Using the concept of elasticity explain the notion that sugar expenditure is “…a miniscule part

of a consumer’s income”.

Elasticity is an economic concept that indicates how the percentage change in one

variable causes a percentage change in another variable. Price Elasticity measures the

responsiveness of the quantity demanded or supplied of a good to a change in its price. Elasticity

is determined by the number of substitutes available, the proportion of income taken up by the

product and if the good is a luxury or a necessity.

Andrew Clark, in his article “ Sugar the new oil as prices soar” has presented

arguments to suggest that adverse natural conditions would impact the sugar industry and force

suppliers to make decisions as to whether to decrease quantity supplied or increase cost. How

will consumers respond to these changes in market condition? Will they see sugar expenditure as

a miniscule part of their income? Sugar consumption is a necessity in all households and

consumers would not pay much attention to the price of sugar since it is a commodity that has an

inelastic demand. Consumers would purchase the same amount of the product relative to the

price increase.

Elasticity also reveals whether firms can pass on higher costs that they incur on to

consumers. The demand for sugar is relatively inelastic, thus increasing the price of sugar leads

to a minimal decrease in the reduction of sugar consumed. If taxes are imposed, then the supplier

would pass on a higher percentage to the consumer since an increase in price would not affect

the quantity of sugar needed.The income elasticity of demand for sugar would be positive since

sugar would be considered a normal good and an increase in income will increase the quantity

demanded.
d) Based on your understanding of market equilibrium, explain the effects of the present
increase in sugar price on the market for ice-cream. Use an appropriate diagram in your
answer.

Market equilibrium is achieved when the quantity demanded is equal to the quantity

supplied and there is no tendency for prices to change. At that point, both supplier and consumer

agree at the same price and quantity, equilibrium price and equilibrium quantity.An increase in

the price of sugar, an input or raw material for ice-cream, would increase its production cost thus

causing a decrease in the quantity of ice- cream supplied at each price. This would cause the

supply curve to shift to the left resulting in an increase in the market equilibrium price and a

decrease in the market equilibrium quantity. The increase in price causes a movement along the

demand curve resulting in a lower equilibrium quantity demanded. As shown in Diagram 1, the

ice cream market equilibrium quantity for ice cream is $6 for 30 gallons supplied or demanded.

If quantity demanded is held constant, and the cost of producing ice cream increases then the

supplier would be forced to increase price and the quantity supplied would decrease. The new

equilibrium price would be $ 7.50 and the new equilibrium quantity would be 22.5 gallons of ice

cream. This would now reduce the quantity supplied by 7.5 gallons and an increase in cost to

consumers by $ 1.50.

On the other hand, if a consumer, who currently pays an equilibrium price of $6 for a

quantity of 30 gallons of ice cream demanded per day, experiences an increase in the price of ice

cream would demand less. If the quantity supplied is held constant, then an increase in the price

of ice-cream would cause a shift to the left / downwards in the demand curve. As shown in
Diagram 2, at the new price there is now a surplus of 8 gallons in the market and pressure for the

price to decrease. Hence, the consumers would be willing to pay $5 for 25 gallons per day. This

shows a reduction in both the market equilibrium price and quantity of ice-cream.

Chart Title
12

10

8
Price

0
1 2 3 4 5

Quantity ( gallons perday)