Based on the article “Falling
Demand for Free Range Eggs Easing” [ http://theranger.co.uk/News/Falling-demand-for-free-range-eggs-easing_21809.html ] dated 1st October 2012 which was
published by the British Free Range Egg Producers Association, the demand for
free range eggs in the United Kingdom have dropped while the sales of cage eggs
have increased. Peter
Thornton, the Chief Executive of Europe’s largest egg business said that the
share of free range accounted for 53 percent of all volume sales in retailers
in 2011 had fallen below half the total market and 5 percent was lost per
annum. On the other hand, the sales of cage eggs were growing at the rate of 20
percent in the major retailers.
The law of demand says
that when other factors which influence the buying plans is kept constant, the
higher the price of a good, the lower is the quantity demanded. This concept
can be deduced from the substitution effect. It is well known that the prices of free range
eggs are higher than those of cage eggs due to the high feed cost. When the
price of free range eggs rises, so do the opportunity cost. The availability of
substitutes, such as the cage eggs which is much cheaper, will be more
favourable to customers to economize on its use.
Customer’s income is
another reason for the decrease in quantity demanded when price rises. Sir
Terry Leahy, the former boss of Tesco perceived that people would seek out a
value alternate when there is a recession. When the price of good rises
relative to income, consumers were faced with a higher price and they could not afford to buy it.
Naturally, they will react by buying fewer free range eggs and choose to buy
more value or standard products.
A change of customer’s
income and the price of related goods result in a change of demand. In response
to recession, the fall in income decreases the demand for free range eggs. The
demand curve then shifts leftward, as shown by the shift arrow of the yellow
curve.
As the demand for free
range decreases, there will be a surplus since quantity demanded is lower than
the quantity supplied. When more customers are purchasing cage eggs, the
quantity demanded exceeds the quantity supplied and therefore, there will be a
current shortage on cage production.
To achieve market
equilibrium, quantity demanded must be equal to the quantity supplied.
Referring to the above graph, the demand curve with downward slopes and the
supply curve with upward slopes will intersect at the equilibrium price. Price
above the equilibrium will be a surplus and the price below equilibriums
indicates a shortage.
Price adjustments are
the way to move towards the equilibrium price. A shortage of cage eggs will
lead to an increase of price. As the quantity demanded exceeds the quantity
supplied, consumers could not force the producer to sell more cage eggs than
initially planned. When the price rises up to its equilibrium point, the
shortage eventually reduced because the quantity demanded decreases and the
quantity supplied increases. When the price increased to a point where there is
no longer a shortage, the forces moving the price stop operating and the price
comes to rest at its equilibrium.
Alternately, a surplus
of free range eggs forces the price down. As mentioned in the article, the free
range eggs have been cascarded down into value egg. Producers plan on selling
does not match with the consumers plan on purchasing. In that case, the
producers could not force consumers to buy more than they planned and price cut
will be the best way to fall back to its equilibrium. The price fall decreases
the surplus because the quantity demanded increases while the quantity supplied
decreases. When the price has fallen to the point where there is no longer a
surplus, the forces moving the price stopped operating and the price comes to
rest at its equilibrium. In the current situation, the free range eggs were
displaced by more enriched cage production which comes on stream. The surplus
of free range eggs will become more and more and this will be a matter of
concern for the industry and they have to come up with a plan to control the
size of the laying flocks and the production of free range eggs so as to meet
the consumer’s demand.
In my opinion, the eggs
market in the UK did not achieve an efficient outcome. A competitive market
achieves allocative efficiency only when equilibrium occurs. At the intersection
point, the marginal social benefit on the demand curve equals to the marginal
social cost on the supply curve.However, this will not
occur on the current situation. The current market which delivers an
inefficient outcome is being regarded as a market failure. In fact, there are
two market failures here, one for the overproduction of free range eggs and
another one for the underproduction of cage eggs.
Considering the
overproduction market, with the quantity of free range eggs that is produced
per day, consumers are willing to pay the amount which is less than the cost to
produce. This results in a waste of resources. When drawing a graph, the
deadweight loss can be shown in the area between the demand and supply curve
towards the right of the intersection point. It reduces the total surplus to
less than its maximum. Hence, there will be a social loss due to the deadweight
loss resulted from the inefficient production.
On the underproduction
market, the quantity of cage eggs produced per day is too little. Consumers are
willing to pay much more than the cost of production. By producing the small
amount of cage eggs, the total surplus is smaller than its maximum possible
level. The scale of inefficiency is measured by the deadweight loss, which is
the decrease of total surplus resulted from an inefficient level of production.
On the graph, the deadweight loss can be shown towards the left of the
intersection point, an area covered between the supply and demand curves.
by Patricia Lee
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