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Economics Commentary 1

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Economics Commentary 1 The law of demand states that if the price of a product changes (ceteris paribus) the quantity demanded changes in the opposite direction i.e. there is an inverse relationship. However, in the case of fine wine, factors other than the price determine the quantity of the wine demanded. These factors are also known as the determinants of demand. Diagram 1 As the diagram shows, there has been an outward shift in the demand curve D1 to give demand curve D2. This shift results in an increase in the quantity of wine demanded from Q1 to Q2 although the price P1 remains. This shift occurs because the determinants of tastes and preferences of the consumer (color and brand label of wine) ...read more.


Thus, the producers of fine wine have greatly increased their prices as seen in the net worth of the fine wine market which is "now worth more than �1 billion ($1.9 billion)". The determinants of the price elasticity of demand for fine wine justify the price inelastic nature of fine wines. Since there are very few close substitute goods to fine wines, fine wine is a potentially addictive good, and since large amounts of company budgets are spent on branding and advertising of fine wines, the price tends to be relatively unimportant to the quantity of fine wine demanded. The law of supply states that (ceteris paribus), the higher the price of a product the more sellers will supply. ...read more.


Presently the fine wine market is growing rapidly. In the short run producers will continue to increase the prices of the wine as consumer incomes increase, costs of production are low and consumer tastes and preferences remain the same because these factors are likely to lead to a further increase in quantity of fine wines demanded. Thus, total revenues in the currently lucrative fine wine market will continue to rise. However, in the long term the price of the fine wine may become unaffordable for the average consumer thereby leading to a possible decrease in quantity demanded. Nevertheless, the fine wine producers will then tend to under-supply so as to further increase the prices only catering to the richer section of society. As a price inelastic good, fine wine will continue to be bought by the richer consumer leading to a steady margin of profit for the producers. ...read more.

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