the government policies and strategies which the government of the country take in these contexts, in order to control the price and quantity levels of the same (Mahanty 2014). Suppose the government imposes a quota on the level of production of cheddar cheese to restraint the level of supply and consumption of the same. The supply quota can be seen to be having the effects which can be seen to be as follows:

Figure 9: Effects of imposition of supply quota on cheddar cheese by government of the UK
(Source: As created by the author)
As is evident from the figure above, the imposition of supply quota is expected to reduce the supply and demand remaining the same, the buyers will have to pay Pb while the seller will receive only Ps, and the remaining portion (shaded portion) will be received by the government as tax revenue (Friedman 2017).
Thus, we can see that there remain different factors which affect the demand and supply of cheddar cheese in the United Kingdom, which in turn are expected to have effects on the overall price level of cheddar cheese in the market of the United Kingdom (Baaquie 2013).
Conclusion
From the above discussion, it can be seen that the market for cheddar cheese in UK is a dynamic one as the same belongs to the category of normal necessity. However, there are various endogenous as well as exogenous factors which affect the demand as well as the supply of cheddar cheese in the market of the United Kingdom considerably. While a rise in the demand leads to a hike in the level of price of the same, the decrease in demand lowers the price of cheddar cheese in the country. On the other hand, while the increase in the supply of cheddar cheese leads to decrease in the level of price of the same, the decrease in the supply of cheddar leads to increase in the level of prices of the same in the markets of the United Kingdom.
References
Baaquie, B.E., 2013. Statistical microeconomics. Physica A: Statistical Mechanics and its Applications, 392(19), pp.4400-4416.
Bauer, M.J.R., 2018. Principles of microeconomics.
Boland, L.A., 2014. Methodology for a New Microeconomics (Routledge Revivals): The Critical Foundations. Routledge.
Burgess, A., 2012. ‘Nudging’healthy lifestyles: The UK experiments with the behavioural alternative to regulation and the market. European Journal of Risk Regulation, 3(1), pp.3-16.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Findlay, C. and Warren, T., 2013. Introduction. In Impediments to Trade in Services (pp. 23-39). Routledge.
Frank, R. and Cartwright, E., 2013. Microeconomics and behaviour. McGraw Hill.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University Press.
Hildenbrand, W., 2014. Market demand: Theory and empirical evidence (Vol. 215). Princeton University Press.
Irz, X. and Kuosmanen, N., 2013. Explaining growth in demand for dairy products in Finland: an econometric analysis. Food Economics, 9(sup5), pp.47-56.
Lea, R., 2016. Post-Brexit trading options for the UK. Arbuthnot Banking Group, 4, pp.1-16.
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Marschak, T.A., Glennan, T.K. and Summers, R.S., 2013. Strategy for R&D: Studies in the Microeconomics of Development. Springer.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Riley, J.G., 2012. Essential microeconomics. Cambridge University Press.
Statista.com 2018. Volume of cheddar cheese market UK 2016 | Statistic. [online] Statista. Available at: https://www.statista.com/statistics/616968/volume-of-cheddar-cheese-market-united-kingdom-uk/ [Accessed 21 Oct. 2018].
Tahir, S., Ghazali, A. and Agil, S.O.S. eds., 2017. Readings in Microeconomics: An Islamic Perspective. In The Name of Allah, The most Beneficent, The most Merciful, p.104.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
Vel?ovská, Š. and Sadílek, T., 2015. Certification of cheeses and cheese products origin by EU countries. British Food Journal, 117(7), pp.1843-1858.
Yang, J.Y., Li, J. and Delios, A., 2015. Will a second mouse get the cheese? Learning from early entrants’ failures in a foreign market. Organization Science, 26(3), pp.908-922.

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