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economics123

By Curtis Hill,2014-10-16 23:19
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economics123

Introduction

    This paper was prepared with the aim to partially analyze the recent situation of ice-cream industry in Australia. It includes a discussion of the market structure and an examination of the nature of demand and supply for ice-cream by Australia consumers.

    Data monitor’s Consumer Graphics database shows that Australia spends more on

    ice-cream per capita than most other countries. Australians spent an average of $52.7 per person on ice-cream in 2004, having grown by 3.9 % on average per year since 1999. (Datamonitor, 2005) there is a huge consumer demand in Australia ice-cream market.

    Market Structure

    Australia, like most of developed countries, belongs to a mixed economy. That is to say, Australia has both private enterprise as the economic basis and government involvement as necessary supplementary means. Within a capitalist economic system such as Australia, there are four typical market structures evolved: perfectly competitive markets; monopolies; monopolistic competition; oligopolies. (Michael & William, 2003)

    Through clarifying the number of firms, the degree of product similarity between enterprises in the industry, control over price, market entry and price competition or non-price competition, we can define which type of market structure ice-cream industry is in. As we know that Australian ice-cream market is controlled and dominated by a small number of firms like Nestle (Peters), Unilevel (Streets), Cadbury and Bulla which account for up to one-third of the output. (“Melting profits”,

    2003) moreover, ice-cream offered by the producers is very close, they do try to differentiate their goods through advertising and customer services, but products are still close substitutes. In the long run, the unit price seems like constant in ice-cream market, because those producers agree not to alter prices significantly or frequently. During a certain period of time, ice-cream market had been occupied by those oligopolists mentioned above, without sufficient financial backing or specialized skills and techniques, market entry is quite difficult. (Ian, John, & Simon, 2003)

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    Given the types and characteristics of market structure and considering the marked features of Australia ice-cream industry, we can assume that the market structure for the ice-cream industry in Australia is an oligopoly.

    An Examination of Demand and Supply for Ice-cream in Australia

    During an exceptionally hot summer, ice cream manufacturers started using a new and cheaper method of ice cream production. Supposed the market is in equilibrium, how’s the effect of demand and supply and how’s the change of equilibrium price and quantity?

    Demand can be identified as the amount of a commodity that will be purchased at a given price at a certain time (Ian, John, & Simon, 2003). For example, by examining the demand schedule for ice-cream in Table 1.1, it shows how many ice-creams are purchased over a range of prices at a certain period of time. If the price of ice-cream is$1.40, then only 5000 would be purchased by customers. However, if the same ice-cream’s price changed to 80 cents, then 12500 ice-creams would be purchased or

    consumed. The graph in figure 1.1 shows a market demand curve for ice-cream according to the table 1.1.

    Table 1.1 The price relates with the quantity demanded

Price per ice-cream($) Quantity demanded

    20000 0;20

    17500 0;40

    15000 0;60

    12500 0;80

    10000 1;00

    7500 1;20

    5000 1;40

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Figure 1.1

    Through the analysis of the demand table and graph for ice-cream, the law of demand has been fully proved as when the price of an ice-cream increase, the quantity demanded will decrease; and when the price of the ice-cream decreases, the quantity demanded will increase (Ian, John, & Simon, 2003).

    Now let’s turn our attention to supply, which is defined as the ability and willingness of producers to provide goods or service at a given price at a certain time (Ian, John, & Simon, 2003).

    It is well known that producers are in business to make a profit by satisfying consumer demand for goods and service, but the relationship between producers and price is quite opposite with the relationship between consumers and price. The lower price of goods the fewer goods will be supplied to the market by producers. Take the same case of ice-cream as an example, from the information in below supply schedule in Table 1.2, how much ice-cream would producers supply to a market at various prices are quite obvious. At the highest price of $1.40 per ice-cream, suppliers are willing to produce and supply 20000 ice-creams. As the price goes down to 80 cents and then decreases to 20 cents, suppliers would only supply 12500 and 5000 ice-cream respectively. The graph in figure 1.2 shows a market supply curve for

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ice-cream according to the table 1.2.

    Table 1.2 The price relates with the quantity supplied

Price per ice-cream($) Quantity supplied

    0.20 5000

    0.40 7500

    0.60 10000

    0.80 12500

    1.00 15000

    1.20 17500

    1.40 20000

    Figure 1.2

It’s easy to arrive at the law of supply as when the price of the ice-cream increases,

    the quantity supplied will also increase; while when the price of the ice-cream decreases, the quantity supplied will decrease at the same time (Ian, John, & Simon,

    2003).

    To see how the market equilibrium of ice-cream occurs, market demand and market supply are brought together as table 1.3.

