Summer drought: Reduces food source, raising the price for the supplies

As the world is aware, scorching heat and massive drought has strike the United States in mid-2012. This natural disaster has brought nothing but devastation as it covers almost 60% of the continent U.S.

Rumour has it saying that the price of several goods will increase in the year 2013 due to this crop-damaging weather that will have an effect on the supply and demand of the country. The good news is that not all the price of goods will be increased.

Meat and dairies which are normally consumed

Ever wondered why the government increases the price of goods?

Well, the Americans survive by consuming mainly more on meat, poultry and dairy products. The U.S Department of Agriculture have said that these are the items that the price will increase due to the drought in the range of 3% to 4%. How so? The drought will cause the grass to wither which is the reason why cows have a little to eat while grazing. Farmers will either have to spend more by using other alternatives to feed the cows or by selling off their cows to earn a living. Farmers who spend more will then result to a higher cost of sales where customers will then have to pay.

Implication of drought in front of a family farm in Lovilia, Iowa

Meat and poultry has the largest effect as most of their feed prices represent the biggest part in their cost production. Corn, soybeans and other commodities are not considered as an exception in this case. Fields dry out and crops wither across most of the country’s midsection. These items are also soared in anticipation of tight supplies after meat and poultry. Farmers will have to pay more to feed their livestock in order to produce more. This will cause the price to increase in the production of these goods.

A farmer standing in a withering field in July 2012

Fruits and vegetables on the other hand do not have a big impact compared to the products mentioned above as they are irrigated even in normal weather. Price of process food on the other hand is less affected as the cost of production does not take up much compared to the transportation and marketing cost. Therefore the demand for these goods by the consumer would not be an issue as there will be sufficient supply by the country.

The never ending demand of consumers is one of the things that the industry can’t run away from. Demand is “the desire and ability to consume certain quantities of a good and service at certain prices at a particular point of time” while supply is “the quantity of goods and services willing to be produced by firms or offered for sale at a particular time or particular place at alternative prices”. So since the supply is limited, the price of goods needs to be increased in order to ensure the continuity of goods for the benefit of the consumers. 

Price Ceilings: The good, the bad and the ugly?

 

Have you ever wonder why Malaysia’s inflationary rate never exceeds 4%? No? Never? Well, that’s because price ceiling exist.

Price ceilings legitimately replicate curb to restrict inflation, or control monopoly power by holding down prices for essentials. Sure, prices on most markets are free to rise or fall to their equilibrium levels no matter how high or low those levels might be. However, government sometimes resolved that supply and demand will produce prices that are unfairly high for consumers or unfairly low for producer, therefore the government sets price ceiling.  Unfortunately, setting price ceiling might not be a great idea… but we’ll talk about that later on.

So, what is price ceiling? Price ceiling is the maximum legal limit that the government allows the distributor to charge for a product or service. Basically, the government controls the prices of the essentials so that the unfortunate would be able to afford the essentials. For instance, stated on Star Newspaper September 2012, Malaysia’s government has announced that the subsidy for sugar prices would decrease in the start of the year 2013. Even though, the subsidies have been reduced, the producers are not allowed to increase the price of sugar. Consequently, Malaysia’s government has set the price ceiling of fine granulated white sugar to RM 2.50 per kg and coarse granulated white sugar for RM 2.60 per kg because sugars are essentials.

Ok.. So what are the effects of price ceiling?

As you can see, for the price ceiling to have an effect they must be set below the natural market equilibrium.  Hmm.. so what happen when it is set? Shortage happens. Woah, how did we get there? Well, if you remember the law of demand, a shortage occurs when there is more demand and less supply at the equilibrium price, which also means there is more quantity demanded than quantity supplied therefore causing the marginal benefits to surpass the marginal cost.

Example, recent rises in the price of gas have left many individuals requesting for a price ceiling on oil. If the government sets a price ceiling on gas, there will be a shortage. Remember the oil crisis in America in the 1970's? This is exactly what happened. You now see why this is a bad idea.

