Module Title: Microeconomics
Assignment Title: (a) Using Demand/Supply analysis and the concept of elasticity, analyse the adjustments in the United Nations Food Price index the period 2008-2014. In your answer provide explanations for the changes in this index over time.
(b) Suggest two possible government interventions that could occur during periods of rising food prices and discuss the advantages and disadvantages of each one.
Tutor Name: Zivile Zekaite
Student ID Number: 2200428
Date of Submission: 9th March 2015
Vegetable oil is used for human food, which represents over 80%, and also utilized for industry use like soap, paint, plastic, biofuel and other inedible products. Since healthy care and environmental protection gains more social attention currently, people concerned more about the price of healthy edible vegetable oil and energy biofuel. Due to the reason above, this essay will attempt to analyse the factors influenced vegetable price from 2008 to 2014 by use demand/supply analysis as well as the concept of elasticity, and suggest two possible government interventions to avoid rising vegetable oil price.
Here are the changes of vegetable oil price overtime. As it shown in the Figure1.1, vegetable oil prices have more than doubled from March 2007 to February 2008. However, the vegetable oil price rapidly declined to about the 2006 level by early 2009 and had an upward trend of price next year. (Frank et al, 2009:14) Moreover, according to the edible vegetable oil price index published by FAO(2015), Figure1.2 shows that the edible vegetable oil price experienced a sharply decline from 227.1 at 2008 to 152.8 at 2009, which reached the bottom in the period of 2008-2014, and then a trenchantly climb, back to its peak of 254.5 at 2011，following a mild decrease until 2014.
Source of the data: www.fao.org/worldfoodsituation/FoodPricesIndex
Based on the history price of vegetable oil, there are two obviously changes of price need to be focused. First, as we can see from figure 1.1, there was a sharply decline from July 2008 to April 2009, which was considerably related to the price increase from August 2007 to June 2008. Second, as is shown in Figure 1.2, the vegetable oil price faced a gradually decline since 2011 to 2014. Therefore, here are the influence factors of these two changes below.
There are extraordinary factors caused the price increased from 2007 to early 2008. To beginning with, Figure 1.3 shows the crude oil price increased 50 to over 140 $US per barrel (Frank et al, 2009:14). With the rising price of crude oil price, the quantity demand of crude oil price decreased. According to Parkin et al(2014), Figure1.4 shows that when price of crude oil increased from P1 to P2, assume everything else remains the same, the quantity demand of the crude oil decrease from Q1 to Q2, and there is a movement along the demand curve. As the subsitutute of vegetable oil, the decrease of crude oil demand caused the increased of vegetable oil demand because price of related good is one of six main factors change demand. Figure 1.5 illustrates that when demand of vegetable oil shift right from D1 to D2, the vegetable oil price increased from P1 to P2(Parkin et al2014). As a result, the price of vegetable oil went up. Figure1.3
In addition, as the international currency, the decrease of the value of US dollar was inevitable lead to the reduction of import, and affected export in certain countries. Frank et al (2009:14) claimed there were export restrictions in certain countries as a response to expected global shortage. For instance, some of the countries banned exports which leaded to the decline of the supply.
Flammini (2008:4) states that another reason caused