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Lambs lay a golden egg“The price of Australia’s favourite meat has risen nine per cent in the pastyear. Industry analysts predict that prices will continue to rise as thelivestock industry tries to...

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Lambs lay a golden egg“The price of Australia’s favourite meat has risen nine per cent in the pastyear. Industry analysts predict that prices will continue to rise as thelivestock industry tries to satisfy rising overseas and domestic demand.The average price for lamb cutlets in SA was $27.50 /kg in March 2010compared to $15.95 in July 2006.Regular marketing campaigns by Meat and Livestock Australia (MLA)have prompted Australians to buy more of their most popular roasts, cutletsand mince. Australians spent a record $2.3 billion on lamb last year, up 10%on the previous period according to the MLA. Lamb meat production in SAhas jumped from 20,000 tonnes to 80,000 tonnes in the last five years.At the same time global demand has risen causing an internationalshortage of sheep meat.However, many farmers have reduced stock numbers over the last decadedue to drought and others have switched their land to crops such as wheatand canola.The current market is so buoyant that some farmers are hand-rearingdozens of baby lambs that are abandoned by their mothers and wouldnormally be left to die, knowing that in spring when they are ready to sellthat they will reap a handsome return.
1.Assume that the market for lamb is perfectly competitive. Using anappropriate model (or models) illustrate and explaina. How a competitive market arrives at equilibrium (4 marks)b. Why the price of lamb has risen? (4 marks)2.Discuss the factors that affect the price elasticity of demand as they apply tolamb and make a suggestion based on your appraisal as to the likely priceelasticity coefficient. Conclude your answer with a brief explanation as tohow price elasticity influences total revenue in the light of any price change.(5 marks)3.Using appropriate models illustrate and explain the impact of a price ceilingon the market for lamb. What associated problems with occur and how willthese problems be rectified? (7 marks)
Answered Same Day Dec 21, 2021

Solution

Robert answered on Dec 21 2021
120 Votes
A perfectly competitive market is characterised by a down ward/negatively sloped demand curve and a positively/upward sloped market supply curve. A down sloping demand curve implies that consumers demand more lamb at a lower price. This is the Law of demand- keeping all other factors unchanged, price and demand are inversely related. An upward sloping supply curve implies that producers are willing to sell more a higher prices. The equili
ium is determined at E where demand equals supply. This point is equili
ium because at this point there is no incentive/ gain for the consumer and the producer. There is no gain in moving from E to any other point in the diagram.
Price of lamb
SS
P1
Pe
DD
Qe
Quantity of lamb
The above assumes that lamb is a normal good, so that its consumption falls when price rises.
To see how equili
ium is reached, consider a price of P1. At this level demand < supply. there are more buyers willing to sell as compared to consumers who demand lamb at this price. This will force sellers to reduce the amount they are willing to sell till this amount equals...
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