Principles of Economics - Essay Example

Principles of Economics College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Introduction Fluctuation in prices is a serious problem, more so if it affects food products. However, the truth is that this is bound to occur given that the production of food relies on weather that, in the present day, has become unpredictable given the recent climatic changes that arise from human activities. Developing counties rely heavily on the weather conditions to produce food, hence the production of food is likely to shift up and down reminiscent of changes in weather. There are other causes for fluctuation in prices of food products. The fluctuation in prices is also expected to have several impacts on the market and the overall economy. This is a general approach. This paper specifically analyses the case of ‘Soaring chilli prices sting business’ reported on The Strait Times on 21st February 2011 in Indonesia by Wahyudi Soeriaatmadja, Indonesia Correspondent. The paper particularly investigates the reasons for the fluctuations for the price of Chilli and the impact the fluctuations have on the market for Fried Tofu. The analysis draws it insights from the principles of economics. Reasons for Fluctuations in the Price of Chilli In this section the causes of the fluctuation in the price of chilli are discussed. From the case under study ‘Soaring chilli prices sting business’, two key causes that point to the fluctuation in the price of Chilli are (1) bad weather; and (2) crop spoilage. Therefore, the focus of this section is on these two causes. Bad Weather Bad weather could arise from various phenomena such as droughts, heat waves, floods, early or late frosts, change in rainfall patterns, among other changes in climatic occurrences. This phenomenon has been widely researched on by scientists; however, there is no concurrence among the analysts as to whether weather conditions are temporary or structural in nature bearing in mind climate changes. Agricultural supply for the most part is heavily dependent on rain and is therefore very much reliant on the weather conditions. Natural variation in weather conditions is regular and expected to remain so or still increase by eventual climatic changes. Hence, for farmers in Indonesia the annual differences in weather conditions are of more concern in view of the fact that just have narrow potential to acclimatise to the yearly production variation due to weather conditions (Abbott et al 2008). Variation of weather conditions creates unpredictability and fluctuations in price as in the case of the fluctuation in the price of Chilli. Crop Spoilage Crop spoilage is the damage or interference with a crop’s sensory properties (original dietary value, flavour, texture), hence making them to deteriorate and become unsuitable to consume or cause harm if consumed. Crop spoilage could be caused by any person at any stage of crop production, processing or storage (farmer, grocer, butcher, chef, home cook or shop attendant). It is therefore important that the correct procedures are followed so as to avoid or lessen the prospect of crop spoilage. Crop spoilage is classified into three main categories depending on the cause of the spoilage. The categories are; (1) Microbial spoilage; (2) Chemical spoilage; and (3) Physical spoilage (Heath & Tully, 2010). Microbial spoilage poses the greatest risk to crop spoilage because apart from spoiling the food, microbiological contaminants are also a risk to people’s health. Microbiological contaminants could be spoilage organisms or pathogens. Spoilage organisms weaken the crops but do not essentially lead to poisoning whereas pathogens cause food poisoning. Spoilage organisms occur as a result of enzyme actions within the crop, microbial actions as well as the reaction of components with the air (oxidation). The responsible microorganisms that cause crop spoilage are yeast, bacteria, moulds and viruses (Abbott et al 2008). Chemical spoilage arises from the natural components added to food. Some moulds generate toxins that stay in the crop, when the mould is removed as food is processed; other chemicals are introduced. Also, as the crops grow chemicals are usually used. These include pesticides, insecticides, fungicides, growth hormones and antibiotics, among others. By accident, chemicals may well be added to food as they are processed. Moreover, a number of chemicals are used to preserve food, boost flavour, colour or to enhance nutrition. In such cases spoilage occurs as soon as the maximum levels are surpassed. Also, some plants are full of naturally occurring poisons that are harmful to people (Abbott et al 2008). Physical spoilage is as a result of the foreign objects (physical substances) not supposed to be found in food. This could be because of the type or quality of raw materials used, the method of food processing used or other materials found in the food preparation, processing or storage areas (Heath & Tully, 2010). Economic Analysis In economic literature, the analysis of the reasons for the fluctuation in the price of Chilli can be analysed using the forces of demand and supply. In particular, from the case study, it is clear that the supply of chilli is what keeps fluctuating hence causing an increase or decrease in the price of Chilli (Gans et al 2011). For this reason, the reasons for the fluctuation in the price of Chilli can be analysed from the supply side as indicated in figure 1 below; Figure 1: Fluctuation in the price of Chilli Price of Chilli D S1 S0 S2 P1 X1 P0 X0 P2 X2 S1 S0 S2 D 0 Q1 Q0 Q2 Quantity of Chilli From the figure 1 