MAE101: Economic Principles - Economics Assignment Help

Description

Please respond to all parts (A and B) of this individual assignment. You are required to use knowledge from Topics 1 to 5 (up to Externalities and Market Failure). Please use graphs and figures when the question mentions them. Some of the questions require, as a first step, that you use the concepts learned in the unit as an organising framework to think about the problem; you are then required to do your own independent thinking based on events in the world. You are free to do reading beyond the material in the unit in such cases. However, you are not required to refer to data or findings from research studies to answer these questions. Emphasis is placed on conceptual understanding and application of those concept.

PART A

Read the article below (posted on The Conversation, May 2022), taken from 

The cost of living is on the rise. The recent Consumer Price Index (a measure of inflation of a standard basket of goods) revealed Australians’ grocery baskets are one of the biggest casualties. The latest data tell us the fruit and veg in our shopping baskets costs, on average, 6.7% more than this time last year. Some items rose by far more. A cucumber, for example, went from A$2.20 last year to A$3.70 this year. The cost of lettuce has become a touchstone during the current election campaign.

The Australian Bureau of Statistics (ABS) reports fruit and vegetable prices have gone up because supply chains were affected by the COVID pandemic (for example, border closures and loss of farm workers), floods, and international conflict (increasing fuel and transport costs). But takeaway foods only went up by 0.7%. The ABS suggests the cost of takeaway foods did not increase as much because of government-funded subsidies and voucher programs in New South Wales and Victoria.

The COVID pandemic has focused our attention on public health and government responses. But when it comes to building resilient food systems that support healthy and affordable diets for all – one of the most important actions for public health – governments struggle to act.

There is some debate out there as to whether healthy foods cost more than unhealthy options. The verdict usually comes down to how you measure what constitutes healthy food and who you talk to. Our assessments consistently tell us one thing: healthy diets are not affordable for everyone. For people who receive low incomes, healthy diets make up about a quarter of their disposable income (the money that comes into their household after taxes).

One in four Australians say groceries are a big financial stress. We’ve monitored diet prices for many years and the implications of recent fresh food increases will continue to be heartbreaking for everyday people.

During our research, one single mother living in regional Victoria told us:

People look at cost first and foremost […] Bag of chips, $1.75, carrots, hummus and celery, $6 or $7. I know what I’m going to pick if I’m in a pinch, and it definitely ain’t the healthy choice.

Another mother of two put the purchase of fresh fruit into context, saying:

My little girl likes raspberries and blueberries. And I like her to have them, they’re brain food. But they range from $4 to $7 for a punnet. And that’s a huge portion of your weekly income.

All the nutrition knowledge in the world won’t help guide healthy choices if people can’t afford healthy food.

Supermarket specials can make unhealthy, ultra-processed foods and drinks look like good value for money. We’ve previously shown unhealthy options are on special twice as much as healthy alternatives. This pattern of discounting can be particularly persuasive for people on low incomes.

Finally, making food takes time. Buying takeaway foods may save time – even though regular consumption can cost us our health.

Our food system does not prioritise the health of people or the planet. While lines for food banks are growing, discussions about removing the GST-exemption on fresh fruit and vegetables have been brewing. As we face global food crises, our governments could be planning ways to keep healthy diets affordable for everyone – for example, by increasing subsidies to keep the prices of healthy foods down.

In the Northern Territory, the Aboriginal-led Bagala Community Store has shown governments what’s possible by setting healthier supermarket pricing standards. When more specials were put on fruit and veg, consumption climbed by 100%. In New Zealand, the government provides healthy lunches to kids at school to reduce food costs for families.

Price is only half of the food affordability issue. As the cost of living rises, our incomes are spread thinner. Even though there has been talk about lifting the minimum wage, we remain far from addressing the root causes of health inequalities as we head into this election.

Healthy diets will only be affordable for all Australians if government income supports are lifted above the poverty line. Our government income support rates (provided through JobSeeker) are the second lowest of high-income countries.

1) The article differentiates healthy from unhealthy food options. Based on your understanding of the concept of elasticity learnt in this unit, which food group (healthy vs unhealthy) should have a larger price elasticity of demand? Why?

2) The article states: “But takeaway foods only went up by 0.7%. The ABS suggests the cost of takeaway foods did not increase as much because of government-funded subsidies and voucher programs in New South Wales and Victoria.” With the help of a diagram, explain:

• What the effects of a subsidy are on takeaway foods prices and quantity traded in the market. Ensure you refer to the diagram when describing these changes.
• Based on your answer in (a), why do you think, despite the 6.7% increase in the cost of vegetables and fruit, prices for takeaway foods only went up by 0.7%?

3) With the help of a diagram, explain:

• Who are the winners and losers from a subsidy on takeaway foods? Remember to include deadweight loss in your discussion (‘society’ loses from deadweight loss). Assume that the consumption of takeaway foods has no externality.
• Consider the same scenario as (a); however, imagine that the consumption of takeaway food leads to a negative externality (a burden on the health system). You can use the same diagram as (a), or draw a new one. Does your analysis from (a) change with the introduction of the negative externality?

PART B

Some of the examples and questions here are developed from: McKenzie, R. D. (2008). Why popcorn costs so much at the movies. Springer, New York.

1) Imagine a hardware shop sells fresh rolled-grass turf (sometimes referred to as ‘sod’ – see Image 1). Every morning, there’s a queue for the turf and the shop runs out of turf within half an hour of opening. Every morning, several queuing shoppers leave the shop without being able to buy any turf. The persistent existence of such queues seems to contradict the basic theory of how prices are determined in a competitive market. What does the theory say should happen in the turf market? Depict with the help of a simple diagram.

2) Despite the theory of how prices are determined in a competitive market, queues exist in a variety of settings. One reason for this could be demand uncertainty – it is difficult for sellers to predict how much demand there is for their products.

• Can you give an example of a good where demand is highly uncertain (or highly volatile)
• Why do you think demand uncertainty can explain why queues exist?
• One argument for why queues exist for turf is that they are highly perishable; i.e. the product goes to waste if it is not sold on the day. Why do you think a perishable good is more likely to result in queues?

3) In the aftermath of Hurricane Andrew (which occurred in 1992) “… big companies performed far differently than the price-gougers selling ice, water and lumber from the back of pickup trucks at wildly inflated prices…But unlike the carpetbagging vendors, who drove away at sunset, the big companies have a long-term stake in the South Florida market. For them the good will of local customers…is a valuable asset.” (Haddock and McChesney, 1994).1

• According to the theory of price determination in competitive markets, what should happen to prices of essentials such as ice, water and lumber, in the aftermath of a natural disaster such as a Hurricane? Depict with the help of a simple diagram.
• The quoted statement from Haddock and McChesney (1994) suggest that in the aftermath of Hurricane Andrew, big companies did not increase their prices (thus leading to queues and shortages), while small ‘carpetbagging’ sellers who arose to respond to the temporary shortages were willing to ‘price-gouge’ with ‘wildly inflated prices’. What do you think explains the differences in the pricing reactions of these two groups of sellers? Which pricing behaviour do you think is better? Why?

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