How Markets Work: Supply, Demand and the Real World - Assignment Example

DEMAND AND SUPPLY Student’s Name Institution Demand and Supply I. The statement ‘The increase in per capita pork consumption and the decrease in per capita beef consumption highlighted in the article can be explained by increasing demand for pork and decreasing demand for beef’ indicates that the decrease in demand for beef is attributed to increase in demand for pork. Over the years the consumption of pork has risen gradually as it is evident with an increase from 14kg/capita of pork to25kg.capita of pork. The increase in consumption of pork means that fewer people prefer beef. Therefore, as a result the consumption of beef has somewhat declined over the years from 40.4 kg per capita of beef in 1972 to 33.6 kg per capita of beef in 2014 (Cawood 2014). This is attributed to the fact that despite being an oversupply of beef in the market the price of beef still remains relatively high. The price of pork, on the other hand, is deemed to be fair meaning that individuals will opt into buying pork rather than beef. In addition to this, the issue of protein content in meat has greatly influences the type of meat individuals consume. This is attributed to the fact that despite beef being the most popular meat, the protein content in beef is low compared to pork. This is to say that an individual will have to consume more beef in order to achieve a certain protein content. However, a person consuming pork, will have to consume less pork to achieve the same protein content as someone consuming beef (Cawood 2014). Therefore, due to the high protein content in pork more people have shifted from beef to pork reducing the demand for beef. This in return affect the amount of beef consumed in a single year in Australia. However, the decline in consumption of beef is not restricted to competition from pork alone. This is attributed to the fact that, some of the traditional beef based cuisine have trimmed the amount of beef consumed in Australia. The best example is stir fries, which traditionally was beef based but recent years have seen the decline in use of beef as the main component. Present day stir fries has shifted to the use of chicken or pork as their main component. Additionally, despite beef being the most popular meat in almost every household the quantity purchased has declined gradually over the years. This means that even though households consume beef, the amount consumed is lower compared to previous years. This in return affects the amount of beef consumed in Australia in a single years. While pork on the other hand is consumed in large chunks thus the increase in amount of pork consumed in Australia in a single year. Therefore, the decline in consumption of beef in Australia could be attributed to the increase in consumption of pork in Australia. This translates to the fact that the demand for pork is quite high despite the supply being low compared to beef that has a high supply but low demand (Cawood 2014). II. The fact that both beef and pork target the same consumers means that the events of one product is more likely to affect the demand and supply of the other product. This is attributed to the fact that beef and pork act as substitutes to each other. This means that consumers have an option in purchasing on of the products in the absence of the other. Therefore, as a result the demand and supply of a product depends highly on the price, supply and demand of the other product (Arnold 2013) Based on the article one of the factors that could highly affect the demand and supply of substitutes is the change in taste. Change in taste arises whereby consumers abandon their usual product in favour of the substitute. This is evident in the case of beef and pork whereby consumers have shifted their taste from beef to pork (Cawood 2014). This in return means that the amount of beef demanded shifts to the left in the demand curve despite the price of beef remaining constant as illustrated in figure1. Fig.1 leftward shift in demand for beef Based on the diagram the amount of beef demanded decreases despite the fact that the price remains constant. This is attributed to the change in taste by the consumers. However, leftward shift for beef means a rightward shift for pork. A rightward shift for pork indicates increase in amount demanded for pork (Hirschey 2008). However, the price of pork remains the same as illustrated in figure 2. Fig. 2 rightward shift in demand for pork The above figure illustrates an increase in the demand for pork which is occasioned by a change in taste but rather than a change in price. A change in price of one substitute is likely to result in a shift in demand of the other good. This is attributed to the fact that consumers tend to move towards a product that cheaper and offer equal satisfaction. This means that should the price of meat remain high than that of pork then consumers are more likely to purchase more pork than beef. This is despite the fact that the price of pork remain constant as illustrated in figure 3 (Hirschey 2008). Fig. 3 increase in demand for pork The above diagram indicates a rightward shift in the amount of pork demanded as occasioned by the high prices of beef. The amount of pork of demanded increases from Q1 to Q2, while the price remains constant. Therefore, this means this means them at Price 2 more pork is demanded after the increase in price of beef. This in return leads to a new demand curve D1 as illustrated by the figure above. Therefore, going by the above figures it clear that various factors have the ability to affect the amount demanded of a product in the case of substitute products (Arnold 2013) Question 2 I. The demand for sorghum has greatly risen in the past few years which could be attributed to various factors such as the high demand for feed crops. Additionally, the in availability of substitutes has greatly affected the amount of sorghum demanded by consumers, thus leading to high production. The demand of sorghum has also been positive due to demand for sorghum by china in the production of bijou. Baijui is an alcoholic beverage and is the most sought out spirit in China. However, the production of baijui greatly depends on sorghum, since sorghum is regarded as the main raw material. Therefore, despite the fact that sorghum is the main raw material for