Discuss about the Bond Supply and Excess Bond Returns.
Under a perfectly competitive market of cherries, the impact of excess production of this product can be analyzed with the help of market demand and market supply curve. To describe the nature of both curves, it is assumed that other factors, for instance, income, tastes and preferences of consumers, price of related products and weather, which can influence both demand and supply of cherries, have remained constant (Kalcheva, McLemore and Pant 2018). Hence, the changes of quantity demanded and quantity supplied of cherries can be measured with the changes of its own price. The market demand curve under this perfect competition is a downward slopping line that represents an inverse relation between prices with its quantity demanded (Dueñas, Leung, Gil and Reneses 2015). This means an increase in price of cherries can decrease its market demand while the opposite situation can also be occurred. On the other side, the market supply curve of cherries is an upward sloping line, which indicates an increase in price of this product can influence its producers to supply more cherries in market. Hence, the equilibrium amount of this specified product and its corresponding equilibrium price can be obtained with the help of these two curves when they equate with each other.
According to figure 1, the market demand curve of cherries is represented by D0 line with a negative slope. On the other side, the initial market supply curve of this product is represented by S0 line, which has a positive slope. Hence, Qe represents the equilibrium amount of cherries in the market while corresponding equilibrium price is represented by Pe. After the bumper-growing season, the total amount of cherry production has increased significantly; that in turn has led the supply curve to shift rightward (Greenwood and Vayanos 2014). This implies that at the same price level, producers can supply more amounts of cherries. This phenomenon is represented in the above diagram, where S1 represents the new supply curve of cherries and consequently the equilibrium amount of that product has changed along with its price. As supply of cherries increases with its stable market demand, the equilibrium amount of that product has increased by Qe Q1 unit while the market price has decreased by Pe P1 unit. Hence, it can be stated that people can receive more amount of cherries with lower prices.
The change in market price of cherries can affect its two related markets that deal with related products of cherry, which are, labor market and complementary one. Due to the huge production of cherries, the market has demanded more labors to pick this fruit, which in turn has increased the demand for them (Altug and Kabaca 2017). Moreover, this increasing demand of labor can help the wage to increase further. This implication can be explained with the help of a diagram by shifting the demand curve labor to the right.
In the above diagram, the change in demand for labor in cherry market has been drawn. Through shifting the demand curve to the right, the diagram has represented the increasing demand for them. As the supply curve of those workers has remained stable, this increase in labor demands by with Q0 Q1 amount has led the wage to increase further by W0 W1 amount. Hence, the decrease in price of cherries due to its over production has influenced the wage of labor to increase further at a fixed supply level.
The impact of price change can also be described in the market of complementary products. For those products, change in price of cherries has led the change in quantity demanded of its complementary goods in the same direction. For instance, an increase in price of cherries can lead the demand for its complementary products to decline while the opposite situation can also be occurred if price of cherries has decreased (Ahmadi, Skiera, Lambrecht and Heubrandner 2017). Cakes, that include cherry, can be considered as complementary products of this specified item. Thus, the decrease in price of cherries may increase the demand for this product and consequently can increase the demand for cakes. In this context, it can be assumed that other factors that can influence the demand for cakes, like its own price, income and tastes of consumers have remained fixed. That means the demand for cakes can be varied only when the price of cherries have changed. A suitable diagrammatical representation is required to explain this concept deeply.
It can be stated from the above figure that decrease in price of cherries has helped the demand of cakes to increase by Qf0 Qf1 unit, when the price of this complementary product has remained at its stable position. This in turn has implied that people are demanding both cherries and cakes by higher amount when the price of cherries has declined.
Price elasticity of demand measures the degree of responsiveness for a product’s change in quantity demanded when its own price has changed. To measure this value, it is assumed that other factors that can influence the demand for this product has remained stable. Hence, the value of price elasticity can be determined as percentage change in quantity demanded by percentage change in its price (Coglianese, Davis, Kilian and Stock 2017). From the given case study, it can be estimated that the amount of cherries has been increased by 20%, as the average production of cherries has remained about 15000 tons for the last few years, while at present; this amount has increased, that is, almost 18000 tons. Moreover, this increasing supply of output can led the price of cherries to decrease by 10% to 20%.
Price elasticity for cherries = percentage change in quantity demanded for cherries/
Percentage change in its price
Hence, it can be stated that percentage change in quantity demanded for cherries and percent change in price of that product has almost same value that is 20% (Zhao 2017). By considering this, it can be stated that the price elasticity of demand for the concerned product is unitary elastic, which means, the amount of price change and its quantity demanded has the changed by same amount.
As the value of price elasticity of cherries is equal to 1, this implies that decrease in price has increased the amount of quantity demanded by same amount. As the production of cherries has increased significantly, its price has decreased by large amount, which in turn can help the consumers to buy this product at a lower price level (Levy, Norton and Smith 2018). This decrease in price has led the total consumption expenditure to increase if consumers demand more amount of cherries for its lower prices (Chen 2017). This in turn has increased the total income of the country by increasing its total demand (Attanasio and Pistaferri 2016). Hence, consumers can obtain surplus value in market. This can be explained with the help of demand and supply diagram.
Consumer surplus in cherry market is represented by the area of triangle ABPe. To purchase one unit of cherry, consumer can pay Pe amount while the concerned person wants to pay A for the same amount of output. When the price of cherry has decreased more, to purchase same amount, the concerned person needs to pay fewer value compare to before. Hence, thus phenomenon has influenced consumers to enjoy more amount of consumer surplus. This in turn can influence them to demand cherries by large amount and consequently, the total demand of this fruit can be increased further.
References:
Ahmadi, I., Skiera, B., Lambrecht, A. and Heubrandner, F., 2017. Time preferences and the pricing of complementary durables and consumables. International Journal of Research in Marketing, 34(4), pp.813-828.
Altug, S. and Kabaca, S., 2017. Search frictions, financial frictions, and labor market fluctuations in emerging markets. Emerging Markets Finance and Trade, 53(1), pp.128-149.
Attanasio, O.P. and Pistaferri, L., 2016. Consumption inequality. Journal of Economic Perspectives, 30(2), pp.3-28.
Chen, H., 2017. The Effect of Life Cost to Consumer Expenditure Behavior. International Management Review, 13(1), p.85.
Coglianese, J., Davis, L.W., Kilian, L. and Stock, J.H., 2017. Anticipation, tax avoidance, and the price elasticity of gasoline demand. Journal of Applied Econometrics, 32(1), pp.1-15.
Dueñas, P., Leung, T., Gil, M. and Reneses, J., 2015. Gas–electricity coordination in competitive markets under renewable energy uncertainty. IEEE Transactions on Power Systems, 30(1), pp.123-131.
Greenwood, R. and Vayanos, D., 2014. Bond supply and excess bond returns. The Review of Financial Studies, 27(3), pp.663-713.
Kalcheva, I., McLemore, P. and Pant, S., 2018. Innovation: The interplay between demand-side shock and supply-side environment. Research Policy, 47(2), pp.440-461.
Levy, H.G., Norton, E.C. and Smith, J.A., 2018. Tobacco Regulation and Cost-Benefit Analysis: How Should We Value Foregone Consumer Surplus?. American journal of health economics, 4(1), pp.1-25.
Zhao, W., 2017. The unitary elasticity property in a monocentric city with negative exponential population density. Regional Science and Urban Economics, 62, pp.1-11.
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