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Price Elasticity of Demand Assignment

From the information above it is obvious that the choice to make when increasing the price of the fruits would be to look at papaya as it will give a higher return than an increase on the price of apples.

There are several factors that can affect supply and demand on every type of market; the fruit market is no exception. The main factor that could affect the market is the price of the product this will directly affect the demand for the product from consumers, with the increasing price elastic goods will see a fall in customers. This will be a very important factor when looking at importing exotic fruits as the tropical fruits will not have price elasticity as high as the price elasticity of traditional fruits such as apple, pears and plumbs this means that the importing company can charge a higher price for exotic fruits. Another factor that affects the sales would be the income of the consumer, if the target market has been appropriately selected then this would be made less of a concern, however, Fruits UK would see a big fall in profits if they did not research the demand of their product properly.

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Another major factor when looking at the demand of the product would be the consumers taste, this would be affected by a fashion at a particular time, if a product came into fashion the demand for this product would increase and with it the price the company charges for the product. As it is very difficult to look at apples as a fashion, it will be easier to look at fashions that indirectly affect the apples popularity, for example, in recent years it has become more fashionable to be healthy i.e. eating healty foods which are where the apple will see an increase in sales.

Expectations is another major influence on the price of a product as an increase on future demand would lead the company to increase prices before the boom in demand occurred. An example of this would be the residents of Florida, US panic buying before the recent hurricane.

If the company is to have a larger potential market this will mean there will be more demand for the product and therefore it will give them the option to increase the price of the product. The best way to do this would be to segment the market by disposable income the set a price according to what this segment will pay for the item.

As well as affecting demand, price can also affect supply – if producers can get a higher a higher price for a product they will also increase the supply if they can in line with demand. This would be hard to apply to the fruit market as there is a limited supply of fruit. The cost importing will also affect the exotic fruit entering the country if the costs are high there will be a limited supply, and if costs of importing are lower the supply of fruit will be higher.

If the government were to introduce a tax on certain fruits this would add a cost that would need to passed on to the consumer therefore lowering the demand of the product, this would mean the supplier would need to calculate whether it would make financial sense to still import the fruit.

The main factor to affect the supply of both traditional and exotic fruit would be the whether, if the is a bad summer the will be a lower supply of fruit which will keep the price at a relative high, if there is a good summer and the crop yield is high this will keep prices down, to avoid this, some producers will burn crops to keep prices artificially high, this would only apply to home grown fruits such as apples, pears and plumbs because the number of exotic fruits can be controlled by how much are imported.

Poor exchange rates and international relations could mean the price of the exotic fruit is made financially uneconomic to sell in the UK. The company may have to look at stick with traditional l fruit or changing the countries they import from.

The price mechanism will determine for the company how much of the fruit is produced or in the case of exotic fruits, how much is imported, also it will determine what fruits will be imported and who it is the traditional fruits are grown for and who the exotic fruits are imported for.

It is most important finds an equilibrium in the market; this will ensure financial security apart from external influences. One factor that would affect the price mechanism would be the prices of substitutes in the market. If the price of other apples on the market were to decrease this would force down the prices of apples that Fruit UK were selling.

However, the government would want to keep the prices high to ensure the farming industry is kept in business; an example of this is the EC’s CAP (common agricultural policy) which aims to keep the farming industry alive. Farmers would also want to keep the prices high so they may discuss price setting between companies, and also limiting supply to keep prices artificially high.

In the market for apples an papaya there will be no particular goods that would complement them, but if the consumer was buy this food they would also be likely to be buying other fruit and vegetables, if the price of other fruit were to fluctuate, there would be little affect on the apple market in particular. Only if the price of other fruit became too high for the consumers would Fruit UK see an increase in apple sale. I think that the effect on papaya would differ from apples in that if other exotic fruits come down in price people may switch to the cheaper imported fruit, this is likely to be because that the consumers market as a whole is more interested in exotic fruits rather than any particular fruit.

The weather would also have an influence on the price mechanism in the UK in that a particularly bad summer the prices would be high but they would not be able to meet the demand for the consumer so in fact they would lose out on total revenue, even though they would be selling at a higher price, in recent years it has become more fashionable would be eating healthily, this would affect the how the products are grown as they are more likely to be organically grown and is more likely to be at a higher price than other fruits, this would mean that there would be a smaller target market, meaning Fruit UK would need to be careful when setting the price they would need to find a price equilibrium.

From the graph I have drawn for the supply and demand of apples, you can see that there is no substitute for apples, obviously there will be other fruits on sale but the consumers who are buying just to have there choice of fruit, therefore ruling out any substitutes in the market.

Because apples are more of a necessity rather then a luxury as a product they are elastic meaning Fruit UK needs to find a price equilibrium for the number of apples needed by the market. If they were to fail to take this into account the company could face not enough supply to meet demand, this would affect the companies reputation making it a less reliable company in the eye of the consumer market. Failure to view and take into account the price equilibrium that if fruits UK were to import too much fruit, for example papaya, this would force down the price and in effect they would make a loss. The same could be said for the more traditional fruits such as apples, if too many were grown the price would fall, to avoid this, the right amount of apples could be destroyed keeping the prices artificially high, the right number of apples would need to be destroyed to reach the price equilibrium.

Another factor that affects the elasticity of the products and also explains the shape of the graph is the number of uses that the product has – this may not be as applicable in the case of apples, although different uses for the apples (e.g. cooking) may lower the elasticity.

Fruits UK have many of the characteristics of an Oligopoly market as it has varieties such as granny smith, le crunch and del Monte, there are around four makes of apple with a large market share and another six with smaller market shares which is a sign it is an Oligopoly.

There is one main barrier to entry in the fruit market and that is actually growing the fruit. They would need a specific type of tree that grew a fruit with a distinctive taste from any other in the market, this would be even harder if a company wanted to introduce a new exotic fruit in the market as it would need to import the fruit, which would have very high costs. Alternatively, they could grow the exotic fruits in a greenhouse which would also prove difficult and expensive.

Although all the companies essentially produce the same product – an apple – they are all distinctive with different textures and colours for example.

The only place this market does not fit in with an Oligopoly structure is that there is not much advertising from the major companies.

There are enough similarities to narrow it down to an Oligopoly structure such as the companies do not compete via price, which is true of the apple market, which mainly competes by the quality of the product and reputation of the company.

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