Impact of Government Action on Sugar Consumption and Demand for Coconut Sugar

PRINCIPLES OF
ECONOMICS
STUDENT ID:
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Question 1
PART A
The newspaper article states that the government is taking an active role in discouraging the
consumption of sugar by portraying graphical images which indicate the harmful effects of
sugar consumption. This is expected to lead to a decrease in the demand for sugar. Also, it is
evident that customers are shifting to alternatives such as coconut sugar whose demand is
rising. As the decrease in demand is not price driven, hence it would lead to a shift in the
demand curve for sugar as illustrated below (Arnold,2017).
From the above demand supply diagram, it is evident that government action would cause a
shift in the demand curve from D1 to D2 as people would want to cut down on their sugar
consumption. However, in the short term, the supply of sugar would remain the same. As a
result, there is a decrease in the equilibrium quantity from Q1 to Q2. Additionally, the price of
sugar also falls from original equilibrium price P1 to P2 owing to an temporary excess created
in the market till the time the supply does not decrease in line with demand (Mankiw, 2015).
Thus, it may be concluded that based on the Australian government action and the
availability of substitute in the form of coconut sugar, there is a decrease in the demand
which would lead to decrease in equilibrium price and equilibrium quantity of sugar .
Part B
As the government is discouraging the use of sugar through increased awareness, customers
are turning towards alternatives. One of the close substitutes of mainstream sugar is coconut
sugar or ‘Kombucha’. The shifting of consumers from mainstream sugar to coconut sugar
would lead to increased demand for coconut sugar. As the increase in demand is not price

driven, hence it would lead to a shift in the demand curve for coconut sugar as illustrated
below (Krugman and Wells, 2016).
It is evident from the above demand supply diagram that the previous equilibrium for coconut
sugar has not altered since the demand curve has shifted right i.e. from D1 to D2. The supply
curve in the short run remains constant as it cannot adjust to the changes in demand.
Consequently, the equilibrium point shifts upwards leading to increase in the equilibrium
price from P1 to P2 and increase in the equilibrium quantity from Q1 to Q2 (Nicholson and
Snyder, 2015). Thus, it may be concluded that based on the Australian government action and
the availability of substitute in the form of coconut sugar, there is an increase in the demand
of coconut sugar which would lead to increase in equilibrium price and equilibrium quantity
of the same.
Question 2
PART A
The price elasticity of a given product is impacted by various factors such as availability of
substitutes, nature of good, contribution of good to the budget. With regards to coconut sugar
in the health food industry, there are a host of products and close substitutes which the
consumers can eat in their quest for healthy products. As a result, if there is an increase in the
price of coconut sugar, it is likely that the demand of the coconut sugar would undergo a
significant decline. This would imply that the demand of coconut sugar is price elastic
(Arnold, 2017). This is also confirmed from the fact that coconut sugar is not a necessary
product and thereby if the prices increase significantly, people might shift to mainstream
sugar along with other cheaper alternatives. Further, as the people become more health