Sample Coursework Paper on Market Structure and Elasticity of Demand

Market Structure and Elasticity of Demand

This paper analyzes the agricultural industry with a particular focus on fruits and vegetables. Fruits and vegetables are the healthiest sources of food globally and most doctors across the globe recommend their patients to take such foods for quick recovery and to foster a healthier lifestyle. Statements about the market structure and elasticity of demand of goods in the industry will be examined using real-world hypothetical data to estimate the fixed and variable costs. In addition, the pricing policy and the marginal effects on the shift of quantity supplied arising from the industry will be examined; alongside non-pricing strategies and the impact of variable costs should the business change its course.

Market structure in economics refers to numerical figures of firms supplying the same homogeneous products (Kokemuller, 2014). There are various types of market structures depending on the field of production, for instance, fruits and vegetables fall under the category of monopolistic competition structure. In monopolistic competition, the nature of competition is imperfect whereby most manufacturers sell different types of products, for instance, in quality or branding thereby lacking perfect substitutes (Kokemuller, 2014). In monopolistic settings, the industry accepts the prices charged by competitors at the expense of their own prices. With fruits and vegetables, the market is relatively big and well established. Fruits and vegetables, such as sweet corn, spinach, and kales are very essential in daily life since it is the source of food for both humans and animals, and for this reason; the market requires such products all through the year. Unfortunately, they are only produced seasonally.

Price elasticity of demand is an economic assessment used to illustrate the elasticity culpability of the demanded quantity of services or products. There are elastic and inelastic types of elasticity demand in the market economies (Dunn, 2009). Elastic demand is one that falls or rises at the expense of the pricing strategies of the good. Fruits and vegetables tend to adopt the elastic demand of pricing fluctuations. Consumers will buy more vegetables and fruits when prices are low, for instance, during the spring season when there is more vegetable production. On the other hand, when prices shoot up like during summer when agricultural production is very low, consumers shy away from vegetables and fruits, reducing the demand. Demand for fresh vegetables is more of a necessity with readily available substitutes and as of such demand is not sensitive to income fluctuations (Dunn, 2009).

Mixed costs comprise of fixed and variable costs. Fixed costs are independent of output, remaining uniform throughout the considered range. Variable costs vary alongside input; such costs multiply with a relative constant rate to capital and labor. To estimate fixed and variable costs, let us consider hypothetical data. With respect to agricultural products such as fruits and vegetables, the fixed cost is likely to be the land set aside for plantation and the machinery used to sustain production whereas the variable cost is likely to be fertilizers, utilities, and wages. For instance, if demand for fresh kales is high, then that would mean that more fertilizers and utilities such as laborers will be required for the production of fresh kales, but if demand for kales is low, then there would be less production and only a few laborers will be needed to sustain the reduced production.

Pricing strategies have a way of relating with the elasticity of products, with constant fluctuations of prices. Consider the above discussions; farm products is produced in plenty during the spring season. During such times, the production of agricultural farm produce is readily available in the market and the prices are fair and at times even lower. Demands for such products are then high since it is readily available at a low and reasonable price. Out of the plenty production of farm produce, quantity supplied in the market will increase at affordable prices and consumer demand will increase. On the other hand, during summer when there is a scarcity of fruits and vegetables, the prices of the few available vegetables tend to rise up forcing consumers to find other alternatives resulting in a decrease in consumer demand. As a result of product scarcity, the quantity supplied in the market will reduce resulting in reduced consumer demand because of the elevated prices.

Due to the changes in pricing strategies, changes in quantity supplied will affect the marginal cost and revenue. Profit maximization refers to the short or long-term procedure used by businesses to establish the production and price that yields the highest profit (Mark, 2009). A firm can attain its climax profit if its marginal cost equals marginal revenue. Revenue is the cash received by a firm from its regular business endeavors. Marginal cost is the shift in proceeds or costs in each added production (Mark, 2009). Taking into consideration that the consumer demand is low as a result of increased prices, then the quantity supplied in the market will also reduce and this will result in reduced marginal cost and revenue. There will be no extra unit realized in the production to maximize the profit, and the industry is likely to succumb to financial challenges.

Government intervention is a non-pricing strategy that can be used to increase obstacles hindering entry. The barrier to entry refers to the hurdles that deny new competitors access to venture into business. Barriers to entry are beneficial since they protect the profits and revenues of the already existing industry from the emergence of new firms, competing in the same line of production. The government, being the sole regulator of all enterprises, dictates the types of a new industry in any given nation and as of such, some might be declined the license to run a business that already exists, thereby eradicating the chances of business competition on the already existing industry from the outside competitors.

It is however essential to note that changes can occur in any business operation, including the industry discussed in this context. The changes can arise from a mix of fixed and variable costs. The agricultural industry discussed above operates under the basis of monopolistic competition whereby an increase in quantity production results in escalated demand, and a decrease in quantity supplied results in declining consumer demand. Should the scope of this industry change, then Variable costs would alter the changes in sales. The cost of sold goods is equivalent to each unit per sale, inclusive of the material cost used in production and the labor cost used to hire the workers. Apart from the variable cost alteration, compensations based on sales volume, commissions, handling charges, and shipping can also alter the industry strategy. As of the fixed cost, there will be no alteration since the unit remains constant despite the number of entities sold.

References

Dunn, J. (2009). Fruit and Vegetable Marketing for Small-scale and Part-time Growers. Small-scale and Part-time Farming Project. Penn State University. Web. March 19 2014. Retrieved from http://extension.psu.edu/pubs/ua262

Kokemuller, N. (2014). What the Price Elasticity of Demand Shows and How Substitutes Affect       Elasticity. Small Business: Demand Media. Web March 19 2014. Retrieved from http://smallbusiness.chron.com/price-elasticity-demand-shows-substitutes-affect-elasticity-74171.html

Mark, H. (2009). Managerial Economics (12th Ed.) Mason, OH: South-Western Cengage Learning.