Orange Juice Market

The law of demand and supply states that an increase in the price of a commodity will result in a decrease in the quantity of that commodity that consumers are willing to buy, ceteris paribus. While the demand for orange juice in Australia depends on discordant variables, we will focus only on the price variable. The demand for orange juice will increase as the price falls and vice versa. Alternatively, the supply for orange juice will decrease as the price falls and vice versa. Thus, for every price there is a quantity of orange juice that will be demanded which will be higher when the price is lower.

When we plot the combinations of quantity and price of orange juice in Australia based on the behavior of consumers, we get a graph known as the demand curve (D). Moreover, when we plot the combinations of quantity and price of orange juice in Australia based on the behavior of producers, that is, Daily Juice Company, we get a graph known as the supply curve (S). The point where both curves (S and D) intersect is referred to as the market equilibrium (E). It is at this point that the consumers are willing to purchase exactly as much of orange juice as Daily Juice Company is willing to sell and the market clears. This means that the demand and supply curves will continue to shift until the equilibrium price and quantity are attained.

In this case, the price for orange juice from Daily Juice Company will rise given the rise in demand for orange juice as a result of the longer, warmer summer in Australia. This means that Daily Juice Company will maintain the same supply of orange juice as before so as to meet the demand in the market. However, as a result of the increase in demand in the orange juice market, there will be an increase in prices of orange juice. This will result in a shift in the demand curve from to the right from DD to DD1. Since Daily Juice Company must increase its supply to meet the excess demand for orange juice in the market, the supply will shift to the right from SS to SS1 to form a new market equilibrium with equilibrium price P1 and equilibrium quantity Q1.

P

SS

P2                                                                                      SS1

P1

P*

DD1

                                                                                                                DD

Q

Q2          Q*                     Q1

 

 

Orange Market

When we plot the combinations of quantity and price of oranges in Australia based on the behavior of consumers, we get a graph known as the demand curve (DD). Moreover, when we plot the combinations of quantity and price of oranges in Australia based on the behavior of producers, we get a graph known as the supply curve (SS). The point where both curves (S and D) intersect is referred to as the market equilibrium (E*). It is at this point that the consumers are willing to purchase exactly as much of oranges as the producers are willing to sell and the market clears. This means that the demand and supply curves will continue to shift until the equilibrium price and quantity are attained.

In this case, there is a shortage of supply of oranges in Australia; a situation that has led to Daily Juice Company opting to import oranges from Spain. Due to the excess demand of oranges, the price of oranges will increase. This means that orange producers will have to increase the supply of oranges to meet the demand in the market. However, as a result of the increase in demand in the oranges, there will be an increase in prices of orange juice. This will result in a shift in the demand curve from to the right from DD to DD1. Since orange producers must increase their supply to meet the excess demand for oranges in the market, the supply will shift to the right from SS to SS1 to form a new market equilibrium with equilibrium price P1 and equilibrium quantity Q1.

 

 

 

P

SS

P2                                                                                        SS1

P1

P*

DD1

DD

Q

                                                            Q2           Q*                     Q1

Question 2

A

From the law of demand, the quantity of a commodity demanded responds to changes in the price. To evince how responsive quantity demanded is to a change in the price, we need to apply the concept of elasticity. The price elasticity of demand for a commodity or service refers to the percentage change in the quantity demanded of that particular commodity or service divided by the percentage change in the price of the same commodity or service, ceteris paribus. Thus:

 

eD = % change in the quantity demanded / %change in the price

Due the downward-sloping nature of the demand curve, the price elasticity of demand is always negative. A positive change in the price implies or signifies a negative percentage change in quantity demanded and vice versa. Supposes that the initial price of one liter of orange juice in the orange juice market was $1. Now suppose that the price increases to $2. What is the price elasticity of demand? A rise in the price of orange juice will result in a decrease in the quantity of orange juice demanded by consumers as shown in the graph above. Suppose the quantity reduced to 0.75 liters.

Average quantity: (0.75 +1) / 2 = 0.875

Percentage change in quantity: 0.25 / 0.875 = 0.286

Average price: ($2 + $1) / 2 = $1.5

Percentage change in price: -$1 / $1.5 = -$0.667

Price Elasticity of Demand: 0.286 / -$0.667 = -0.429

The demand for orange juice is price inelastic.

 

B

Given that the demand for orange juice is price inelastic, the total revenue will move in the direction of the change in price. This means that when the price of orange juice rises, the total revenue will also rise. However, when the price of orange juice falls, the total revenue will also decrease. When the demand is price inelastic, a given percentage change in the price of orange juice results in a smaller percentage change in the quantity of orange juice demanded. This implies that the total revenue will move in the direction of the change in price, that is, an increase in price will result in an increase in total revenue while a reduction in price will reduce the total revenue.

 

Question 3

Typically the burden or incidence of tax falls both on the producers and the consumers of the taxed commodity. However, if we want to predict the group that will bear the most of the tax incidence, we need to examine the elasticity of demand. In this case involving orange juice, the tax burden falls on the most inelastic side of the market. If the demand is more inelastic than the supply, the consumers will bear the most of the tax burden and vice versa. We have established that the demand of orange juice is price elastic. As mentioned in the article, the longer, warmer summer will result in an increase in demand. Thus, when the demand for orange juice is inelastic, the consumers will not be responsive to price changes and the quantity demanded will remain relatively constant even when the tax is introduced.