Demand, Supply, and Market Equilibrium - Case Study Example

Overview: Sugarcane cultivation and associated industrial paraphernalia contributes roughly two and a half billion dollars to the Australian economy. The industry has aged over a century now in Australia and it has proved to be a key mechanism for growth and progress of many coastal communities. Moreover, it has played a vital role in economic stability of rural areas of Australia. Issues: When it comes to sugar industry in Australia, it is difficult to complete the analytical discussion without taking “CANEGROWERS” into consideration. It is a leading representative forum for Australian sugarcane growers.  Around 80% of Queensland sugarcane growers are members of this forum which in fact is a representation and services group. Based in Queensland, the State that produces around 95% of Australia’s raw sugar output, the CANEGROWERS National Office represents the interests of cane growers Australia wide. (CANEGROWERS Constitution, 2006) Government and business leaders recognise CANEGROWERS as the authoritative voice of cane growers. Membership ensures that growers' needs are represented at the highest possible levels of industry and government decision-making. We safeguard growers' interests on all issues likely to affect their business. The given case study highlights the aspect of quality in this industry. The industry is viewed as one of the most progressive in the world.  It has channelled huge amounts of time and energy into research and development, continually looking at ways of farming better to protect the land and surrounding environment so that growers can continue to plan to make a living from their farms for generations to come. Analytical Approach: This assignment endeavours to take a closer look from the economic perspective to the aspect of quality and associated technological advancement in this industry. The discussion in this regard will be undertaken by answering series of relevant questions as under: Question 1: What is the significance of the quality assurance comments made by the speaker in the case of the sugar industry? What sort of ‘quality assurance’ activities does CANEGROWERS undertake on behalf of individual sugar cane producers; and to what end? How will you explain this in economic terms? It is very significant to interpret the logical relationship between quality of sugar produced and rate at which it is sold. Today, the Sugar Industry continues to improve its processes and quality management systems in order to satisfy consumers' increasingly high expectations and demands. Consumers expect food quality not only in terms of nutritional criteria but also expect their foods to be safe - with strict adherence to codes of good practice (The World Sugar Research Organisation). Further, the comment is also significant as the price competitiveness of sugar is based quality or the amount of impurities present in it. Being a commodity, the quality of sugar becomes the differentiating factor which decides its price quality equilibrium in the market. Various sugar mills apply quality assurance methodologies so as to keep the quality of their output under check. The given case study has given a comparative overview of an old quality assurance process vis-à-vis a modern quality management technology. Although it is generally considered that improving quality will result in increasing cost, this is not necessarily the case in modern quality management. In the past it was generally believed that high quality would come only with high cost. Today, with the concept of total quality management, we have learned that high quality actually reduces overall cost. Thus even on the same amount of sugar processed, which actually a limitation on capacity of the mills, the higher price on grounds of higher quality can result into higher revenue and hence profits. CANEGROWERS, being a representative forum for Australian sugarcane growers undertake various quality assurance activities on behalf of the individual cane growers. The prominent among them are cane testing and negotiation of cane and sugar quality schemes (CANEGROWERS Membership Brochure). These quality assurance initiatives are often quite costly to be undertaken by individual can growers or the sugar mills. However, this cost gets distributed among all the members when it is being undertaken by CANEGROWERS. Thus the profitability of individual firms and cane growers increases when the higher returns on account of good quality is compared with the investment made in the quality assurance technologies. Further, from a perspective of whole Australian sugar industry, such collaborative initiatives undertaken by CANEGROWERS helps in forming a good reputation in the international market when exports are taken into consideration. Question 2: Why is it in the interests of individual firms to support an industry association such as CANEGROWERS? Justify your answer. CANEGROWERS, being a representative forum for Australian sugarcane growers undertake various activities which cover every aspect of the sugar industry. The range of these activities is so broad and deep that the extent of their volume and cost associated with them is beyond the scope of any individual firm. It is logical to understand that the total cost associated with these activities gets distributed among various individual members which make these undertaken activities cost effective. Moreover, it is also appreciated here that the dissemination of information or knowledge sharing is uniform and equally accessible by each individual. Thus the competitive platform becomes uniforms and it depends on individuals to decide the strategies based on this information so as to develop individual differentiators (Scherer and Ross, 1990). Irrespective of the earning capability, the amount and extent of information pertaining to these initiatives are available to the each contributing individuals. This serves as a mechanism to realise the condition of perfect competition (Cate and Richard, 1999). Question 3: What factors does the sugar industry have to consider when determining the equilibrium price and quantity of supply and demand for sugar? Illustrate and explain. The equilibrium price can be defined as the price that balances quantity supplied and quantity demanded. The equilibrium price is often referred as the "market-clearing" price because both buyers and sellers are satisfied at this price (Case and Fair, 1994). While determining the equilibrium price, both the demand as well as supply of sugar has to be taken into consideration. The industry will have to take a macroscopic view of the total actual or expected annual production of the sugar. This will decide the smoothness of supply in the market. In case the production has not realised, then