PART ONE (LO 2)

Analysis of Market Behaviour Applying Demand and Supply Model

Answers 1. (a), (b) and (c)

Price
NZD 5.5
NZD 5

(b)

NZD 4.5
NZD 4

NZD 3
(c)
NZD 2
demand,price being same

Decrease in income decreases

NZD 1
Quantity
0

100 or <

<1000

1000 or <

(c) Customer Preference, Increase or decrease in income, Increase or decrease in

population size etc.

Answer 2- Market Equilibrium

a) Market equilibrium is a market state where the supply in the market is equal to the
demand in the market. The equilibrium price is the price of a good or service when the
supply of it is equal to the demand for it in the market. If a market is at equilibrium, the price
will not change unless an external factor changes the supply or demand, which results in a
disruption of the equilibrium.
Supply, Demand and Equilibrium

If a market is not at equilibrium, market forces tend to move it to equilibrium. Let's break this
concept down.

If the market price is above the equilibrium value, there is an excess supply in the market
(a surplus), which means there is more supply than demand. In this situation, sellers will
tend to reduce the price of their good or service to clear their inventories. They probably
will also slow down their production or stop ordering new inventory. The lower price
entices more people to buy, which will reduce the supply further. This process will result
in demand increasing and supply decreasing until the market price equals the equilibrium
price.

If the market price is below the equilibrium value, then there is excess in demand (supply
shortage). In this case, buyers will bid up the price of the good or service in order to
obtain the good or service in short supply. As the price goes up, some buyers will quit
trying because they don't want to, or can't, pay, the higher price. Additionally, sellers,
more than happy to see the demand, will start to supply more of it. Eventually, the upward
pressure on price and supply will stabilize at market equilibrium.

Answer 3.
Price elasticity of demand is the responsiveness of QD of a good or service to its
change in price, calculated by using midpoint method:
= 700/ (1800+1100)/2 /1/(12.49+13.49)/2
= 0.483/0.0770
=6.27
The calculation showed that free range pork had a coefficient greater than one,
so is very elastic. I consider free range pork (Freedom farms) to be an elastic
demand (elastic demand is when the price of a good changes by a certain
percentage and the QD changes by a greater percentage, QD is very responsive
to price change). I think pork is elastic as it is a luxury good, not a necessity.
Because of the availability of substitutes for free range pork it makes the
demand for the free range pork more elastic as people switch to the substitutes,
like NZ produced pork (Hellers) or imported (Ryans pork). I am able to show this
using the idea of cross elasticity of demand, for example if the price of NZ
produced pork increased when the sow stalls are banned the demand for free
range pork and/or imported pork would increase, therefore I would expect the
coefficient to be positive. Cross elasticity of demand is the responsiveness of QD
of a good to changes in the price of another good (usually a substitute or
complement) this can be calculated by using the formula Exy= %change in QD of
x/% change in price of y If the price of pork increases there is a more than
proportionate decrease in the QD, because it is an elastic good. The slope of the

curve is more flat compared to an inelastic curve where the slope would be
steeper.
Name of pork Price

per 400g

Free range (Freedom Farms)

$12.49

Imported (Ryans)

$4.50

NZ produced (Hellers)

$6.66

Answer 4.
Part TWO - Profit Maximisation (LO 3)

References
http://market.subwiki.org/wiki/Demand_curve
http://education-portal.com/academy/lesson/market-equilibrium-in-economics-definitionexamples-quiz.html
http://www.nzqa.govt.nz/assets/qualifications-and-standards/qualifications/ncea/NCEAsubject-resources/Economics/91401-B/91401-EXP-B-student6-001.pdf