Quantity of casino usage
2] One factor is the price elasticity of demand A given per unit subsidy will result in
an increase in SS movement along the demand curve As the demand for biofuel may be considered a necessity as it is used as a fuel less than
proportionate increase in qty dd total amount of subsidy (per unit subsidy X new qty) is less than if demand was price elastic smaller impact on
government expenditure.
(d) Assess whether demand or supply factors are more important to explain the changes in the price of food.
[8]
Identify the change in the food prices.
- Based on Table 1 and Extract 1, food prices have been continuously rising until 2011.
- This can be explained using demand and supply side factors. Factors affecting the supply of food are:
- Floods in Australia, poor weather in South America, and extremely dry weather in Russia last year (Extract 1).
- Ethanol producers are using more corn for production of biofuels (Extract 1). This leads to fall in supply of food as food and biofuel crops are in competitive supply (as explained above).
- Also, rising oil prices (Figure 1), could further reduce supply of food as oil is an important resource in the production of food. The increase in price of oil will cause an increase in unit cost of production of food, causing a further fall in supply of food. Factors affecting the demand for food are:
- Demand has increased due to rising population – the world population has nearly doubled since 1970 (Extract 1).
- Rising global standards of living are leading to more demand for meat. This leads to raising more livestock, which consume a large amount of grain and adds to more stress on already tight supplies (Extract 1). Hence, as demand for meat increases, demand for food crop also increases.
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- The fall in supply (S1 to S2 in the figure above) as well as rise in demand (D1 to D2) for food has led to the rising food prices in 2011 as indicated in Table 1 and Extract 1.
The supply of food is relatively price inelastic in the short run (PES<1) as it takes time to grow the food crops and food crops are perishable commodities, making it difficult to maintain stocks of food. Hence, with a rise in demand for food crops from D1 to D2 with supply at S1, the increase in price will be more than
proportionate to the increase in equilibrium quantity, causing the ‘dramatic leap’ in food prices (Extract 1). OR The demand for food is relatively price inelastic in the short run (D1) as it is a necessity (PED<1). Hence, with a fall in supply of food crops from S1 to S2 with demand at D1, the increase in price will be more than proportionate to the decrease in equilibrium quantity, causing the ‘dramatic leap’ in food prices (Extract 1).
Conclusion:
Whether demand or supply factors are more important in determining the changes in the price of food depends on the extent of impact these factors have in explaining the price change. It is likely that the fall in supply of food is likely to outweigh the rise in demand for food as world population growth has been declining (Extract 1), whereas the biofuel subsidies have been responsible for vast quantities of grain being switched into biofuel production instead of food production (Extract 3), causing massive impacts on the supply of food. Also, major producers of food grains such as Australia, South America and Russia have been affected by adverse weather conditions, further exacerbating the problem.
Level Descriptor Marks
L3 For an answer that demonstrates analysis, with relevant evidence from the case study, along with evaluation.
7 - 8
L2 For an answer that demonstrates analysis to show how food price may increase in future, with no evaluation or judgement using the evidence from the extracts.
4 - 6
L1 For an inaccurate answer/ an answer with conceptual errors.
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(e) Discuss the policy options available to the world’s governments to address the rising food prices
[10]
Intro
The objective of the policies suggested should aim to moderate or reduce food prices which have been increasing over the past few years (Table 1). This is a problem as rising prices is inequitable and the high prices may mean that not everyone is able to afford the food which is a necessity for survival.
Demand Related Policies
(1)Reducing demand for biofuel (ext 1, 3) finding/developing alternative renewable energy sources such as solar, hydro reduce demand for biofuel more land avail for food production increase SS of food lowers prices Evaluation:
(+) energy is a necessity should not reduce production of biofuel unless there are alternatives present due to rising oil prices (Fig 1) if ss of biofuel is reduced higher price of biofuel ↑demand for oil (substitute) ↑price of oil affect price of many goods and services especially necessities like energy as unit COP rises impacts equity
(-) Long term - requires a long time before results may be seen not effective in SR
(-) Costly high opp cost involved, not all countries may have the resources, may require a global initiative to subsidise such R&D govt will need to ensure that the benefit of lower price of food outweighs the costs of lower spending in other areas such as healthcare, etc…
Note: Students should note that reducing subsidies for biofuel may not be an ideal policy as it may lead to a rise in the price of oil which is also a necessity
creating another inequitable problem.
Supply Related Policies
(3) Export restrictions (ext 2) reduce domestic prices Evaluation:
(+) subsidies is a ST solution impact is immediate addresses the inequity quickly
(-) May impact global prices, ext 2 " interfere with the global food commodity market" may invite retaliation from other countries.
(4) Investment/Subsidies into food production (ext 1,3) increases supply of food
Evaluation:
(+) subsidies is a ST solution impact is immediate addresses the inequity quickly
(+) As PED<1, a unit subsidy will result in a more than proportionate fall in price compared to increase in qty can achieve the objective of ↓prices with a smaller subsidy
(-) Subsidies is still costly, may be a burden on govt budget may need to cut down expenditure elsewhere need to weigh the ↑benefits of using the subsidy versus costs of cutting of expenditure in other areas i.e. education, etc…
Copyright © 2013 Meridian Junior College. All rights reserved. Conclusion
Due to the urgency of the problem, there may need to be short term solutions that are used to address the rising price of food i.e. price controls, export restrictions, subsidies, etc. However, such policies may cause problems such as shortages for price controls and global impact on prices for export bans.
It is necessary to also have a long term solution that targets the root cause of the food crisis i.e. increasing food production to increase food supply to ensure sufficient SS even during adverse weather conditions. Alternatively, demand for biofuels should be reduced to their impact on food prices esp in light of the projected increased in biofuel subsidies.
Level Descriptor Marks
L3 For an answer that demonstrates analysis of at least 3 policies spanned over demand and supply management, with relevant evidence from various sources in the case study, along with evaluation. A reasoned judgment is also required.
6 – 8
L2 For an answer that demonstrates analysis of relevant (1-2) policies to address the rising prices, lacking in evaluation or reasoned judgement using limited evidence from the extracts
4 – 5
L1 For an inaccurate answer/ an answer with conceptual errors with no use of case evidence.
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