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Internet broadband connectionFoodEffect ofthe pricechange onhhs’expenditurePriceP 0P 1bacS 0S 1P 3P 2PriceghfS 1S 0DDOQ 0 Q 1QuantityOQ 3 Q 2QuantityAssumptions:i. The price changes are driven by ss changes ii. No substitution between the 2 goods
Part (b)1. Explain how the policy is intended to work to help stabilise / moderate increase in foodprices.The policy to release grains and frozen meat from the state stockpiles increases themarket supply, pushing prices down.Release supply from the government’s stockpile à surplus forms at current price àdownward pressure on prices as firms cut prices to rid the surplus à as price falls,quantity demanded rises while quantity supplied falls à price will continue to fall untilthe market eventually clears where quantity demanded exactly balances quantitysuppliedGraph + accompanying explanation2. Thesis: success of policy depends on PED and PESa. Relevance of PEDFor any given increase in ss, the extent by which prices fall depends on PED.Demand for food items tend to be price inelastic (more so for grains which are seen asstaple than meat). With demand for grains being more price inelastic, prices will haveto fall more to induce a large enough increase in quantity demanded to clear themarket of the surplus created by the release of supply from the government’sstockpile. The converse is true of meat.Graph + accompanying explanationb. Relevance of PESFor any given demand curve and increase in supply, the extent by which prices falldepends on PES.Supply of meat is likely to be more price inelastic compared to supply of grains. Whenthe government releases frozen meat from its stockpile, a surplus of meat (frozen andfresh) is formed at the original price. For the farmers, the need for refrigeration makesit costly for them to store meat. To continue to hold on to their stocks of animalsinvolves costs on a daily basis. For these reasons, farmers are more prepared toaccept lower prices for meat products in the face of a surplus. In contrast, it is cheaperto store grains. When there is a surplus, farmers would more readily store grainshoping to sell at higher prices in the future than to accept lower prices at the currentpoint in time. Quantity supplied of grains will therefore fall by a larger extent inresponse to any given fall in price as compared to meat.Graph + accompanying explanation
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ST ANDREW’S JUNIOR COLLEGEH1 ECON
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