Economics Ib Hl - Personal Commentary 1

Topics: Supply and demand, Inverse demand function, Economic equilibrium Pages: 5 (822 words) Published: October 11, 2011

• Name: Johanna Troedsson

• School: SöderportgymnasietSchool #: 1216

• Commentary #: 1

• Referring to section 2 of the syllabus

• Date written: 3rd of February 2011

• Date of article: 18th of January 2011

• Source:, 1/18/2011, 14.30

• Wordcount: 731 words

Commentary Number 1

The food prices in our world are on their way up to a level almost impossible to manage. As we try to become more environmentally friendly, we have started to reallocate our resources, especially from food to fuel. According to an article published in Dagens Nyheter, this is together with the growing population and poor weather the greatest reason for the increasing food prices. [pic]

The size of the population is one of the factors affecting the demand, which is defined as the quantity of a good or a service that consumers are willing and able to purchase at a given price in a given time period. As the population of the world grows, so does the demand for food. And as we aim at becoming more environmentally conscious, we tend to prioritize environmentally friendly fuel over our basic food by using food to produce fuel. This does also contribute to the increasing demand for food, which causes the demand curve to shift to the right, from D to D1 as shown in the diagram above. And as the curve shifts, a new equilibrium must be reached by raising the price from P to P1 in order for demand and supply, which is defined as the willingness and ability of producers to produce a quantity of a good or a service at a given price in a given time period, to be equal.

Given that the price is raised it will become more favourable for producers to increase their supply, referring to the Law of Supply which states that “as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus (all other things being equal)”. If the producers are able to increase their supply, the prices might decrease as Lennart Båge, President of the United Nations Fund for Agriculture Development (ISAD) states: “the prices might drop slightly when the access is rising due to demand”.

With the opportunity of making a greater profit when supplying, many producers would probably like to increase their production as the prices on the market rises. This would move the supply curve to the right, from S to S1, lowering the price from P1 to P and thus reaching a new equilibrium at price P and quantity Q2, as seen in the diagram above. But due to poor weather and other factors affecting the agriculture, it might be hard to raise the supply. The use of transgenic or artificial fertilizer may simplify and increase the production, but considering our western world’s negative opinion towards these kinds of accommodations, it might be hard to carry out and to make profits. [pic]

Another way of reducing the prices might be price controls. Often when it deals with basic food commodities, the government might interfere by setting a maximum price which is below the equilibrium price and prevents producers from raising the price above it. This will enable the poor to afford the food, but due to the change in price, the demand will shift to the right along the curve. As seen in the diagram above, there will now be an excess demand at price PMax, as the quantity supplied is Q while the quantity demanded is Q2. This excess is most appropriately solved by increasing the supply, shifting the supply curve to the right from S to S1, which is blue and crosshatched on the diagram in order to make it easier to imagine the situation without the S1 curve. Now a new equilibrium is reached at Pmax and Q2. Increasing the supply can be done by the government in several ways, for instance by offering subsidies to firms and industries producing the product, giving them an opportunity to increase their production. But according to Lennart Båge,...
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