Introduction to Microeconomics - Essay Example

Order 503575 Introduction to Microeconomics 18 February Processed-Food’s Demand and Supply Shifts World’s largest food maker, Nestlé, is concurrently being pushed under the buffer of demand-side market forces and the threat of supply-side market forces.At the supply side, its inputs’ cost; milk, cocoa, coffee, sugar, and grain; is expected to rise by about 8-10 percent. This may hurt the supply of Nestlé products shifting it to the left while increasing its prices and decreasing quantity at equilibrium.

Besides, rise in raw-material costs can also shift the market supply of processed-food to the left potentially raising market equilibrium prices.However, this affect can be well offset by pretty larger rightward-shift in Nestlé products’ demand in emerging markets raising its net equilibrium quantity along with the increased price. Owing to high middle-class population growth in these countries, the food processors other than Nestlé can also experience shift in demand of their products. Yet, determinant of Nestlé’s shift in demand is not only the emerging market’s innate potential but also the increasingly appealing behavior of consumers in these markets towards Nestlé brands.

In the light of this strong shift in demand, Nestlé can well forward rising input costs to its consumers without much affecting the sale-volume. This reflects relatively inelastic demand for Nestlé products in emerging markets, developing a high revenue-potential to Nestlé even in pace of rising input costs. Besides Nestlé, overall food processed market (mainly the food makers as Peers Danone and Unilever) can also effectively put into practice the rise in price in response to the rising food costs since the rightward shift in processed food’s market demand can well offset the leftward shift in its market supply thus raising the market’s equilibrium quantity with price.

Yet by raising its price, food maker, Kraft Foods, may hurt its quantity demanded, and thus demand, due to elastic nature of its products’ demand; leftward movement along its demand curve, which is due to increased prices owing to left-shifted supply, may offset the rightward shift in its emerging markets’ demand.Further, due to its larger market share, Nestlé can capture the large part of this shift in market demand; shift in Nestlé products’ demand is expected to be larger than the shift in other food makers’ demand thus, rise in its equilibrium quantity should also be higher than others.

Word count: 375 words.Information in the above essay has been extracted from the following news article.Nestle Emerging Market Growth to Offset Cost RisesVEVEY, Switzerland (Reuters) - Nestle, the worlds biggest food maker, said strong demand in emerging markets would help it offset a steep rise in input costs in 2011 after it beat sales forecasts for 2010.The maker of Nescafe coffee and Gerber baby food said it was well placed to cope with rising commodity prices by making cost savings and pushing up its own prices.

"We saw a significant uptick in raw material prices in the second half," Chief Financial Officer Jim Singh said in a conference call on Thursday. "We expect 2.5-3 billion Swiss francs additional input costs in 2011."The increase would be about 8-10 percent on a cost base of about 30 billion Swiss francs, a Nestle spokesman said.Nestle can rely on its strong presence in emerging markets, where underlying sales growth was 11.5 percent in 2010, and the appeal of brands such as KitKat chocolate bars to offset rising costs for milk, cocoa, coffee, sugar and grain.

The company could raise prices on its popular coffee products Nescafe and Nespresso -- the latter exceeded 3 billion Swiss francs annual sales for the first time -- Chief Executive Paul Bulcke said at a media conference.Underlying sales growth at the group rose 6 percent in 2010 to beat a Reuter’s poll forecast of 5.5 percent, and accelerated to 6.4 percent in the fourth quarter, making the group confident of meeting its long-standing target of 5-6 percent growth in 2011.Nestle shares were up 1.

1 percent at 1210 GMT, outperforming a 0.5 percent rise in the STOXX 600 European Food & Beverage index.Peers Danone and Unilever recently said they were confident about passing on higher costs, but Kraft Foods cut its 2011 forecast for earnings growth because it expects some consumers to be put off by price increases."We see Nestle as best placed to escape the volatility of costs which are impacting the food sector in 2011," said Deborah Aitken, an analyst at brokers Bryan Garnier.Full-year net profit at Nestle rose to 34.

2 billion Swiss francs, including the proceeds from the sale of its remaining stake in eye care group Alcon to pharma group Novartis.Nestle CFO Singh said the group could use part of its cash for smaller acquisitions, particularly in its nutrition business, as it intends to boost its medical food activities.Vontobel analyst Jean-Philippe Bertschy said the dividend increase of 15.6 percent to 1.85 francs per share was high, but the lack of comment on an additional share buyback was slightly disappointing.

Nestle aims to conclude its current 10 billion Swiss franc buyback in the first half of the year and will subsequently decide on a new one, Singh said.Asked about Nestlé’s 30 percent stake in cosmetics group LOreal, Bulcke said there was no reason to change the status quo.Nestle shares gained 9 percent in 2010, but have lost about 4 percent since the beginning of the year, as investors worry about input cost inflation and forex headwinds.They trade at about 14-times estimated 2012 earnings, a slight premium to Danone, Kraft and Unilever (Koltrowitz, Yahoo! Finance).Works CitedKoltrowitz, Silke.

“Nestle Emerging Market Growth to Offset Cost Rises.” Yahoofinance.com. Yahoo! Finance, 17 Feb. 2011. Web. 18 Feb. 2011.