Economics

1.Using the demand and supply model, explain how equilibrium price and quantity of bananas are being determined in a competitive market.

Graph 1

When the product reach to the equilibrium price,the quantity that producers are willing to produce and supply in the market is identical to the quantity consumers are willing to buy,which refer to there is neither a shortage nor a surplus,and the same quantity is equilibrium quantity(Jackson et al,2009P.57).

Specifically,in graph1, the intersection of banana demand curve and supply curve is the equilibrium price Pe.While When the market price of banana is at p1,the relatively low price attract more consumers,that is ,the quantity demanded of banana will increase to Q2.On the other hand,the same low price will hold back producers to produce and provide enough bananas that the market need ,so the quantity supplied will decrease to Q1.Obviously,Q2 is much larger than Q1,hence the shortage will emerge.Many potential buyers rather to purchase it at a higher price in order to get their desire fruit which is unavailable for them now,as a result,the competition between consumers will actually bid up the price of banana,meanwhile suppliers are willing to produce a larger quantity of banana at higher price.Due to the law of demand, the quantity demanded for banana will experience a decline trend as price rise.As long as shortage exist,price will keep rising that lead to larger quantity supplied and smaller quantity demanded.Eventually price will reach a point which the quantity of supplied and demanded are equal-the equilibrium price-Pe.

There is an another situation ,the market price maybe higher than Pe,assume P2 as the momentarily price for banana.At this specific point,sellers are induced to produce a great deal of banana(Q4) whereas this will discourage consumers to purchase it(quantity demanded decline to Q3). there will be a great suplus in banana supplied in Q4 and Q3. Competing suppliers will bid down the price so as to sell out there stock to potential buyers,and more buyers are glad to buy more bananas at a lower price,the quantity demanded will increase.Since price will decrease,due to the law of supply,quantity supplied will decrease with price.The competiton between producers will keep push price down until it reach Pe,the market-clearing price.

2 Based on the same model, explain clearly why the price of bananas has increased.

Graph 2

There is an origin equilibrium price of banana shown as Pe in graph2.While nearly 95 percent bananas have been destroyed due to the wild weather(Wynne,2011),this extremely poor harvest result in the SS curve shift to the left to the S’S’.In this case,the former price Pe could only induce producers to supply Q1 quantity of bananas(S’S’),whereas the quantity demanded remain the same(Qe on DD curve).Once again there will appear a great shortage between Qe to Q1(i.e between quantity demanded and quantity supplied).As we have anaylsed before, especially given banana is quite popular fruit and enjoy great market(Wynne,2011).The price of banana will rise because of the competing customers bidding up it under the shortage condititon.Further,this will lead to a left movement along the consist DD curve as price go up,so the quantity demanded will decrease,and quantity supplied will increase.This situation will exist until price rise to a certain equilibrium point Pe’ where quantity supplied and demanded are both at Qe’ in graph 2.

In short,as farmers suffering a great loss of banana,the supply curve will shift to the left,cause a large shortage at the origin price Pe,the competiton among consumers will bid up the price until it reach a new equilibrium price Pe’.That is the reason behind the increasing price.

3．Referring to the determinants of price elasticity of demand as they apply to bananas, discuss the likely impact of this increase in price on farmers’ total revenue.

Graph 3

The price elasticity of demands are the measure of how responsive consumers’ demand quantity is to a change in the price of a product.Economists measure the degree of elasticity or inelasticity by “Ed”(Jackson et al,2009P.72).The determinants of the price elasticity of demand are the number of available substitutes,the size of an item in the household’s budget,whether the product is a luxury or necessity,and the time period involved in the product’s consumption(Jackson et al,2009P.79)..

According to the article,banana is a popular fruit and enjoy