above, DD is the demand curve showing the demand of Chilli and the SS0 supply curve shows the normal supply of Chilli to the market. Point X0 shows the normal point of equilibrium at which the demand curve of Chilli intersects with the normal supply curve of Chilli. At this point the normal price of Chilli would be P0. Given bad weather or crop spoilage, less Chilli will be supplied to the market. Given the reduced supply of Chilli, the supply curve of Chilli will shift to the left to SS1. Demand remains unchanged. As a result we have a new point of equilibrium X1. At point X1 the market has to pay a higher price for Chilli, P1. Therefore bad weather and crop spoilage has led to an increase in the price of Chilli. Similarly, if there is good weather or better crop preservation and processing, more Chilli will be supplied to the market. Given the increased supply of Chilli, the supply curve of Chilli will shift to the right to SS2. Demand remains unchanged. As a result we have a new point of equilibrium X2. At point X2 the market has to pay a lower price for Chilli, P2. Therefore good weather or better crop preservation and processing has led to a decrease in the price of Chilli. Impact of the Fluctuations in the Price of Chilli on the Market for Fried Tofu In economics, demand is generally defined as the willingness to buy a given quantity of a product at a given price. From this definition, the key factor that influences the demand for a product is its price, mutatis mutalibus. However, demand is also influenced by a number of other factors such as the price of related goods, the buyer’s income as well as taste and preferences, and future expectations, among others. From the case study the major factors that affect the demand of chilli are two; (1) the price of chilli; and (2) the price of related goods (fried tofu, noodles, bread and pizza). The effect of the price of a product on its demand is what gives rise to the ‘law of demand’ (Gans et al 2011). According to the law of demand, if the price of a product goes up, its demand goes down, mutatis mutalibus and if the price the same product goes down, its demand goes up, mutatis mutalibus. Also the demand curve slopes downwards from the left to the right and is not a straight line, as indicated in figure 2 below (Sexton & Fortura, 2006). This applies for the case of chilli. Figure 2: Conventional demand curve Price per unit Demand curve 0 Quantity in units However, the fluctuations in the price of chilli affect the market for fried tofu through the effect of related products. This would cause the demand curve for fried tofu to shift either to the right or to the left, mutatis mutalibus. Related products can either be (1) substitutes, or; (2) complements. Substitutes are products that buyers can use either product to serve the same purpose whereas complements are products that are consumed together. From the case under study, it is apparent that chilli and fried tofu are complements in view of the fact that they are consumed together. For complements, if the price of one product goes up, the demand for the other product goes down, mutatis mutalibus and if the price of one product goes down, the demand for the other product goes up, mutatis mutalibus. In this case, an increase in the price of chilli results in a decrease in the demand for fried tofu, mutatis mutalibus (Gans et al 2011). This effect will cause the demand curve for fried tofu to shift to the left as shown in figure 3 below; Figure 3: Effect of the fluctuation in the price of chilli on the market for fried tofu Price of chilli D2 D0 D1 S X1 X0 X2 D1 S D0 0 Q2 Q0 Q1 Quantity of fried tofu From the figure above, SS is the supply curve of fried tofu and DD0 is the demand curve of fried tofu. We analyse the effect of the fluctuation in the price of chilli on the market of fried tofu. Chilli and fried tofu are complements. When the price of chilli increases, the demand for fried tofu goes down, hence, the demand curve of fried tofu will shift to the left to DD2. Therefore the quantity demanded for fried tofu decreases from Q0 to Q2. On the other hand, when the price of chilli decreases, the demand for fried tofu goes up, hence, the demand curve of fried tofu will shift to the right to DD1. Therefore the quantity demanded for fried tofu increases from Q0 to Q1 (Gans et al 2011). Conclusion There are several factors that cause the price of products to fluctuate. In the case of ‘Soaring chilli prices sting business’, two key factors that led to the fluctuation in the price of chilli bad weather and crop spoilage. Bad weather had an effect on the production of chilli given that in such conditions farmers could produce less hence less chilli was supplied to the market. As regards crop spoilage, this had an effect on any stage in the processing of chilli, that is, production, processing and storage, which could affect the supply of chilli to the market. Given that chilli and fried tofu were consumed together, they are regarded as complements. Therefore if the price of chilli fluctuates, the demand for chilli also fluctuates in the opposite direction because the demand curve for fried tofu will shift (Sexton & Fortura, 2006). References Abbott, P. C. Hurt, C. and Tyner. W. E. (2008). What’s Driving Food Prices? Farm Foundation Issue Report (FFIR), Oak Brook, IL. Gans, J. King, S. Stonecash, R. and Mankiw, G.N. (2011). Principles of Economics. 5th edn. Cengage Leraning. Heath, H, H. M. and Tully, L. (2010). Food Solutions, Food and Technology. 2nd edn, Pearson, Melbourne. Sexton, R.L. and Fortura, P. (2006). Exploring Economics. Nelson Education Limited. Read More