Consider a market transaction that you have undertaken (or considering) as a consumer which was notable because it is particularly recent, large or unusual. Analyse this transaction from a micro-economic standpoint:
a. Explain how & why (from the perspective of the supplier), the good or service in question was created, and the reason you entered the market to secure this product or service (demand side).
b. Discuss in general terms the factors on the demand and supply side that will have influenced the price you paid for this product. Show what might happen to the price of the product if one of these factors changes.
c. Assess whether the product in question is likely to be price elastic or inelastic at the current market price. Following this assessment describe the likely impact on the supplying company’s revenue following an increase in the price they charge (ceteris paribus)
Additional Material:
Books
Economics – N. Gregory Mankiw, Mark P. Taylor 2017
Essential economics for business – John Sloman, Elizabeth Jones 2020
Additional info may be needed within the essay:
Equilibrium Analysis: Demand and Supply
Graphical representations
Elasticity Analysis
Elasticity and revenue
Knowledge and Understanding: Ability to explain the core concepts of the demand and supply theory
Professional Format and Writing Style
Referencing and Citation: Acknowledgement of sources of written and visual information
Introduction
Microeconomics is the foundation of the concepts of consumption and production decisions. It studies how firms interact continuously with the consumers towards making viable decisions concerning the allocation of scarce resources. The paper proceeds as follows: Section one reviews the reason for the creation of coconut oil and reviews the factors that affect it’s processing and manufacturing as well as the reasons for purchasing a product at a particular price. Section 2 describes the factors that determine price rates in both supply and demand side. Towards the end, it demonstrates the price elasticity of the product. It concludes through a graphical analysis of the product response to the increasing prices and revenue gained by the company.
Supply-side
How it is created
Coconut oil is extracted from dry coconut meat or pressing copra or dried coconut meat. In this state, the product is regarded as copra but otherwise using fresh coconut that yields a virgin coconut oil. The product comes in three categories; the virgin, refined, or partially hydrogenated. The conventional method regards a machine to press the dried coconut meat to release the needed oil. Small scale manufacturers can use hand tools to press a desiccated coconut to release the oil, then filter to get rid of any impurities. In large processing plants, manufacturers can use partial hydrogenation techniques to extend the lifespan of the coconut.
Why the product was created
The commodity rose in its demand when people realized the health benefits of the oil. Following the soaring celebrity, trends have endorsed coconut oil as a versatile product that can be used to reduce belly fat, strengthen the immune system, and prevent Alzheimer’s and dementia. Suppliers decided to manufacture the product and send it to the market to fulfill the following needs;
Raising demand
Grooming of hair
Many people around the world, especially medical practitioners, recognize the drug as good for hair grooming. Good hair lining accrues from the fact that the oil reduces the loss of proteins in the hairs. Millennials demanded the product due to health benefits (Salina, and Shetty, 2018).
Detergent
The consumer also appreciated product use in making soap and other detergents. The soaps made from the product have the hardness required and high solubility compared to other products. Detergents that contain coconut oil form lather easily in both hard and soft water.
Cooking
Coconut oil is also used for cooking. In Asia, coconut oils are mainly used as a product in the kitchen and continue to gain popularity significantly across the world. Asian people have a high preference for the product during frying and sautéing.
Health benefits
Over the last decade, demand for coconut oil has skyrocketed due to the emerging health benefits. Research shows that health care practitioner’s claim Coconut oil can be used as a remedy for variable conditions such as .reducing stress, preventing liver diseases, healthy skin fighting candida, dental issues, reducing eating disorders, and preventing asthma. As a result, many people have added coconut oil to their food, supplement, snacks, water, and coconut sugar to boost their immune system. Also, it is a rich source of fiber and has no cholesterol.
Demand-side
Why buy the product
Reasonable pricing
The product only costs 15 dollars per liter. This price is affordable even for low-income groups. With such price consideration, the product appeals to most people and closes the need for consumers to compare alternatives.
Tastes and preferences
Over the years, coconut oil has become a household preference for many people across the world because of its neutral taste that has no traces of food. Its versatility and uniqueness elevated it to the brand of choice for most people. Coconut oil is the most preferred commodity both in the kitchen and laundry. Due to the diverse promotional strategies, the brand is on top of the list among its alternatives.
Competitive
The product is accurately competitive. There is information symmetry regarding all its uses. The internet has all the information the customer needs to decide on whether to purchase the product. Its popularity gave a colossal level of competition at competitive prices. Besides the costs, the product guarantees satisfaction (Mankiw and Taylor, 2017, 31).
Level of income
The product is cost-friendly, thus suitable to the low and middle-income populations. The people who buy the product prefer it due to the costs and quality that accompanies it. The level of income gave the privilege to enjoy the benefits of the product.
Factors influencing the price paid for the product
Supply-side
Supply refers to the volume of goods flowing in the market at a specific price in a given period. The quantity of a product is influenced by several factors that play a role in the market. The market amount encompasses the willingness of an individual to sell a product to give a specific quantity at a particular price. In economics, supply is categorized as a function of rate and production costs (Mankiw and Taylor, 2017, 31).
