Beer Strike Threatens Christmas Cheers - Essay Example

Article Analysis: Beer Strike Threatens Christmas Cheers Submitted by: Economics 100 Table of Contents Introduction Supply Issues 2 Demand Issues 3 Converging Supply and Demand 4 Consumer and Producer Surplus 5 Conclusion 6 Bibliography 7 Table of Figures Figure 1: Supply is inelastic versus supply is elastic 2 Figure 2: Demand is elastic versus demand is inelastic 4 Figure 3: Converging inelastic supply and elastic demand 4 Figure 4: Consumer and producer surplus 6 Introduction: In Australia, beers like Tooheys New, Extra Dry, Old, XXXX Gold, Hahn products, White Stag, Heineken and Becks are part of the summer tradition. This boost in demand during the summer is supplied by the increases in production during the winter seasons. However, recently, the market has been threatened by the supply cutbacks caused by a strike by the workers. From the workers’ perspective, this can be catastrophic for the producer of Tooheys, which controls about 50% of the market supply. Lion Nathan, the parent company which is facing this strike, is the producer of three out of the top five beer brands in the market, including XXXX GOLD (2), Tooheys New (4) and Tooheys Extra Dry (5). Their portfolio ‘also includes some of the nation’s fastest growing beer brands, such as Hahn Super Dry and Boag’s Draught, and the leading light beer, Hahn Premium Light’ (Lion Nathan 2010). Lion Nathan appears to be in big trouble at the time this article was written and is facing severe supply issues. The strike occurred at Lion Nathan’s factories as a result of a dispute on pay rises. Brewery technicians at the beer giants western Sydney factory began ‘a week of strike action aimed at starving the amount of beer the company can supply over the peak summer period. The factory, which has been at the Lidcombe site since 1978, produces all of Tooheys beer - about 3.3 million hectolitres each year. Brewery technicians make up 84 of about 1100 of the brewerys workers but oversee the recipes and ingredients. The technicians are calling for a 4.5 per cent pay rise and say a 3 per cent offer from Tooheys parent company Lion Nathan is unfair.’ (Hills 2010). The concepts that can be applied to this article are the supply curve, the elasticity of demand and supply and the producer and consumer surplus. These will be explained in the following paragraphs. Supply Issues: The first economic issue in this situation is that there are fewer players in the market. Lion Nathan seems to dominate the market, with a 43% share of the market in 2007 (Hills 2010). This signifies that beer production is a market in Australia which is largely an oligopolistic structure with few large players controlling the supplies. This not only means that the large players control the prices but also that the supply is largely inelastic. With the inelastic supplies, a shift in the demand curve could have a greater impact on the price than if the supply was elastic. Figure 1: Supply is inelastic versus supply is elastic The supply is the willingness of the producers to supply to the market at a particular market price. This supply curve is affected by the cost of production among several other factors. In the case of beer manufacturers in Australia, this cost of production has gone up which means that the supply curve of beer will shift to the left by the magnitude of the increase. Demand Issues: The beer market seems to have a relatively elastic demand. This is because the demand for beer is determined by the substitution effect and the income effect. The reduction in the real income as a result of the increase in the price of beer will result in a decrease in the demand for beer. Also, beer has close substitutes like other alcohol beverages. So, an increase in the price of beer will mean that people will switch to other alternatives. Assuming that the prices of other alcoholic beverages remain constant during this time, a cutback in supply leading to a rise in prices will lead to a decrease in the demand for beer. Despite the fact that those who have a taste for beer may not be satisfied with other alcoholic beverages, we still propose that the demand for beer will be elastic because in this case we are talking about locally manufactured beer only. The prices of imported beer will not be affected by the rise in wages of beer manufacturing workers. This means that people have the alternative of switching to imported beer. In case of elastic demand for beer, this means that the impact on price will be lesser than the impact on price if the demand were inelastic. This is illustrated in the graph below. Figure 2: Demand is elastic versus demand is inelastic Converging Supply and Demand: The inelastic supply and elastic demand can be put together on one graph to show that the price will rise as a result of the leftward shift in supply and the rightward shift in demand. Figure 3: Converging inelastic supply and elastic demand Consumer and Producer Surplus: In Figure 3, the original equilibrium occurs at Y and the consumer surplus is the area under D1 above QY. The producer surplus is the area above S1 under QY. Due to the shift in the demand curve following the seasonal demand of Christmas and the shift in the supply curve following the workers’ strike, the new equilibrium occurs at W. The consumer surplus is now the area under D2 above PW and the producer surplus is the area above S2 under PW. The total economic surplus may or may not change depending on the magnitude of the shifts in both the curves. However, the relative distribution of producer and consumer surplus has changed. In this case, due to the lack of competitiveness in the market, the producer surplus increases and the consumer surplus declines. Therefore, the consumers lose while the producers gain. This can be explained graphically by saying that the consumer surplus decreases by the area PWQY. The producer surplus increases by the area PWQY. The area WRX is the deadweight loss that goes to no one. Figure 4: Consumer and Producer Surplus Conclusion: An oligopolistic market structure such as the one that exists in the Australian beer market results in market inefficiencies and deadweight loss. It means that the producers gain and the consumers lose. Such markets can be corrected by increasing the competitiveness of the market by not only having more players but also by introducing substitute products that challenge the producers to keep their supplies elastic and be willing to absorb part of the changes in cost of production. Bibliography Australian Beer. Lion Nathan. 2010. http://lion-nathan.com.au/brands/australian-beer/ (accessed December 3, 2010). Hills, Brenden. Beer strike threatens Christmas cheers. The Sunday Telegraph, November 20, 2010: http://www.news.com.au/business/beer-strike-threatens-christmas-cheers/story-e6frfm1i-1225957534642 (accessed December 3, 2010). Hills, Brenden. Beer strike threatens Christmas cheers. The Sunday Telegraphy, November 22, 2010: http://www.perthnow.com.au/business/news/beer-strike-threatens-christmas-cheers/story-e6frg2qu-1225958359543 (accessed December 3, 2010). Read More