baijui they do not produce sorghum. This forces them to import sorghum, with Australia being the most preferred source of sorghum. Therefore, poses a great challenge on Australian farmer to produce sorghum in large volumes putting in mind the population size of china. Additionally, the fact that there exists a ready market for sorghum acts as an incentive to Australian farmers. This is in returns leads to increased production of sorghum in Australia. Additionally, the demand for feed crop within the Australian and market and the absence of substitutes has led to high production for sorghum. This is attributed to the fact that production of sorghum is viewed as profitable, thus leading to increased production of sorghum in Australia. As a result of the high demand of sorghum in Australia, the prices have also been on the rise. This is evident in the fact that price of sorghum rose from $20 a tonne to $30 a tonne (Foley 2014) II. Price elasticity of demand tries to determine how a product is sensitive to change in demand occasioned by a change in the price of the commodity. This is to say that upon the change of price of any commodity, the demand for the said commodity will definitely change. Therefore, as a result price elasticity of demand could be said to be elastic or inelastic. Price elasticity of demand is said to be elastic if the demand changes by the same percentage as the increase in price of the commodity (Andreyeva et al 2010). This is to say that should the price of a commodity increase by ten percent then the demand of the said product is expected to change by the same percentage which in this case is ten percent. Price elasticity of demand is said to be inelastic if the demand does not change or changes slightly with change in price. This means that the demand for commodity remains constant despite an increase or decrease of price of the said commodity (Bailey 2012). Therefore, in relation to sorghum, its demand is quite high when comparing to other feed. As a result of this, the price elasticity of demand for sorghum could be said to be inelastic. This is compounded by its degree of necessity, meaning that a commodity that is deemed as a necessity will be purchased irrespective of change in price. This means that the demand for sorghum will most likely remain the same even if the price of sorghum was raised (Foley 2014) III. Price elastic of supply, on the other hand, tries to determine the change in quantity supplied in relation to a change in price of the said commodity. This is to say that a change in price of a commodity, either an increase or a decrease, is more likely to affect the amount of the commodity supplied. Price elasticity of supply is said to be elastic whereby the amount of commodity supplied changes by the same percentage as the change in price (Prasch 2008). This is to say that should the price of a product rise by ten percent then it’s more likely the supply will increase by ten percent. However, price elasticity of supply is said to be inelastic whereby a change in price does not affect the amount of the commodity supplied. This is to say that should the price of a commodity increase or decrease by ten percent the amount supplied still remains constant (Landsburg 2010). Therefore, in relation to sorghum, it could be said to inelastic. This is be due to the fact that should the price of sorghum increase or decrease the amount of sorghum supplied is more likely to be the same. This is attributed to the fact that a piece of land can only produce up to a maximum amount of sorghum. Therefore, the amount of sorghum supplied will remain constant in respect to changes in prices of sorghum. As a result the price elasticity of supply for sorghum is inelastic (Foley 2014) III. Cross price elasticity of supply, on the other hand, refer to the percentage ratio of change in demand of one product occasioned by the change in price of another commodity. For products that are regarded as substitutes the cross price elasticity is positive (McEachern 2012). This is attributed to the fact that an increase in price of one commodity leads to a decrease in supply of the other commodity. Sorghum and barley are good substitutes. This is based on the fact that both commodities are used to perform the same task, which in this case is the production of alcohol. Therefore, an increase in the price of sorghum would lead to a decrease in the amount of barley produced. This is attributed to the fact that an increase in the price of sorghum in the market would lead a farmer to use up more land to produce sorghum than barley. Therefore, the amount of barley supplied by the farmer is lower compared to that of sorghum. However, the same could be said if the price of barley increases in the market. This is because the amount of sorghum supplied in the market will fall down to compensate the increasing price of barley as more barley will be produced. Therefore, the cross price elasticity of supply in this case would be positive as earlier stated the cross price elasticity for substitute product is positive. This is in relation to complimentary goods whereby the cross price elasticity is negative, which is attributed to the fact that the existence of one product depends on the existence of the other product (Hirschey 2008) References Andreyeva, T., Long, M.W. & Brownell, K.D. (2010). The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food. Am J Public Health, 100(2), 216-222. Arnold, R.A (2013). Economics (11th ed.). Stamford: Cengage Learning. Bailey, D (2012). How Markets Work. New York: The Rosen Publishing Group. Boyes, W & Melvin, M (2012). Microeconomics (9th ed.). Stamford: Cengage Learning. Cawood, M (2012 Jun 2). Red meat challenged. Retrieved from http://www.theland.com.au/news/agriculture/cattle/beef/red-meat-challenged/2699983.aspx?storypage=0 Foley, M (2014 Feb 27). Sorghum's upturn. Retrieved from http://www.theland.com.au/news/agriculture/cropping/general-news/sorghums-upturn/2689410.aspx?storypage=0 Hirschey, M (2008). Managerial Economics (12th ed.). Stamford: Cengage Learning. Landsburg, S (2010). Price Theory and Applications (8th ed.). Stamford: Cengage Learning. McEachern, W.A (2012). Economics: A Contemporary Introduction (10th ed.). Stamford: Cengage Learning. Prasch, R.E (2008). How Markets Work: Supply, Demand and the 'real World'. Edward Elgar Publishing, Read More