Production cost
Production cost determines the supply of product in the market. When the cost of production goes down, the amount of a product supply goes up. If the production cost goes up, the suppliers are likely to cut the amount supplied due to poor prospects. Market prices are the critical determinants of the quantity. Given a circumstance where the production costs are higher than the prevailing rates in the market, then the supplier alters the prices of goods.
Several factors determine the costs of production in the coconut industry. Firstly the price of raw materials and transportation costs. When the cost of raw materials is high, the supply increases the selling price causing a significant change in the consumer price. Also, if the wages are kept high either by the government regulations or trade unions, then the production costs rise significantly, increasing consumer price (Mankiw and Taylor, 2017, 32).
Natural conditions
Climatic or weather conditions play a role in the determination of the price in the markets. During dry seasons the price goes up because of the low yield; hence the demand will be higher than supply, whereas during the rainy seasons, the yield increase, demand drops, prices fall as well as competition amongst sellers due to the flooded market.
Related good prices
Substitute price is a fundamental factor that causes a change in the supply. Suppliers usually look at the changes in the cost of the related good to determine the amount to supply at prevailing market conditions. Changes in price are directly proportional to the amount of a provided in the free market. For instance, if a good X0 increase in price and good X1 fall, then farmers go to produce good X0. When prices increase, the quantity also supplied increases. If the price goes down, the volume provided also goes down.
The market structures also play a role in determining the prices. Competitive markets such as in the above scenario play a crucial role in changing rates, but oligopoly and monopoly markets have a distinct relationship between prices and quantity supply. Another factor under the influence of the prevailing prices is speculation. In the event that the supplier predicts future higher expectations that the price of the product will appreciate over certain duration of time then it likely that the amount to be produced in the future is higher, but if the expectations encompass drop in price, the quantity to be supplied goes down (Sloman and Jones, 2020, 25).
Government and legal regulations
There exist laws and policies to regulate the purchase of goods and services to protect the interest of the public. Certain products should not be sold beyond set limits by the Government; hence this influences the product should be sold in the market whether the demand is high or low; it’s kept constant.
Demand-side
Changes in income level
The purchasing power of the product plays a significant role in determining the prices prevailing in the market. During a financial crisis, the rate of unemployment spikes as well as the costs of good. When the economy booms and most people are working, the prices of products shift up due to rising demand. Sellers reduce the losses due to the extremely favorable fiscal policies, which simultaneously influence the purchasing behavior and boost the business’s revenue. There is also optimal financial growth and capital gains when goods are offered on credit as consumers can buy the products in bulk under such circumstances (Sloman, and Jones, 2020, 27).
Competition
Substitute products in the market cause an increase or decrease in the price of production due to stiff competition. When the demand for substitute increase, then the price fall for the existing product. If an alternative loses demand, it means the other product gains market share, and prices increase.
Effects of Changes in the factors on price
An increase in production cost
Prices Supply curve
P1
P0 Demand curve
Q1 Q0
Quantity
The above graph shows a change in the price in supply influence by the difference in production cost. In this scenario, the prices increase as the costs of product shift the supply curve to the left, reducing the quantity supplied and increasing the prevailing rates in the market.
Assessment of price of product elasticity or inelastic at the prevailing price in the market
Coconut oil current price $15 per 1 liter
Price elasticity is computed by finding a quotient of the change in quantity demanded by the change in rates. If the current price is $15 per 1 liter, then when the price changes to $20 and the quantity demand falls to 0.75 liters. The price elasticity is
Price elasticity= change in quantity demand /change in price.
Price elasticity=20-15/0.75-1
Price elasticity=20
The product is inelastic since the elasticity is greater than 1. The demand does change with the prices. Prices are highly sensitive to the movement of the costs.
Describe the likely impact on the supplying company’s revenue following an increase in the price they charge
Price S1
p1 e1 S0
p2 e2 e0
p0 D
D1
Q2 Q1 Q0
Quantity
When suppliers increase the prices, then the quantity significantly falls due to the decrease in demand. The price increase from P0 to P1, and the quantity drop from Qo to Q1. In response, the demand drops, and quantity continues to drop to Q2, as shown in the figure above. Due to the drop in demand, the company will be forced to use price P2 to rescue its revenue. Their revenue of the company falls by a small margin after the interaction of the market forces. Revenue P2Q2 is the final profits the firm enjoys at the moment.
Conclusion
In summary, the paper reveals the forces acting towards determining the quantity and prices in the market. On examining the factors that may change the prevailing rate, the report finds that Supply and demand curves are very significant in the event of analyzing the performance of the product in the market. In this case, coconut oil has multiple actors that play a role in its market, and understanding this is very useful to both suppliers and consumers.
Reference List
Mankiw, N.G., and Taylor, M.P., 2017. Economía. Ediciones Paraninfo, SA. Retrieved on June 20, 2020, from https://b-ok.cc/book/5336466/a14491
Salian, V., and Shetty, P., 2018. Coconut Oil and Virgin Coconut Oil: An Insight into its Oral and Overall Health Benefits. Journal of Clinical & Diagnostic Research, 12(1).
Sloman, J., and Jones, E., 2020. Essential economics for business. Pearson Higher Ed. Retrieved June 20, 2020, from https://b-ok.cc/book/2871805/cae1f3