So here is the ugly part, when shortages occur, people will go to a higher distance for that necessity. When there is a demand, there will be a supply. Obviously, a supply that will not be acceptable by the government. For a price ceiling problem that is relatable is the black market. No, it is not a name for an underground market place but oddly it stands for an activity that takes place outside of the government’s eyes

A perfect example of a black market situation is a movie called Blood Diamond. Basically the movie is about an illegal diamond trading in a mine, which was set against the backdrop of civil war in Africa. In this movie, the illegal activity has brought many disadvantages to the African citizens, especially the ones living in poverty because of ineffective administration, corruption, and the poorly paid officials who are vulnerable to bribery etc. This situation coupled with the presence of significant national mineral wealth gives opportunity to war-profiteers, who easily access arms from an underground black market. 

Price ceilings are incompetent for many reasons. One reason worth considering is that they increase the need for monitoring and implementation. That means increased government administration, which does not come cheap. Increased government spending equals more taxes or more borrowing. Thus, I conclude that price ceiling has a few benefits and drawbacks. 

So, is price ceiling a good thing? Bad? Or ugly? You decide.

Eyeing The 'i' from An Economics Point of View

 The dawn of the history of mobile phones has just been broken.

Ever since, Apple Incorporated released their first ever iPhone, the technology world seems to be revolving in a slightly different way. Every year, results have shown that about two thirds of the company’s return is originated from the sales of the iPhone itself. This makes the phone a vital product for the company in order to achieve maximum profit.

So, what exactly is the elasticity of the iPhone? 

Before I begin to get further into details, it is necessary for me to define what exactly price elasticity of demand (PED) is. According to McConnell, Brue and Flynn, price elasticity of demand is the measure of how sensitive a consumer is towards a price change for a certain good and service. So, in the Apple iPhone’s case, it means that how a consumer would response to the price change of the iPhone, whether it has risen or fallen. The first iPhone to be launched in the US was priced at $599 in early 2008 and the rough estimation of total sales for that first quarter was 270,000 units of iPhone. For the next quarter, the price had been decreased by $165 and an estimated total number of iPhones sold for that period has increased to 1,119,000. Using the midpoint formula, the PED of the iPhone is found to be 3.8. This means that in every 1% change in the price, there is a 3.8% change in the quantity demanded. In economic terms, this indicates that the iPhone is a highly elastic demand. 

  

From the sketched graph above, the total revenue generated by Apple Inc. in the first and 2nd quarter of 2008 from the sales of the iPhones can be calculated. For the first quarter, they have made total revenue of USD$16,173,000USD while for the second quarter, an astounding total of USD$552,786,000 was received. This proves the economic theory which says that if a demand is elastic, and if the prices are reduced, the total revenue will rise. That figure is just from the total income from the sales of their iPhone products. Just imagine how much are they really earning from the sales of their iPods, iPads, Macbooks etc. 

However, there’s always a downside to every good thing, whether you like it or not. Apple Inc. may be the captain behind its wheel, steering its ship which is the whole company, to great heights, but they may not have the control over the other external factors that determines its elasticity, for instance, substitutability. We should not forget that the iPhone is not the only mobile phone available in the market as there are many other choices of brands of mobile phones such as Nokia and Blackberry that consumers can consider to buy from. The higher the number of substitutes a demand has, the more elastic the demand will be. A very well-known and close substitute to the iPhone is the Samsung Galaxy phone. The Samsung Galaxy contains features that are similar with the iPhone and price-wise, they are considerably cheaper as well. Therefore, this makes the brand a tough one for Apple Inc. to beat. 

Besides, not everybody can afford to get an iPhone, which brings me to my following point. The next determinant that makes the iPhone an elastic demand is the proportion of income earned by consumers. If the iPhone’s price was to change due to certain reasons, the quantity demanded for it would definitely be greatly affected, especially by average income earners, because these changes in price make a significant fraction to their annual incomes and budgets. So, the company needs to know and understand exactly how to arrange their pricing strategies according to the statistics of their targeted consumers. 

In a nutshell, despite a few unavoidable obstacles, Apple Inc. still succeeded by raking millions and millions of dollars just from the sales of the iPhone itself. Their products are obviously a popular choice among mobile phone users in this generation. I foresee a whole bright future for this company’s financial status and could not wait to see the release of the next big thing from them.