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A. To determine how a competitive market can arrive at price equilibrium, factors incorporating the demand and supply of lamb must be taken into consideration as well as the buying and selling decisions made by households and producers respectively (Jackson, et al, 2011). The lamb market is viewed as a competitive resource market where the demand curve is downward sloping and the supply curve is upward slopping reflecting the direct relationship between resource quantity supplied and prices (Jackson, et al, 2011). In order to perform demand and supply analysis, all things being equal or ceteris paribus (Jackson, et al, 2011) is maintained.
As indicated by Graph 2, the demand curve will shift to the right.
The demand curve will lead to increased prises as the demand curve moves from D1 to D2. Supply (S) remains unchanged however the Equilibrium point is adjusted and has now moved upward and to the right to where the D2 and the supply curve intercept. This indicates a rise in prices for lamb also indicates an increase in the quantity of lamb.
Quantity of Lamb (per kg/ unit)
The supply of lamb was also a factor in determining the levels of prices as farmers reduced stock numbers due to the drought which severally affected their resources. Supply factors as illustrated in Graph 3 details the relationship between supply and demand and the direct effect on prices. A shift from S1 (supply curve) to S2 shows the relationship and how the curve now moves up and left with the repositioning of the equilibrium point. The graph details the increase in price and a decrease in the quantity lamb.
The determinates of price elasticity of demand for lamb may be analysed with reference to proportion of income, substitutability, luxury and necessary goods classification (Jackson, et al, 2011).
By measuring the responsiveness of the quantity of lamb demanded to a change in price is known as the price elasticity of demand (Jackson, et al, 2011). Graph 4 details the relationship towards the quantity demanded at various price points. A sensitive approach is noticed between the movements from Q1 to Q2 and P1 to P2. This is reflected in the elasticity of demand for lamb as increased marketing campaigns domestically as well as increased global demand for lamb has seen Australian farmers fall short however this has seen the price per kilo mean extra profit for producers.
With households having a abundance of alternatives when it comes to meats, it is clear lamb could be substituted as first choice and thus greater elasticity in demand. Having seen a steady increase in Australian consumption for lamb increase and prices also increase from $15.95 in July 2006 to $27.50 /kg in March 2010, demand will likely be more elastic by occupying a greater proportion of income. Lamb could therefore almost be classified as a luxury item by consumers; lamb will naturally tend to have a higher elasticity. Other meats such as beef, turkey and chicken will tend to be more inelastic. It’s likely that analysis of the lamb market concerns a relatively small time interval, attracting a lesser...