Question:
Include an introduction where you provide an overview or ‘essence of the story’. What is the purpose of your assignment? What economic models/concepts are you going to use to analyse? For example, will you be using the model of demand and supply, concepts such as opportunity cost, elasticity, consumer’s and producer’s surplus?
The article “Beef prices set to explode” by Catherine Miller published on 17the January 2015 in the Stock Journal stated that the Australian beef producers will benefit from the sale of beef because in the recent years the demand for beef consumption is increasing compared to the supply of beef. The article shows that since 1973 the demand for beef has been low all over the world and the major reason behind that being the taste and preference of the customers.
However from early 2003 with the change in the eating habits of the people the demand for the product has increased and even China is seen to turn into an exporter of beef. However Australian beef companies are not benefiting from the increased demand because of the reduction in the number of cattle due to natural drought. Dr. Ainsworth confirmed that the Australian producers will start benefiting when they are able to gain back the situation.
The report examines the contents of the article using the microeconomic techniques like demand and supply model, relationship between the variables and changes in demand and supply and also analyses the different contributing factors to changes in the demand rate.
According to the law of demand states that there is an inverse relationship between the price and the quantity demanded. So when the price of a product increases other things remaining the Constant (Like the income of the product, taste and preferences of customers, prices of the related goods, demand of the related goods) the demand for the product decreases and vice versa. However in certain exceptional cases if the supply of the product remains the same without showing any increase or decrease then with the increase in demand the price also increases.
The rise in the price for beef with the rise in the demand for the same is an example of Veblen good. A Veblen good is a luxury good that is consumed by the customers to establish a status symbol in the society.
Figure 1: Normal demand curve and Demand curve for Veblen goods
(Source: Ball, Madeline K and David Seidman, , 2012,pp96)
The above figures shows the opposite effects of the prices on the quantity demanded of the goods. The Demand curve for Veblen goods (Beef) shows that with high price P1 the quantity demanded will be Q1 and when the price decreases from P1 to P2 the quantity demanded for the goods also decreases from Q1 to Q2. Hence two separate demand curves namely D1 and D2 have been drawn to show the reduction in the demand rate due to reduction in price. Economists opined that in these kinds of goods the reduction in price leads the consumers to believe that the reduction in the price denotes a poor quality of the goods and hence the demand decreases.
In case of normal demand curve it is seen that at low price level of P2 the demand is higher at Q2 and with the increases in the price of the goods the demand decreases to Q1.
Around 50% of the population of China prefers beef as a part of their daily diet because they assume it to be healthier and beef consumption is as sign of high income society in China. Hence the demand for beef import is forecasted to increase by 15% which will enable the Australian producers to increase the prices of the beef by 3.2%. In spite of the high prices the demand for Beef will remain the same.
Figure 2: Increasing trend in Beef demand in China
(Source: D. S. Gosalamang,2012, pp58)
Economists suggested that apart from price there are certain other factors that affect the demand of the goods in a positive manner. In the past decade average beef consumption has increased due to the influence of the following factors.
Taste and preferences: Changes in the taste and preferences of the consumers increase the demand for a product. Experts have opined in case of cultural preferences the demand for a product will be highly affected. The demographic composition of the population of the country is responsible for the taste and preference of the consumers.
The per capita consumption of beef in the chart below of the various countries reflects the cultural preference of the population of these countries.
Figure 3: Per capita consumption of beef in major beef consuming countries, 2014
(Source: www.forbes.com , 2015)
The lowest beef consumption in India indicates the fact that due to the presence of large Hindu population the cultural preference for beef is very low in this country. On the contrary due to the large availability of Cattle and a small national market beef is the primary and traditional component of Argentine cuisine.
Income of the consumers: The income level determines the ability of the consumers to purchase a particular product. Hence the higher the disposable income the more is the consumption power of the consumers and hence the demand for goods increases.
Majority of the beef consuming countries falls within the range of middle and high income nations. However the quantities and the quality of Beef consumption will depend upon the income level of the consuming countries. Since beef is more expensive than the other forms of meat hence the consumption is low in sensitive economies like Mexico, Japan and China.
However the growth in the GDP rate of China by 1.13% and a high population is forecasted to make China one of the potential consumers of beef. The article shows that in the past decade the consumption of beef in China was around 4.3 kgs a person however the country had to convert itself into importer of beef when the country was not able to meet the internal requirement. This was induced due to the growing economy in China.
