Price Elasticity of Demand - The Price of Beef - Report Example

1. Article Summary The article with the “The Price of Beef” was about the increasing price of beef observed in the US and how the consumers and suppliers of beef were reacting to the situation. 2. Introduction Economics is not only about supply and demand but also about prices. Prices, like money, make the exchange of good and services in the market possible. If money income determines the type and quantity of goods and services that the consumers can demand, price dictates the type and quantity of goods and services that producers will supply and make available for sale in the market. Price is deterrent to consumers’ consumption spending but serves as a motivation for the producers and sellers at the same time. However, their behaviors tend to vary on the responsiveness to price changes or elasticity of the goods and services in question and can be influenced by several factors present in the economy. In the end, rationality will be the guiding principle for both the consumers and the producers in making economic decisions. This paper tries to examine the factors related to changes in price of beef and the behaviors of both consumers and suppliers of beef towards it. In analyzing price elasticity of the demand and supply of beef, discussions on market price, determinants of price elasticity of demand and supply were also made. Related articles on demand and supply of food and grains like corn are utilized to achieve the goal of producing an intelligent analysis of the issues reflected in the article. And for better understanding of some of these economic concepts, illustrated graphs were also used to help in serving the purpose. 3. Analysis A. Market Price One of the economic goals that are widely, if not accepted in our society and in many others is the price level stability (McConnell and Brue 1993). This goal aims to avoid the sizable upswings or downswings in the general price level. In a microeconomic perspective, this goal is reached when changes in the market prices are manageable and don’t hurt consumers and producers that much. As price is the quantity of money paid by the buyers or consumers and received by the sellers or producers for a unit of good or service, it is very important for it to be stable.We need to analyze market prices to extend our understanding of demand and supply and to see the relative efficiency of these in allocating resources. A rise or fall in market prices will have a corresponding effect or impact to the people in the economy. In the article, the rise in beef price inflicted by high corn prices, more exports to protein-hungry nations and the market forces of supply and demand, is causing a pain being felt by beef lovers nationwide. But since some customers like Beth Belling from Omaha are carnivore, they have to have their beef even if hurts them a little more. Retailers are also affected by the increasing beef price but they reported that they are absorbing some of the cost increases— as much as $1 a pound for many cuts of beef — to keep consumers buying. Ruth Comer, a spokeswoman for West Des Moines-based Hy-Vee Supermarkets, said that they try to flatten out the price curve as much as they can so the customers don’t experience sticker shock when they come in store. They also believe that passing price increases along is going to prompt customers to pull back and stop buying or look elsewhere. Restaurant operators also say that higher prices of beef squeeze their finances as they become reluctant to raise menu prices. B. Price Elasticity of Demand and Supply The responsiveness of supply and demand to any change in price is measured by the price elasticity. It is expressed as the ratio of the percentage change in the quantity demanded and supplied to the percentage change in price. This value will help us determine the degree of elasticity that a product’s demand or supply can have. The degree of elasticity, classified as elastic, inelastic, or unit elastic, will tell us the nature of the product (McConnell and Brue 1993). 1. Price Elasticity of Demand The elastic demand Price elasticity of demand measures the responsiveness or sensitivity of the consumers to a change in price of a product. For some products, the demand is such that consumers are relatively responsive to price changes. This means that a very small change in price will cause to very considerable or significant change in quantity purchased. We can say that demand for such product is elastic. However, consumers are unresponsive to price changes for some products. This is seen when substantial change in price creates a modest or little change in quantity purchased. Demand is inelastic in cases like this one. In instances that the change in price equals the change in quantity demanded, we say that the demand for that product is unit elastic. When presented in a graph, the typical demand curve is elastic in the high price (low-quantity) ranges and inelastic in low price (high-quality) ranges. Figure 1 Figure 1 illustrates the linear demand curve which means that the slope is constant throughout. However, the demand curve tends to be elastic in its high-price range and inelastic in low-price range. This means that expensive goods and services have elastic demand while cheaper ones have inelastic demand. In the article, the increase in the quantity of beef demanded is pushing its price higher. It seems that the demand for beef is inelastic because the consumers tend to be unresponsive to the price change. They are insensitive about the increase because they need and have to buy beef despite its high price. One of the determinants of price elasticity is the type of good or service. The demand for necessities tends to be inelastic while the demand for luxuries tends to be elastic (McConnell and Brue 1993). For the people of the US, beef is considered as one of their necessities. 2. Price elasticity of Supply The concept of elasticity is also applicable to supply. Supply is elastic if the producers or suppliers are responsive to the changes in prices and inelastic if they are unresponsive or insensitive. So in this part, we will analyze the behaviors and responses of the producers, wholesalers and retailers of beef toward price changes. The main determinant of price elasticity of supply is the amount of time in which the producer has to respond to a given change in price (McConnell and Brue 1993). The greater the amount of time producers have to adjust to changes in demand, the greater will be their output response. In this analysis, we will consider the immediate market period as the time because the immediate market period is so short that producers like farmers cannot respond to a change in demand and price. As the season outdoor grilling approaches, the quantity of beef demanded is increased but as the US Department of Agriculture reported, the supply of cattle for slaughter may decline in the coming months. This is also what exactly happened in the US last October of 2010 (Berry & Polansek 2010). Shortage in food supplies made the prices shoot up but prices of grains fell when the weather was better and inventories for US corn were increased. In the immediate market period, there is insufficient time causing the supply curve to be perfectly inelastic. This is shown by the line parallel to the vertical axis. Figure 2 Figure 2 illustrates the beef producers, wholesalers and retailers’ perfectly inelastic supply curve in the immediate market period. Because they do not have time to increase beef supplies, they cannot respond to the increase in demand for beef due to the approaching outdoor grilling season. The price increases from Po to Pm and demand curve shifts from D₁ to D₂ but there was no increase in supply. 4. Conclusion Elasticity is an extension of the demand and supply analysis. It has implications both to the consumers and producers. The price elasticity of demand varies according to the type of the good and services that consumers demand while price elasticity of supply varies directly with the amount of time producers have to respond to the price changes. The concept of elasticity may help consumers in allocating their incomes efficiently and adjusting to changes in prices of different types of goods and services. On the other hand, elasticity is helpful for producers in deciding about their pricing mechanism. Bibliography Berry, Ian, and Tom Polansek. "Grain Prices fall From Their Heights." www.online.wsj.com. October 3, 2010. http://online.wsj.com/article/SB10001424052748704029304575526452832778416.html?KEYWORDS=supply+and+demand (accessed February 23, 2011). Internet Center for Management and Business Administration, Inc. Price elasticity of demand. 2007. http://www.netmba.com/econ/micro/demand/elasticity/price/ (accessed May 10, 2010). Mankiw, N. Gregory. Macroeconomics. New York: Worth Publishers, 1997. McConnell, Campbel, and Stanley Brue. MICROECONOMICS: Principles, Problems and Policies. New York: McGraw-hill, Inc., 1993. McConnell, Campbell, and Stanley Brue. Macroeconomics: Principles, Problems and Policies. New York: McGraw-Hill Companies, Inc. , 2005. Miller, Roger LeRoy. Economics Today: The Micro View. Boston: Pearson Education Inc., 2004. Read More