Equilibrium price is the price where the market clears and that quantity demanded meets quantity supplied. There is neither shortage nor surplus. The market is in equilibrium.This is true when demand curve and supply curve intersects at point E, where it is known as the equilibrium point. At equilibrium point E, equilibrium price is PE. Should price be higher than the equilibrium price, there will be surplus and there will be a downward pressure on price till equilibrium price is reached again. Should price be lower than PE, there will be a shortage and there will be an upward pressure on price till PE is reached again.
1b. With the aid of a diagram, explain how changes in the factors described in
the article affected the price of grapes. (4 mark)
Price of grapes is affected both by changes in demand and supply factors but largely supply factors. Demand for grapes fell whereas supply of grapes increased greatly.
Demand factor:
Demand for grapes fell as a local winery has collapsed.
Supply factors:
Supply of grapes increases due to dramatic increase in plantings over the last seven years due to expansion of the industry.
Successive favourable seasons such as mild summer and minimum rain which meant little damage to the grapes
Graphically, demand curve shifts to the left and supply shifts to the right (students
might want to comment on the extent of the shifts). As a result, equilibrium point
moves from E1 to E2. Price fell from P1 to P2.
2a. Define price elasticity of demand. (1mark )
Price elasticity of demand refers to the responsiveness of quantity demanded of a good to a change in its price.
For Qn (2a) students must give definition in words not the mathematical expression.
2b. Use the concept of price elasticity of demand to explain why the
exceptional crops had not been positive for grape-growers.
(3marks)
The exceptional crops had not been positive for grape-growers because the increase in supply had caused price of grape to fall such that income of grape growers were adversely affected. This is because grapes are the main ingredient for wine and therefore it has an inelastic demand (PED<1). Thus when price of grapes fell, it would not be compensated by a proportionate the increase in quantity demanded for grapes Graphically, when supply of grapes increases greatly, ceteris paribus, there will be a rightward shift of the supply curve from S1 to S2. Price falls greatly from P1 to P2 but quantity demanded for grapes only increase slightly from Q1 to Q2. The gain in revenue ZE2Q2Q1 is much less than the loss in revenue P1P2ZE1.This suggests that there will be a fall in revenue.3. With the aid of a diagram, explain how the wine market will be affected due to the change in the price of grapes. (3 marks)
Grapes are factor of production of wine. As the price of grapes falls drastically, this means that the cost of production of wine will fall. This implies that the supply of wine will increase. Supply curve of wine shifts to the right from S1 to S2, ceteris paribus. Price of wine falls from P1 to P2 and quantity demanded for wine increases from Q1 to Q2.
4. Imagine that you are the chair person of the Riverland Wine Grape Growers Association. Evaluate 2 methods which you can adopt to prevent a recurrence of the problems described in the passage. (6marks)
Students can suggest ways to reduce the growth of industry: 1. Limit the number of grape growers in the industries by increasing the barrier of entry to limit new potential grapes growers. Examples are such as increasing payment for license fee to the Association, reducing the availability and allocation of land for growing grapes. 2. Increase the cost of production on existing grape farmers. This can be done by increasing the rental cost of land, interest of capitals and wages of labour or even through increasing of agricultural tax or decreasing agricultural subsidies This helps to reduce the supply of grapes Evaluation: May be anti-competitive in nature. May result in opposition by grape farmers Students can also suggest ways to establish new markets for grapes. 1. Embark on R&D to expand the uses of grapes so that increase in demand for grapes may help meet the increase in supply of grapes.
Evaluation: Takes time and incur large research costs 2. Explore new markets overseas to sell the excess supply of Australian grapes. Evaluation: Depends on the success of free trade agreement with partner country. May benefit Australian but not the importing country as price of grapes produced by importing country may be depressed robbing livelihood of farmers in the importing country.
