The very poor harvests for grain and potatoes, together with decline in real incomes of many UK citizens, will impact the market for grain and potatoes and beef, assuming that beef is a major product from livestock. This affects UK consumers and farmers in terms of changes in consumer expenditure and producer revenue respectively. Both are determined by the product of equilibrium price and quantity. This can be analysed by using demand, supply, and elasticity concepts.
Poor weather conditions in 2012 have led to very poor harvest of grains and potatoes. This decreases the supply of grains and potatoes. As the demand for grains and potatoes is likely to be price inelastic due to the lack of substitutes for consumption (grains and potatoes are staple food), livestock feed, and production of many foods, a fall in supply will lead to an increase in price with a less than proportionate decrease in quantity supplied. According to the diagram above, as supply falls, shifting from S0 to S1, price will rise sharply from P0 to P1 with a less than proportionate decrease in quantity demanded from Q0 to Q1.
On the other hand, the fall in real income of UK citizens will decrease the disposable income and purchasing power of the UK citizens. This decreases the demand for grain and potatoes as they are normal goods. As the supply for grain and potatoes is likely to be price inelastic due to the long gestation period, the decrease in demand will lead to a decrease in price with a less than proportionate decrease in quantity demanded. As illustrated in the diagram above, a decrease in demand from D0 to D1 will lead to a sharp price decrease from P0 to P1 with a less than proportionate decrease in quantity demanded from Q0 to Q1.
When considered simultaneously, a fall in supply and fall in demand for grain and potatoes will lead to three possible market outcomes depending on the relative extent of fall, with a decrease in quantity demanded and the change in price indeterminate. In this case, it is likely for the fall in supply to be more drastic than the fall in demand. This is because the demand for grain and potatoes is expected to be income inelastic as they can be considered a necessity. Hence, a fall in income will lead to a less than proportionate fall in the demand of grain and potatoes. Furthermore, it is mentioned that the harvest of grain and potatoes was very poor, leading to an expected large decrease in supply. As illustrated in Figure 3, a decrease in supply from S0 to S1 with a less than proportionate decrease in demand from D0 to D1 will lead to a fall in equilibrium quantity from Q0 to Q1 and an increase in equilibrium price from P0 to P1. Assuming the increase in price outweigh the decrease in equilibrium quantity, consumers’ expenditure and producers’ revenue will increase, as area OP1E1Q1 is larger than area OP0E0Q0.
For the case of the beef market, it is expected that supply will decrease. This is due to the above analysis whereby the price of grain and potatoes is expected to increase. Since grain and potatoes are livestock feed, the cost of production will increase. This reduces potential profits and decreases the incentive for producers to produce. As such, the supply of beef will decrease. On the other hand, with the fall in real income of UK citizens, they will again have a lower disposable income and reduced purchasing power. Since beef can be considered as a luxury good, the demand for it will decrease. The decrease in demand is expected to be more significant than the decrease in supply as the demand for beef is income elastic. As such, the fall in income will lead to a more than proportionate decrease in demand for beef. Also, the price of grain and potatoes may be only part of the cost of production. Hence, the decrease in supply will not dominate the decrease in demand. With reference to Figure 4 above, a decrease in supply from S0 to S1 with a more than proportionate decrease in demand from D0 to D1 will lead to a decrease in price from P0 to P1 and a decrease in equilibrium quantity from Q0 to Q1. As such, consumers’ expenditure and producers’ revenue decreases, from OP0E0Q0 to OP1E1Q1.
The extent of the impact on consumers’ expenditure and producers’ revenue warrants analysis of possible government intervention. In the case of the market of grain and potatoes, the government may want to protect consumers’ interest as grain and potatoes are important commodities and are necessities to consumers. As such, the government may seek for stopgap measure to prevent the overwhelming increase in price with the introduction of a price ceiling. A price ceiling is the highest permissible price that the producer can legally charge, and is set below the equilibrium price at the level whereby the government think is desirable for the population. With reference to the diagram above, as the price ceiling is set, price of grain and potatoes will decrease from Pe to Pmax. With this introduction, consumers will be willing and able to purchase at Qd whereas producers will only be willing and able to produce at Qs, resulting in a shortage due to excess demand. Hence, this only benefits consumers who are able to purchase the good. In order to benefit all consumers, the government will have to find solutions to the shortage. This can be done by increasing supply of the good such that the new market equilibrium will be at Qd. The government can attempt to increase supply of grain and potatoes by offering subsidies or tax relief to the producers in order to increase their profits and encourage more production. This is however a long term strategy due to the long gestation period and will unlikely increase the supply of grain and potatoes much in the short run. The government can also release some of the stocks of grain and potatoes to the market if they were previously stockpiled.
On the other hand, the government might want to protect the interest of the producers in the beef market. They can impose a price floor to prevent excessive decrease of the price of beef. A price floor refers to the lowest permissible price that the producer can legally charge. With reference to Figure 6, when a price floor is set, the price of beef will increase from Pe to Pmin. This will encourage producers to produce a higher quantity, Qs, while consumers will only be able to willing to consume at Qd, leading to a surplus due to excess supply. Likewise to a price ceiling, this will only benefit producers who are able to sell at the higher price and reap higher revenues. In order to benefit all producers, the government must have appropriate responses. In the short run, the government can buy the surplus at the promised price. Due to the opportunity cost of available government funds, this may limit government spending in other more pressing sectors of the economy. As such, the government must also seek to increase the demand such that the equilibrium quantity will be achieved at Qs. In the short run, this can be achieved by the reduction in personal income tax or indirect tax on beef. This will increase the demand for beef due to increased affordability. In the long run, the government can attempt to increase demand through an increase in economic growth, leading to increased disposable income and purchasing power without sacrificing on tax revenue. In conclusion, the very poor harvests for grain and potatoes will lead to an increase in consumers’ expenditure and producers’ revenue on the market of grain and potatoes and a decrease in expenditure and revenue on the market of beef. This will negatively impact consumers and producers respectively. The extent of impact is dependent on the appropriate government actions taken to tackle the situation. However, it is unlikely that the situation can see vast improvements in the short run due to inherent difficulties in changing the demand and supply of both products.
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