Question

Read excerpts from the article below.

Essential oils quickly becoming nature's liquid gold for Australian farmers ABC News

A renewed push towards natural products in the past decade has seen oils back in business. Perfumeries and beauty brands are also snapping up Australian oils for products that claim to help with ailments, calm the nerves or simply release sweet smells. The science doesn't back up all claims in this growing community, but increasing work is being done at universities and labs across Australia to determine exactly what properties Australian plants and trees may contain. But the hype — whether it proves true or not — is generating income for farmers. […] Dee-Ann Prather's family started growing tea tree on their northern New South Wales farm in 1993. […] Ms Prather said such is the strength of essential oils, international companies are increasingly looking to buy into Australian businesses associated with the products. "We've seen many of the multinationals come in and buy up the natural companies because they have the faith in the naturals market, and that the naturals isn't a buzz; it's here to stay," she said. The Prathers have planted around two million new trees, which will be ready to harvest in two years. […]

After justifying the appropriateness of its use, use the model of perfect competition to support a discussion of the short run and long run prospects for firms producing tea tree oil, in response to the changed demand conditions.

Criteria

Explanation of suitability of model to this market

Diagram/s correctly drawn [SHORT-RUN]

Diagram/s explained and used to support explanation [SHORT-RUN]

Diagram/s correctly drawn [LONG-RUN]

Diagram/s explained and used to support explanation [LONG-RUN]

Answer 1

In the Short Run, the firm will produce that level of outpur where its price = marginal cost of the production. Note that, in perfect competition, Price = Average Revene = Marginal Revenue, and all these curves are horizontal. While, marginal cost curve is upward sloping. The point where Price line intersects marginal cost curve, that point is known as equilibrium point. The diagram is given in the attached picture.

In the long run, the demand curve will shift to the right side, as the demand for oil is rising. As a result, market price will increase. Now, the horizontal Price line or AR or MR cuve shifts upwards (shown in the righthand side diagram). The quantity produced increases in the long run. So, the price will rise and quantity produced will rise. The profits will rise.