ASSIGNMENT COVER

REGION: BULAWAYO SEMESTER: 2 YEAR: 2023

PROGRAMME: MARKETING MANAGEMENT INTAK E: 1

FULL NAME OF STUDEN T: BENSON CAMPILA PIN: P2241868A

EMAIL ADDRESS: [email protected]

CONTACT TELEPHONE/CELL: 0785542713 ID. NO.: 25-041232E25

COURSE NAME: P/ OF ECONOMICS

COURSE CODE: BBF121

ASSIGNMENT NO. e.g. 1 or 2: 1 STUDENT’S SIGNATURE B CAMPILA

DUE DATE: 10/04/23 SUBMISSION DATE: 10/04/23

ASSIGNMENT TITLE: QUESTIONS 1 AND

2

Instructions
Marks will be awarded for good presentation and thoroughness in your approach.
NO marks will be awarded for the entire assignment if any part of it is found to be copied directly
from printed materials or from another student.
Complete this cover and attach it to your assignment. Insert your scanned signature.

Student declaration
I declare that:
 I understand what is meant by plagiarism
 The implications of plagiarism have been explained to me by the institution
 This assignment is all my own work and I have acknowledged any use of the published or
unpublished works of other people.

MARK ER’S COMMEN TS: Very good. Your presentation is in line with ZOU standards and you cited
sources very well. Minor improvements required. Keep up this standard.

OVERALL MARK: 88% MARK ER’S NAME: Murangwa S.I.

MARK ER’S SIGNATURE: DATE: 01/05/23
Question 1a

Explain three determinants of the supply of maize grain in a country of your choice (12
marks)

Introduction

Njaya and Gudyanga (2013) define supply as the amount of commodity suppliers or producers
are willing and able to supply at a given price at any given point in time. According to the law
of supply, an increase in the price of a product would result in an increase in the quantity of
that product supplied to the market, whereas a decrease in price is likely lead to a decrease in
the quantity of the product supplied to the market, ceteris paribus. Lipsey (2003) posits that
there is a direct or positive relationship between the price of a product and the quantity that
producers are willing and able to supply to the market. The determinants of the supply of maize
grain to a country such as Zimbabwe are explained below.

The price of the grain

An increase in the price of the maize grain may result in an increase in the quantity of the grain
supplied by the farmers whereas low prices of grain are likely to lead to a decrease in metric
tonnage of grain supplied to the market. This emanates from the law of supply which deduces
a positive functional relationship between the price of the product and the quantity of grain
supplied to the market, holding other factors constant. The primary reason why farmers supply
more grain through the Grain Marketing Board and other private players is the high market
prices that maize grain may fetch in the markets. This relationship is shown diagrammatically
using the supply schedule below.

Price S

P2

P1

Q0 Q1 Quantity
 The diagram above shows the supply function of a given product. An increase in the price of a
product from P1 to P2 will result in an increase in the quantity supplied from Q1 to Q2.
Explain fall in price as well.
Price or related goods

According to Beardshaw (2001), related goods can be split into complements, that is, goods
that are jointly supplied and substitutes, that is, goods that compete for the same factor inputs.
An increase in the price of other cash crops such as tobacco and soya beans may likely
contribute to a decrease in the supply of the maize grain as farmers favour the profitable options
of supplying such products. On the other hand, if the price of maize increases relative to the
prices of other substitute crops, there may likely to be an increase in the quantity of the maize
grain supplied. This is because farmers will be enticed to undertake the production of maize as
compared to other cash crops or grains.

Technology

The use of technology in the farming business has a bearing on t0.he amount of produce that
emanates and also determines the supply of agricultural produce to a country such as
Cite source
Zimbabwe. An improvement in technology, such as the discovery of high yielding varieties,
use of tractors and combine harvesters and other machines has a potential to contribute to an
increase in the maize output and ultimately maize grain supplied in the markets. A deterioration
in technology, on the other hand may likely to lead to a decrease in supply conditions of grain
in the commodity markets in Zimbabwe.

Question 1.b.

The government of Zimbabwe has regulated that all maize grain must be sold and bought
at a price above the market equilibrium price. With the help of a well labelled diagram,
discuss the effect of this price control measure (13).

A price control or price legislation refers to a set of government measures instituted to

determine the prices of goods and services in an economy. When the government feels that the
equilibrium price is too low to the detriment of the profit options of producers, it may institute
a price control in the form of a minimum producer price or a price floor (Njaya and Gudyanga,
2013).
A price floor is a form of price legislation where the government fixes or sets the price of a
product above the equilibrium price to cushion the incomes of producers. This is illustrated
diagrammatically below.

Price Market Surplus Supply

Pm Price Floor

Pe

Demand

Qd Qe Qs Quantity

The diagram above shows how a price floor results in the creation of market surplus or excess
supply of grain in the market. The equilibrium price and quantity are Pe and Qe respectively.
An introduction of the minimum price at Pm, would reduce the quantity demanded to Qd and
increase the quantity supplied to Qs. This will result in a market surplus created of the
magnitude (Qs- Qd). Price floors offer other advantages as well as other problems to an
economy such as that of Zimbabwe as explained below.

