Background: In 2018, a newspaper article reported “more and more Aussie drinkers are choosing mid-strength beers and non-alcoholic beverages over full-strength brews”. The article described how per capita consumption of alcohol was declining in Australia, but that sales were increasing for mid-strength beers and non-alcoholic beverages. The article stated these trends were driven by millennials (consumers between the ages of 18 to 34) drinking less alcohol per capita than for older aged groups. In their choice of drinks, millennials were more likely to consider new craft beers and ” health factors such as low carb, calories, vitamin-fortified and organic as very important” factors in decision making.
Using competitive market theory (as taught in Module One) explain what will happen to the equilibrium price and equilibrium quantity for full strength beer as a result of a change in tastes to mid-strength beers and non-alcoholic beverages.
To meet the requirements of the Marking Guide, students are strongly advised to complete the following steps: Assume illustrative figures and prices only.
1. a) Create imaginary demand and supply curves for full-strength beer before mid-strength beers and non-alcoholic beverages became more popular. Use illustrative figures with scales on axes, label all curves and axes, identify the equilibrium price and quantity and create a diagram heading. Diagrams (including computer generated) which do not have all these features will not be awarded full marks.
b) Replicate the same demand and supply diagram now showing how the equilibrium price and quantity for full-strength beer has changed after consumers have shifted their preferences to mid-strength beers and non-alcoholic beverages. Include all labels. 2. Choose and fully explain the relevant demand or supply determinant that initiated the pricing and production quantity change for full-strength beer. Ensure you cite numerical examples from your second diagram to explain and illustrate the change. Explanations which do not example quantity changes at given prices will not be awarded full marks.
3. Using competitive market theory, explain fully the ‘market force’ that caused the equilibrium price and quantity for full-strength beer to change. Students in their written descriptions are expected to refer to figures in their second diagram. Explanations which do not explain the relevant market force in operation and example quantity changes at changing prices will not be awarded full marks.
4. On a third diagram, show with supporting written commentary, what other circumstances/determinant/variable would need to have changed to allow the equilibrium quantity for full-strength beer to remain unchanged in circumstances of a change in tastes to mid-strength beers and non-alcoholic beverages.
Using the prompts below (which closely align with the Marking Guide), make informed comments about the price elasticity of demand for full-strength beer. Task:
1. (i) Explain what the ‘price elasticity of demand’ for full-strength beer means.
(ii) Using the price elasticity coefficient formula, calculate the price elasticity of demand for full-strength beer using the following imaginary data: (Note: do not use the ‘mid-points price elasticity of demand’ formula, show all workings). Year Average beer price* Quantity of beer sold (‘000 litres**) 2016 $47.00 75,371 2017 $50.00 72,778 (*price for a typical ‘6 pack’ or carton of full-strength beer in 375mL bottles) (** for the purposes of this exercise, ignore the ‘000 reference)
(ii) From your data above, state was the type of price elasticity of demand faces full-strength beer.
(iii) Explain what the term you have used above means.
(iv) If the beer industry wanted the quantity demanded of beer to increase 10%, assuming your Ed score, in what direction and by how much exactly would beer price levels need to change? Show workings.
2. Assume the government is considering increasing taxes on full-strength beer sales to raise revenue. Using the appropriate ‘total revenue test rule’ in conjunction with your answer from
(i) above, explain whether tax revenue will rise or fall following the tax increase.
3. Explain two reasons why for different groups of people the price elasticity of demand for full strength beer could be elastic OR two reasons why the price elasticity of demand beef could be inelastic. Define all terms used.