http://online.wsj.com/news/articles/SB10001424127887323420604578651952889248848
Product: Orange Juice
Demand of a product refers to the quantity of goods or services, which consumers are willing and able to buy at different price levels, over a specific period, ceteris paribus. Supply refers to quantity of goods or services, which supplier is willing and able to offer for sale at different price level, over a specific period, ceteris paribus. The interaction of the market demand and market supply curves gives the market equilibrium price and quantity for a particular good or service.
Firstly the change of taste and preferences of the consumer causes the demand for the orange juice to decrease. There is increasingly number of beverages joining the the market, increasing the variety of the beverages. Also, with the advertisement of different variety of drinks, this causes the consumer to change their taste and preference to other types of drinks such "from energy drink Red Bull to Coca-Cola Co.'s Vitamin water, and juice-based health crazes like pomegranate and açai". By changing the consumer taste and preferences, the consumer switched over to other types of drinks, leading to an decrease in demand for orange juice.According to the wall street journal analysis, " domestic retail orange juice sales fell to 39.53 million gallons in the four weeks ended July 6, the lowest on record" This shows that demand for orange juice has decreases. Since the change of taste and preference of consumer is causes them to switch over to other types of drinks, demand for orange juice decreases, leading to a leftward shift in demand curve.
Next, the increase in income has led to a decrease in the demand of the orange juice. Orange juice is regarded as inferior goods compared to wine that is regarded as normal goods. When income increases, people would switch over from orange juice to wines as it become affordable to many people. When this happens, the demand for orange juice decreases and demand for wine increase, leading to a leftward shift of orange juice demand curve and rightward shift of wine demand curve. For example, in China, there is an increase in the real GDP growth rate of 7.60 percent. This shows an increase in income level in the country.
Hence, the increase of income of the people causes orange juice (an inferior goods) to decrease in demand, this leads to a leftward shift of the demand curve.
Next, the bad weather condition and government policies have led to a decrease in supply of orange juice. Bad weather condition causes the yield of the oranges to fall, decreasing the harvest of the orange during harvest season. Government implements import restriction against goods that does not comply to the regulation of the country. As there is restriction on the oranges supply, this leads to decrease in orange supplied.This leads to a decrease in supply of oranges. When there is a decrease in supply of orange, the supply curve of orange shifts leftwards, leading to an increase in price for the same quantity supplied. When the price of orange increases, input prices for orange juice increase. This makes the firms less profitable, leading to a decrease in supply of orange juice. For example, "the spread of citrus greening, a disease that chokes off nutrients to fruit and causes them to drop prematurely from the tree, reduced supplies". Other than this, "several crop-damaging hurricanes in 2004 and 2005" in Florida has lead to a decrease in orange supply. Since the bad weather conditions have lead to an increase in price of oranges, this causes an increase in input prices, making orange juice less profitable, This causes a decrease in supply of orange juice as firm would not want to produce too much, leading to a leftward shift of supply curve.
Also, expectations of future price of orange juice may lead to an increase in supply of orange juice. When the producer expect the price of orange juice to rise in the future, producer would want to hold their stock to sell it off at higher prices in the future. This causes a decrease in supply of orange juice. For example, "Prices of orange juice have fallen 17%". This means, the price of orange juice is relatively low due to other factors such as government policies and bad weather condition for a short-term. However, "the ban never materialized" and better weather condition may cause the price of orange juice to rise in the future. As the price of orange juice may rise in the future, producer would hold their stock by reducing orange juice supply. This leads to a leftward shift of the supply curve.
Fig 1. Simultaneous decrease in demand and supply in the orange juice market
As shown in Fig 1, at the initial equilibrium of E0, equilibrium price is P0 and equilibrium quantity is Q0. When the demand curve shifts to the left from D0-D1, and when the supply curve shifts to the left from S0-S1, quantity demanded exceeds the quantity supplied. There would be a shortage of Qa -Qb leading to a upward pressure on price. As price increase, there would be a upward movement along the demand curve D1, as quantity demand decreases. As price increase, there would be a upward movement along the supply curve S1, as quantity supplied increases. The price adjustment process continues until quantity demand is equal to quantity supplied at the new equilibrium E1. At E1, equilibrium price is P1 and equilibrium quantity is Q1.
In conclusion, the increase in income level and change in taste and preferences leads to a decrease in demand for orange juice, leading to a leftward shift of demand curve, the government policies, bad weather and the expectation of future prices leads a decrease in supply of orange juice, leading to a leftward shift in the supply curve.Hence, the quantity of orange juice decreases and the price of the orange juice increases.
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