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Table 1.3 The price relates with the quantity demanded and supplied

Price per ice-cream($) Quantity demanded Quantity supplied

    0.20 20000 5000

    0.40 17500 7500

    0.60 15000 10000

    0.80 12500 12500

    1.00 10000 15000

    1.20 7500 17500

    1.40 5000 20000

    Therefore a diagram of the initial market equilibrium for ice cream as below (figure 1.3):

    Market equilibrium occurs at a price at which the quantity demanded is equal to the quantity supplied .As seen from the above diagram, there is only one price in the graph where the quantity demanded is equal to the quantity supplied, this is known as the equilibrium price and quantity of ice-cream, that is, at 80 cents and 12500 ice-creams. The demand and supply curves intersect at the equilibrium point, at that price and quantity, the ice-cream market clears. There is no surplus (excess supply) or

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    shortage (excess demand) for both demand and supply (Michael & William, 2003). In real ice-cream market, disequilibrium exists everywhere, through the adjustment process, demand and supply will tend to equilibrium at last.

    Now we turn our focus on the conditions of demand. There are many factors known as economic determinants that cause the demand curve to shift. A movement along the curve is following a change in the price of the goods itself, while everything else remains constant which indicates there has been an increase or decrease in the quantity demanded; A shift of demand curve is caused by changing the other relevant factors while the price of the goods holds the same which reveals there has been an increase or decrease in demand itself. For instance, while in hot summer, the demand for ice-cream increases, which shifting the curve to the right .Table 1.4 New demand for ice-cream under weather condition

Price per ice-cream($) Quantity demanded

    22500 0;20

    20000 0;40

    17500 0;60

    15000 0;80

    12500 1;00

    10000 1;20

    7500 1;40

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Figure 1.4 Shift of ice-cream demand curve under weather condition

    Figure 1.4 shows the market demand curve for ice-cream. During the hot weather, consumers are willing and able to purchase more ice-creams when the price is fixed. So the demand curve for ice-cream will shift to the right from D to D1, which indicates that at the same price, consumers would like to purchase more ice-cream due to the change of weather condition.

    This part of essay considers the use of cheaper method by ice-cream manufacturer, how’s the effect on the ice-cream supply by adopting new production method? Market

    supply curve shows the relation between the price of a good or service and the quantity supplied while all other economic determinants remain the same. Similarly, there are many factors may cause the supply curve to shift and lead to an increase or decrease in supply.

Table 1.5 New supply for ice-cream under improvement in technology

Price per ice-cream($) Quantity supplied (Qs)

    0.20 7500

    0.40 10000

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0.60 12500

    0.80 15000

    1.00 17500

    1.20 20000

    1.40 22500

    Figure 1.5 Shift of ice-cream supply curve under improvement in technology

    Ice-cream manufacturers discovered a more efficient technology, and implemented it into assembly production, production cost will fall, so ice-cream suppliers are more willing and able to supply ice-cream at each price. Supply increases will be reflected by a shift to the right of the supply curve. As figure 1.5 shows by adopting the cheaper production method, the curve shifts rightward from S to S1.

    Equilibrium is the combination of price and quantity at which the demand and supply exactly match. Once a market reaches equilibrium, that price and quantity will continue to change if any one of these above mentioned economic determinants changed. Therefore, by analyzing the ice-cream market, both demand and supply curves shift rightward, however, the outcome of market equilibrium becomes less obvious (Michael & William, 2003). It has three possible outcomes for the right shift of demand and supply curves.

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    First are simultaneous changes in demand and supply. Demand increases more than supply. As table 1.6 shows below.

    Table 1.6 Demand increases more than supply

    Price per ice-cream($) Quantity demanded Quantity supplied

    0.20 25000 7500

    0.40 22500 10000

    0.60 20000 12500

    0.80 17500 15000

    1.00 15000 17500

    1.20 12500 20000

    1.40 10000 22500

Figure 1.6

    As in figure 1.6, note that demand increases more than supply, demand curve shifts from D to D1, and the supply curve shifts from S to S1. Then the new equilibrium price and quantity occurs as Pe1 and Qe1. The change in equilibrium price, however, depends on the size of the increase in demand relative to the increase in supply (Michael & William, 2003).

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    Second are simultaneous changes in demand and supply. Demand increases equal to supply. As table 1.7 shows below.

    Table 1.7 Demand increases equal to supply

Price per ice-cream($) Quantity demanded Quantity supplied

    0.20 22500 7500

    0.40 20000 10000

    0.60 17500 12500

    0.80 15000 15000

    1.00 12500 17500

    1.20 10000 20000

    1.40 7500 22500

    When equilibrium price change is indeterminate, as figure 1.7 shown, demand curve for ice-cream shifts from D to D1 while supply curve for ice-cream shifts from S to S1. The new market equilibrium occurs as E1. Then equilibrium quantity also shifts in the same direction-rightward, and the effect on equilibrium price depends on which curve shifts more, in the above case, they shift equally, thus the outcome is

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