The use of price controls in the grain market is likely lead to an increase in the production of
strategic commodities such as maize. Minimum producer prices act as incentives for producers
to commit resources and other inputs to provide certain strategic commodities in an economy.
The government of Zimbabwe has over the years, set the minimum producer prices for maize
to encourage the production of the maize grains in Zimbabwe.

Price floors are also likely to protect the incomes of poor farmers who may be at a disadvantage
due to price distortions set be the market. An introduction of a price floor is likely to increase
the producer surplus, thereby increasing the incomes of poor farmers and improve their
standards of living (Mohr P et al , 2015).

The surpluses that result from price floors may be stored in grain silos at the Grain Marketing
Board to provide the government with a buffer of strategic grain reserves that may be utilised
in times of drought, thereby dealing with supply bottlenecks that emanates from natural
phenomena. In the same vein, the surplus may be sold or exported which may earn valuable
foreign exchange for the government of Zimbabwe or donated to countries where the need may
arise.

However, price floors may result in winners and losers. Those farmers that are paid at minimum
producer prices benefit whilst consumers that have to buy the products or maize grains at above
market prices lose out in the market. Similarly, price floors have been known to benefit large-
scale farmers at the expense of small-scale producers.

Mankiw (2008) contends that price floors also have drawbacks in the sense that they have the
potential of benefitting inefficient producers. Inefficient farmers that would otherwise not have
survived in the absence of such price controls, may be given a lease of life and hence these
price controls have a tendency of encouraging inefficient production.
A good discussion
Question 2.a.

Using diagram(s) illustrate the relationship between average cost (AC) and marginal cost
(MC) – (10 marks)

Average costs refer to total cost per unit of output produced and is given by the formula

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 (𝑇𝐶)

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 =
𝑂𝑢𝑡𝑝𝑢𝑡 (𝑄)

Average Costs can also be deduced as the sum of average fixed costs and average variable costs
and hence:

Average Costs = Average Fixed Cost + Average Variable Cost

The average cost curve is U-Shaped, the falling part of the average cost curve is explained by
the impact of fixed costs which are spread over a large range of output, whereas the rising part
of the average cost curve is explain by the law of diminishing returns or the law of variable
proportions. This is illustrated below

Costs

ATC

Output

The diagram above shows the U-shaped average cost curve in the short run where at least one
of the factors of production is fixed.
Marginal cost refers to the increase in total costs that emanate from the change in output, that
is, the change in total costs that results from the change in the scale of production. The marginal
cost curve is narrow U-shaped.

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑂𝑢𝑡𝑝𝑢𝑡

The marginal cost curve cuts the average cost curve from below at the minimum point of the
average cost curve. This is illustrated in the diagram below.

Costs Marginal Cost

Average Cost

Output

The diagram above shows the graphical relationship between the marginal cost and average
cost function. The marginal cost function cuts the average cost function at its minimum point
from below. More expected

Question 2b.

With the aid of a clearly labelled diagram, discuss the long run equilibrium of a firm
under perfect competition.

A perfect competition is best described as a market structure in which there is a large number
of market participants, that is, there is a considerable number of buyers and sellers such that no
supplier has the power to determine the price of the products (Piros and Pinto, 2013). The
perfect competition is composed of firms that are price takers that is the firms may only charge
the market prevailing price. The firms also sell homogenous products that are identical in
respect of quantity, packaging, branding and prices. Moreover, there is perfect information and
knowledge, which implies that no firm possess the advantage of having privileged information
in the market, and in that regard, buyers and suppliers possess the same information (Lipsey,
2003)

Another feature of a perfect competition is that there is no government intervention and factors
of production are assumed to be perfectly mobile. The firms in the perfect competition face a
horizontal demand curve where the demand is equal to the average revenue and is also equal
to the marginal revenue function. In the short run, firms in the perfect competitive market
structure earn abnormal profit (Sloman J, 2006).

In the long, the firms in a perfectly competitive market structure are attracted by the existence
of the short-run profits and due to the freedom of entry and exit into the market, the new
entrants would join in and share the profits that the existing firms have been enjoying in the
short run. Therefore, in the long run equilibrium of perfect competition, the firms would earn
normal profits as shown below:

Revenue/ Costs Marginal Cost Average Cost

P=AR=MR=D

Quantity

Q0

The diagram above shows the long-run analysis of a perfectly competitive firm where the firm
sets its output at the profit maximising level of output Q0, where marginal cost is equivalent to
marginal revenue. The firm’s average cost is tangential to the average revenue curve, giving
rise to the normal profit earned at a point where average cost is equal to the average revenue
curve.
 References

1. Sloman J (2006) Economics 6th Edition. Pearson Education Limited, England.

2. Lipsey G et.al (2003) Economics for Business and Management. Oxford University
Press.
No numbering
3. Mankiw N.G (2008) Principles of Microeconomics 5th Edition. Cengage Learning
Centre. USA

4. Ahlersten K (2008) Microeconomics. Ventus Publishing Company.

5. Mohr P et.al (2004) Economics for South African Students 3rd Edition. Van Schaik
Publishers, Pretoria, South Africa.

6. Piros C.D and Pinto J.E (2013) Economics for Investment decision makers. CFA
Investment Series.

These should be in alphabetical order