Due date: 23 March 2007.
1. Explain how the price of bananas is established, assuming a perfectly competitive market. use an appropriate model in your explanation. Discuss the dominant factor relevant in determining the likely price elasticity of demand and supply for bananas. (5 marks)
2. Use an appropriate model to explain how Cyclone Larry cause an increase in the price of bananas to “around $15 per kilogram”. Make sure you use your diagram to explain what the article means when it says that “many consumers could not afford to buy them”. (3 marks)
3. using the same model you have used in 1. and 2. (redraw the diagram) explain the recent fall in the price of bananas to ‘about $2 per kilo’. What do you expect to happen to the price of bananas in 2 or 3 months? (3 marks)
4. The article notes that “Retailers selling bananas have notice a big demand for them”. your textbook suggest that a large demand should result in an increase in price. Can you resolve this apparent contradiction? (2 marks)
5. Some have argued that the government should have controlled the price of bananas after the cyclone at the pre-cyclone price. Use a supply and demand diagram to analyse the consequences of such a price control. (2 marks)
Q1. Normal Price of Bananas
The price of bananas can be established using the laws of demand and supply. These laws assume a hypothetical, perfectly competitive market, in which prices normally move instantly to market equilibrium, operating with allocative and productive efficiency (Jackson et al 2007, p40, p75) (Wikipedia, 2007). This theoretical perfect competition approach in analysing the price of bananas relies on theoretical market criteria (Investopedia 2007).
The law of demand assumes all other things being equal, and consumers acting rationally so as consumption is affected by diminishing marginal utility (Jackson et al, p77). For example, buying more bananas when...