1) During the last twelve months, consumer demand for organic food and drink has fallen sharply. Explain, in economic terms, the factors that are likely to have contributed to this decline Ans. Changes in aggregate demand will influence at a macroeconomic level which include the total level of economic activity, productivity. Rising productivity levels in an economy will lead to an icreased demand for labour. Government industrial relation policies will affect the demand Consumer confidence is one of the most accurate lagging indicators interpretable. As it takes time for consumers to react and respond to economic events, consumer confidence confirms patters occurring in the economy and its position on the trade cycle. Supply and demand is one of the factors pointing towards dropping organic prices, but it is only a short-lived catalyst. As the demand dwindles, so too will production. It is the other factors that will sustain the decrease.
One such factor is the effect that oil prices are having on fertilizer costs. The idea may soon become reality. Peter Melchett, policy director of the Soil Association, said, “This study suggests that as oil inevitably becomes scarcer and costs more, economic forces will increasingly favor organic farming.”
While these two factors affect the source of organic food, it is the retailers themselves who may trigger the fastest and longest-lasting drop in organic food prices. In response to the decline of sales, a looming price war may push organic food prices down to a level comparable to regular foods. (Thomas L. Friedman 2005)
The niche of people who are passionate about their organic foods will remain strong regardless of the price. When they were hot just a few months ago, many grocers and health food stores dedicated more space to stay ahead of the demand. Now that the demand has taken a dive, retailers will be trying to gain a stronger share of the shrinking market. Even Whole Foods, known for higher quality and prices to match, is reducing prices and trying to change their public image.
2) Consider an economy that produces two output goods : manufactured products and financial services. Using a production possibility frontier to explain how the output of each of these sectors has changed in response to the credit crunch and the economic downturn. Explain the resource implications.
Ans. Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.
Let's turn to the chart below. Imagine an economy that can produce only wine and cotton. According to the PPF, points A, B and ...