Substitute goods consumption: The demand for a product is also influenced by the price and demand for a substitute good. If the price of the substitute good is lower than the actual product then the demand for the substitute good will rise and the demand of the actual good will fall.
In nutritional context major competitors of beef are pork, dairy products, eggs, meats, chicken sea foods and vegetables. Many low income countries like India and Mexico switch over to vegetable, sea foods, chicken and eggs as a source of protein rather than preferring beef. The higher price of beef makes it an opportunity cost for the low earning consumers.
Figure 4: Consumption of nutritional sources
(Source: Maltz, Arnold, 2012, pp53)
China produces and consumes the largest amount of pork which is a substitute to the beef. Being farming country China’s agriculture is suited to produce pork hence the consumption of beef had decreased in the past decades. As per Forbes UK consumption of beef has also become stagnant due to stagnancy in the population and income growth and hence the consumers are now switching over to chicken consumption.
Quality of the product: Quality of a product may increase the value of the product there by increasing the demand for the product. It is a rare factor in case of all products however in case of high priced products and food products quality is an important determinant of demand. Certified by the Public Health journal, beef is one of the healthiest diet packed with 72% of iron and noted to contain amount of healthy fats that can decrease the risk of heart diseases by lowering the LDL and increasing the HDL. Recent studies shows around 12.5% increase in the demand for beef results due to the factors like quality, flavor, color, tenderness and juiciness of the product. It is also suggested that part from these factors some concerning factors that affect the demand for beef are the nutritional value, healthiness, animal welfare and environmental concerns.
The article focuses on the negative aspect of low supply of beef focusing on the following factors that can contribute to low supply rate of beef.
Natural calamities: The recent drought experienced by Australia increased the feed prices and reduced the supply of beef. The poor seasonal condition of the country has reduced the availability of pasture and has thus reduced the fresh supply of cattle for beef production. The decrease in the pasture quality during the drought requires the producers to arrange for supplementary feeding and this increases the overall cost hence the producers tend to reduce the stock numbers. The droughts experienced by Australia in the years 1994-1995, 2002-2003 and 2006-2007 shows the rise in the price of both the feeds.
Figure 5: Prices of feed during drought in Australia
(Source: Mlote, Sophia Nyakunga et al, 2013, pp41)
5. Conclusion
The project shows the effect of price on Veblen goods and also the affect of other variables on the demand for the products. The report uses the economic laws and the concepts in analyzing the present demand trend of beef in the global market and it shows that beef being a Veblen product the demand increases with the increase in price. The only constraining factor that is affecting the supply of beef is the natural calamity faced by Australian producers. The beef consumption has changed over the time due to the factors like improved quality, changes in cultural preferences and consumer demographics, increase in disposable income and changes in the price of substitute goods.
Reference list
Books
Ball, Madeline K and David Seidman, Supply And Demand (Rosen Pub., 2012)
Geunes, Joseph, Demand Flexibility In Supply Chain Planning (Springer, 2012)
Mankiw, N. Gregory, Mark P Taylor and Andrew Ashwin, Business Economics (Cengage Learning, 2013)
Newbold, Paul, William L Carlson and Betty Thorne, Statistics For Business And Economics (Pearson, 2013)
Journals
S. Gosalamang, ‘Supply Response Of Beef Farmers In Botswana: A Nerlovian Partial Adjustment Model Approach’ (2012) 7 Afr. J. Agric. Res.
Maltz, Arnold, ‘Global Supply Chains: Other Voices’ (2012) 48 J Supply Chain Manag
Mlote, Sophia Nyakunga et al, ‘Factors Affecting Agro-Pastoralist And Pastoralists’ Willingness To Adopt Beef Cattle Fattening In The Lake Zone In Tanzania’ (2013) 5 Journal of Agricultural Science
Soliz, Shreya, Price Concepts In Management & Economics (World Technologies, 2012)
Taiwo, B.B.A., O.D.D. Olaniran and F.A. Aluko, ‘Breed And Environmental Factors Affecting Body Measurements Of Beef Cattle In Yewa, Nigeria’ (2010) 5 Agricultural J.
Verga, Giovanni and Maria-Gaia Soana, ‘Supply And Demand In The European Credit Market During The Recent Crisis’ (2012) 22 Applied Financial Economics
Websites
www.forbes.com (2015) how-increased-meat-consumption-in-china-changes-landscapes-across-the-globe. Available at: https://www.forbes.com/sites/bethhoffman/2014/03/26/how-increased-meat-consumption-in-china-changes-landscapes-across-the-globe/ [Accessed on 17.1.2015]
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