MLF1002 Economics Assessment [30%]
Trimester 3.2024
Sanna CANDLES
The scented candle market has a low entry barrier because of its simple production process – molten wax [infused with fragrance oils & colouring] poured into a jar with a wick. The market is fast growing and very fragmented – ranging from:
1. Mass produced low-quality candles ($10+) sold in discount stores & supermarkets . . . .
2. and mass produced high-end, premium-brand candles ($40+) sold online, and in specialty homeware outlets & department stores . . . .
3. to hand poured artisan candles ($50+) by small-scale manufacturing enterprise that are usually family-run. Sold online and in specialty homeware outlets
School teacher Sanna has been making hand poured artisan candles for the past 10 years as a hobby and side “business” – selling limited quantities to loyal customers in her neighbourhood.
At the end of 2022 Sanna left her $100 000/year high-stress teaching job, obtained a business loan of $200 000 to take her business to the next level. As a sole proprietor Sanna manages her business with 2 full-time production employees from a tiny, converted warehouse in Perth.
Her hand poured artisan candles tick all the boxes for “premium quality” but retail for only $35 each [online] – attributed to her self-taught production method and relatively low operating costs.
Sanna’s production facility (including labour) has a maximum supply capacity of 15 000 units/year [60 units per day x 5 days x 50 weeks].
Sanna CANDLES’s income statement for the 2023 is as follows:
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Income
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10 000 units @ $35
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350 000
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Expenses/costs
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|
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Direct candle cost = 10 000 x $6
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60 000
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Wages
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120 000
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Interest on business loan 10%
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20 000
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Rent & utilities
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20 000
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General expenses
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10 000
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Net Profit (before tax)
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120 000
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Question 1
Draw a Demand & Supply diagram showing the starting Demand Curve (D1) and Supply Curve
(S1) of hand poured artisan scented candles in general.
a. Briefly explain your diagram’s Price Elasticity of Demand (PED), i.e., D1.
b. Briefly explain your diagram’s Price Elasticity of Supply (PES), i.e., S1.
c. Briefly identify & explain the factors that can shift the Demand curve of these candles.
d. Briefly identify & explain the factors that can shift the Supply curve of these candles.
e. On the same diagram, show where the Demand curve shifts right by more than the Supply curve shifts left, and the new equilibrium Price.
[You must clearly state all your assumptions throughout]
[Your diagram must be accurate, and completely & correctly labelled]
[Quality of explanation, about 400 words: sub-total 8 marks] [Accuracy of final diagram: sub-total 2 marks]
Total: 10 Marks
Question 2
Explain how high annual inflation (say, of 5%) can affect various aspects of Sanna CANDLES’s business especially on her income, costs and profit.
o Should address both short term and longer-term impact.
o Should address both cost-push and demand-pull inflation.
[You must clearly state all your assumptions (if any)]
[Your answer must be specific to Sanna CANDLES – otherwise, no marks!]
[Please use sub-headings, bullet-points, paragraphs, etc. to separate each point.]
[Quality of explanation, about 400-600 words: 10 marks]
Aria Foods Co.
Self-made millionaire Judy Smith started Aria Foods, a packaged-food business based in Perth 20 years ago. After several setbacks because of failed products, it is now renowned for its innovative products developed through its well-funded research & development (R & D) department.
The private business has most employees on a bonus-pay system where top performing workers are given shares in the company. As a market-leader in many food categories in Western Australia, Aria Foods has expansion plans the next 5 years - doubling its production capacity.
The company recently developed a ready-to-drink “liquid meal” made from soybean, dairy products, and rice; and is high in fibre, vitamins & nutrients. It has the consistency of a McDonald's thick milk shake and expands 100% in volume when ingested.
The ‘meal’ part of the drink consists of chewy tapioca balls similar to those found in bubble tea (“boba”). Therefore, it is more filling than any existing food drinks and the fullness lasts as long as a full solid meal – some 5 hours!
Convenient and portable, the beverage comes in patented plastic bottle that allows the drink to last up to 6 hours once opened and unrefrigerated. Both nutritional and great tasting in a wide variety of flavours, the “meal-on-the-go” beverage represents an exciting and innovative opportunity in the “liquid meal” market.
The new product was developed as a low-calorie food to address the obesity problem in Australia. Almost two-thirds of Australian adults are overweight or obese with most citing overeating as the primary cause, followed by poor food choice.
Question 3
Explain IN YOUR OWN WORDS at least 5 key characteristics (or features) of Capitalism – within the context of Aria Foods.
Also, briefly contrast these characteristics with Socialism.
[Your explanation must be specific (or relate) to Aria Foods, otherwise no marks!] [Hint: examples of two characteristics are private property and free market . . . . ]
[Quality of explanation, about 400-600 words: 10 marks]