Question
In July 2012, rapeseed oil prices per tonne stood at $1200. Since that time prices have fallen. By April 2015 they were at $742 per
In July 2012, rapeseed oil prices per tonne stood at $1200. Since that time prices have fallen. By April 2015 they were at $742 per tonne. Between April 2015 and July 2016, prices hovered between a range of $820 and $750 per tonne before a relatively steep rise to $917 per tonne in January 2017. After this point, prices fell back to around $830 per tonne at the time of writing. What factors have driven these changing prices? One important factor has been the growth in popularity of rapeseed oil in cooking and other uses such as biofuels. Rapeseed oil is lower in saturated fat than one of its substitutes, olive oil, and contains chemicals which assist with blood circulation. Demand for rapeseed oil has, therefore, shifted to the right which, other things being equal, would imply that prices should have risen, whereas the overall trend in the period looked at show a fall in price of around 30 per cent. One possible explanation is that the supply of rapeseed has increased as farmers have devoted more land to the production of rapeseed. According to the Agriculture and Horticulture Development Board (AHDB), the amount of land in the UK alone devoted to rapeseed has grown from around 400 000 hectares in 1980 to around 750 000 hectares in 2012. Since that time, supply has been greater than demand, which explains some of the fall in prices from the high of 2012. In 2013/14, the United States Department for Agriculture (USDA)for example, reported production levels were around 72 million tonnes, whereas demand was around 69 million tonnes. Between 2015 and 2017, demand outstripped supply, which can help explain the rise in prices from around $750 per tonne to around $900 per tonne. Question 1: Use a graphical demand and supply framework to analyse and fully explain the changes in prices and quantity. Question 2: i) Suppose government reduces subsidies given to soft drinks' producers and at the same time the Pepsi company engages in an aggressive advertising campaign. How will these affect initial equilibrium situation in the market for Coke? ii) Explain using diagrams, how is consumer surplus related to the price elasticity of demand? (5 marks) Question 3: Explain carefully, using numerical and graphical examples how knowledge of price elasticity of demand might help a manager to increase or decrease price. Illustrate your answer by the use numerical examples. Question 4: Explain the impact of a price ceiling on producer surplus in a market where the supplier has many competitors compared to one where there is no competition.
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