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    Supply and demand model

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    Now, prices of enriched wheat flour to go up.
    Cakes, cookies and buns are likely to cost more as the price of their main ingredient - enriched wheat flour is expected to rise by at least 30 sen per kilogram this month. An industry source told the new straits times that the Malaysian flour mills association had informed flour wholesalers about the inevitable price hike due to a hike in the global price of wheat. The price of wheat flour has risen by about 70 % this year. Enriched flour currently tagged at RM1.7 to RM1.8 per kg, is not a controlled item like general wheat flour which is retailed at RM1.35 per kg. It is learnt that the association is trying to keep the price hike low profile due to the sensitivity of the commodity and its impacts on consumers, especially during Ramadan. Federation of sundry goods merchants association of Malaysia deputy president Gan Choon Hin said several flour mills had spread the word about the likely price hike to wholesalers and the quantum of increase was said to be at least RM7.50 for a 25 Kg pack. This means that we will have no choice but to mark up the price of enriched flour by at least 30 sen more per kilo, he said in an interview. It is learnt that the increasing demand for wheat flour in india and china as well as the poor harvest in Australia and north America due to extreme weather conditions, had contributed to the shortage and subsequent price hike. From US$220 (RM770) per tonne early this year, the price of wheat has hit US$380 (RM1,330) per tonne this month an increase of 70%. Enriched wheat flour is generally used to make cakes cookies and buns while general wheat flour which is slightly inferior in quality is used for making fried food.
    The questions:
    Q1. Use demand and supply model to explain how world events "had contributed to the shortage" and the rise in the world price of wheat.
    Q2. Explain the determinants of the price elasticity of demand as they apply to the demand of wheat. Use your conclusions about the price of elasticity of demand to explain what they imply about the revenue that the Australian wheat farmers are likely to receive as a consequence of the poor harvest in Australia.
    Q3. Governments often impose price controls in situations where rises in the world price impose hardship on domestic consumers. Use the model you have developed in Q1 above to analyze the impact on the wheat market of a price control imposed at the original price of US$220 per tonne. In your answer you should analyze how distortions in the market caused price ceiling are resolved.

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    Solution Preview

    See the attached file. The demand curve is in blue and the supply curve is red. Because of weather conditions, less wheat was produced. This effectively shifts the supply curve backward from S1 to S2. Equilibrium occurs at a higher price and smaller quantity demanded.

    For agricultural products the demand curve tends to be inelastic. The elasticity of the demand curve is determined by the availability of substitutes and how necessary it is for survival. There are few substitutes for ...

    Solution Summary

    Use of supply and demand model to explain the world price of wheat