expected production will be affected by various factors like installed capacity of sugar mills, the environmental factors like rainfall or probable natural calamities. The supply will also be affected by the state of logistics i.e. means and modes of goods transport available and connectivity of the farm and the mills to the agriculture produce market. There are possibilities that there might be imports of sugar in the country which again is one of the important factors for determining the supply. The holistic picture will take note of all these aforementioned factors and then will predict the state of supply of sugar for the whole industry. Now coming to the demand side, the demand will affected by both domestic as well as well export demand. The demand of sugar generally has fix component which is derived out of its day to day use. However, the demand also has a seasonal component which is affected by festivals and celebrations like sudden hike in sugar consumption during Christmas celebrations. Similarly, the export demand also varies as per the demand variation in the country of import. Accordingly, the holistic assumption of the expected demand can be arrived at. Taking into consideration the assorted factor inputs for supply and demand of sugar, the equilibrium price can be arrived at. Practically, there will be a zone of surplus and scarcity between which the equilibrium price will keep fluctuating. Question 4: How is the elasticity of demand concept useful for the Sugar industry? Illustrate. Price Elasticity of Demand (PED) is an economic parameter which measures the responsiveness of demand for any product or services following a change in its own price and is mathematically represented by co-efficient of elasticity of demand which in turn is calculated as “Percentage change in quantity demanded divided by the percentage change in price”.( Taylor & Frost, 2009) Like any other industry, the concept of PED plays a very vital role sugar industry too. The price elasticity of sugar will logically be higher due to availability of many substitute or alternatives in the market like jaggery, sugar free etc. Thus, if the price of per unit of sugar rises, the consumption will switch over to the substitutes resulting in lowering of demand. Most people would shift their preferences from sugar to sugar substitutes, thereby reducing their quantity demanded of pure sugar. Most economists would agree and therefore consider sugar the classic, highly elastic good. Accordingly, the figure below illustrates the considerable reduction in the amount of sugar demanded as its price increases. Question 5: Explain and illustrate the market structure which applies to the Australian Sugar Industry. By closely analysing the Australian sugar industry, it can be inferred that anatomically it resembles closely with perfect competition. As in case of perfect completion, there are many individual sugar cane producers and plenty of sugar mills. Further, the entry barrier to get into this industry is also not very strict. The produce from these various growers and mills are hardly differentiated as most of them use same kind of cultivation or processing technology. The demand for sugar is also elastic in nature due to availability of substitutes in the market. These all conditions points to the inference that can be made that the Australian sugar industry closely resembles the economic market structure of perfect competition (McWhinney, Crawford, Ridge, Cameron and Absolon, 1988). It can be also inferred that due to presence of representative forums like CANEGROWERS, which makes the uniform dissemination of information and even serve availability, helps in attaining a market structure closely resembling that of perfect competition. However, there is high probability that the structure can be transformed into Monopolistic competition. Here the number of firms and individual players will still be high with small market share. However, with use of advance technology, especially that pertaining to the quality assurance, as indicated in the case study given here, the differentiator can be built around various firms. Differentiators can be developed in various varieties of sugar available in the market. Though, it would be very difficult to maintain the differentiators over longer period of time, the firms and individual producers will have to strive for continuous improvement in their offering to the market. Further, the cost benefit analysis need to be done, in order to testify that how it would be feasible to differentiate while dealing in commodities like sugar. Conclusion: The given case study has highlighted various important macroeconomic concepts taking the perspective of sugar industry in Australia. The concept of quality assurance and use of advance technology to increase the profitability at the limited installed capacity is remarkable. The price competitiveness is being affected by quality which in turns helps the firms to gauge differentiating mileages over others, even in commodities like sugar. Further, the concept of cost distribution in competitive market is also nicely demonstrated where it in the interests of individual firms to support an industry association such as CANEGROWERS. The case study also correlates the concept of price elasticity of demand and industry structure. However, there is a clue also given in this case study wherein the market structure can go under change from perfect competition to monopolistic competition by creation of differentiators by use of advance technology in various aspects of sugar production and processing especially through quality assurance. References: 1. CANEGROWER Membership Brochure, http://www.canegrowers.com.au/icms_docs/70345_CANEGROWERS_Membership_Brochure_2010.pdf, accessed on 19th August 2011. 2. CANEGROWERS Constitution, 2006, http://www.canegrowers.com.au/page/Industry_Centre/About-CANEGROWERS/ accessed on 19th August 2011. 3. Case, K.E., Fair, R.C. (1994). 'Demand, Supply, and Market Equilibrium', Chapter 4 in Principles of Economics, 3rd ed., Prentice Hall Englewood Cliffs, New Jersey 4. F.M. Scherer and D. Ross, Industrial Market Structure and Economic Performance, Houghton Mifflin Co., Boston, 1990, Ch. 12, especially pp. 483-488. 5. Fred H. Cate and Richard J. Varn, The Public Record: Information Privacy and Access, A New Framework for Finding the Balance 10, 13 (1999) 6. McWhinney, W., Crawford, D.M., Ridge,D.R., Cameron, J.M., and Absolon, J.E.(1988). The economics of cane from field to factory. Proceedings of the Australian Society of Sugar Cane Technologists, 10: 7 7. Taylor, J.B. & Frost, L. 2009, Microeconomics, 4th edn, John Wiley & Sons Australia Ltd, Milton. 8. The World Sugar Research Organisation, http://www.wsro.org/, accessed on 19th August 2011. Read More