Answer to Question #189820 in Microeconomics for REGIN MILTON

Question

Explain the drivers of rising food prices in Australia. Use the concept of elasticity to explain the changes in equilibrium price and quantity

Answer 1

a) The law of demand applies to food just as it does to all other goods and services. The law of demand states that if the prices of the product rise the quantity demanded will decrease this is evident in itself for example if I have 100 USD and the price of one unit of food is 10 USD that means I have a capacity of consuming up to 10 units of food with each increasing unit of food my marginal utility to buy another unit of Food keeps decreasing until it reaches zero.

b) The prices of any product rise because of multiple reasons which can be increased in the raw Material prices, change in government policy, change in interest rate, overall inflation level of the economy, increase or decrease in the income of the potential buyers.

Price and the quantity will be re-determined with the help of elasticity since in the above example we find out that the elasticity is 0.4 which tells us that it is not so much elastic that one unit of increase in price will replicate to 1 unit of decrease in quantity but it is given that five units of increase in price will decrease two units of quantity or we can say that every 2.5 units of increase in price will reduce one unit of quantity demanded so the new equilibrium will find out based on this ratio only.