Discuss about the Microeconomics and Industrial Organisation.
The object of the paper is to make a microeconomic evaluation of a recently published article. Microeconomics deals with economic decision of a single individual. The fundamental concepts are demand and supply analysis, elasticity of demand and supply, market efficiency and market failure. Today the world demand for different verities of super foods is increasing rapidly. An article is chosen on super foods like Quinoa, Acai and Chia. Domestic supply often falls short of domestic demand. This raises price. The increased demand also boosts export of these items from different countries. The trade restrictions have been eliminated and free trades are welcomed to maintain a balance between supply and demand. The rising price is thought to hamper welfare of many inhabitants. However, household data reveals that when price increases then wealth of Peruvian household increases indicating improvement of welfare. The aspects from microeconomics that are used to evaluate the article are forces of demand and supply and Elasticity of demand.
The article is based on super foods such as quinoa, acai or chia seeds. The demand for super foods are growing increasingly as these are nutrition rich foods and are beneficial fir health and contribute to well being. In developed countries, especially people’s taste and preferences for super foods instead of traditional staple food are expanded rapidly. Its consequent affects are seen on global and local economies with trading of super foods and famers engaged in harvesting theses crops.
Prior to one decade, only population in Anden popularly knew quinoa. Now, it has introduced to variety of places in the world in the form of cleansing diet or in trendy salad bars. It is thought to able to eliminate the problem of undernourishment in most of the poor nations and therefore, moving towards achieving Millennium Development Goals (themarketmogul.com 2017). Though the popularity of quinoa has accelerated widely there are discrimination in its prices depending on supply and demand condition. In Bolivia and Peru, price of Quinoa is rising because of a rising demand. In these countries, Quinoa is viewed to play a major role for achieving food security. Various programs at the school level are arranged in Bolivia to boost Quinoa intake. The raising demand for the seed has increased export demand, minimizing need for any barriers to trade such as tariff or quota.
To prevent the price rise focus has been given on increasing supply of Quinoa and it has made possible to increase world supply of Quinoa. The factor contributing to rising production volume is not gains from productivity but increasing areas of cultivation. There is a rumor that rising demand for quinoa globally can hurt the welfare of poor inhabitants in South Australia as would be unable to afford traditional grains (Rubin 2016). Yet, it is found that Quinoa price is lowest among member Countries of Latin American Integration Association (LAIA) in 2012. In a study conducted by Bellemare et al using representative data set found that both household consumption and household welfare both are improving in line with Quinoa price.
Another nutrition rich super food is Acai consumed in the forms of juices, granola bars and smoothies. Both the production and consumption volumes for acai berry is relatively small. From 2000 to 2009, there was a 60-fold increase in price arising from increased demand. Price and demand stabilized after this period (Wojcieszek, Popowski, and Ruzik 2016). The production of Acai berries increases moving the price towards stability.
Chia seed is another type of super foods. It is neither a berry nor a grain and consumed in the forms of cereals, Smoothies and pudding. It is rich in Vitamin B and iron. The production and consumption of Chia is also growing like Quinoa and Acai berry.
Demand and Supply analysis for determining prices
In free market equilibrium, the movement of demand and supply forces determines price and quantity. Demand captures the desires of buyers to buy something backed by their purchasing power. Supply on the other hand represents the quantity available in the market at a particular point given price (Kimbal 2015). Change in any of them changes equilibrium in the market and therefore, price and quantity changes in the market.
Price discrimination of Quinoa is largely contributed by the mismatch of supply and demand (Askari, Zamir and Mirakhor 2015). In Peru and Bolivia demand of Quinoa outpaced its supply resulting in an increase in price. Price has become more than tripled since it is in 2004. Government of Bolivia and Peru has taken measures to fulfill domestic demand despite sky rising price.
Above figure depicts the effect of a rising demand on equilibrium price in the market. e in the figure is the primary equilibrium point yielding equilibrium price and quantity as p* and q* respectively. Now, with rising demand of Quinoa, the demand curve shifts right from DD to D1D1. Corresponding to this, the new equilibrium point is e1. Price rises from p* to p**.
Now to stabilize the price, volume of production needs to be increased (Frank 2014). Sales of Quinoa have increased sharply over the last two decades. Increase in supply is contributed from in the area under cultivation rather than productivity. There are several factors responsible for a stagnant yield of Quinoa. Firstly, there are obstacles in the form of credit constraint for small farmers in Andean countries. They have lack of access to advanced technology and fertilizers (Chenayah 2017). The second problem arises in the form of proper storing place for Quinoa. In order to store it in good condition, cool, dry and dark place in needed. Inability for proper storage results in loses of raw quinoa. Despite, with increasing production volume the pricing condition has improved.
When there is an increase in volume of production, then supply curve will shift outward. The new supply curve is S1S1. Equilibrium point e1 is obtained from the matching of new supply curve S1S1 and new demand curve D1D1 (Bernanke, Antonovics, and Frank 2015). Corresponding to the new equilibrium price decreased from p* to p1.
Similar is the market adjustment for berry acai and Chia seeds. The price rose in response to high demand and then increased production volume stabilizes the price.
Role of elasticity of demand
Demand elasticity with respect to price measure the percentage change in quantity demanded in respect to a percentage change in price. Demand is relatively elastic when demand changes more than price change (Nicholson and Snyder 2014). In this case, elasticity measure is greater than one. In situation where proportionate change in demand is less than that of price, then demand in relatively inelastic in nature. The measured elasticity here is less than 1.
The demand for cereals or seeds is generally inelastic in nature. Change in price does not affect the demand much. However, for super foods like Quinoa, acai or chia demand is elastic types (Hill and Schiller 2015). These are considered as luxury food items mostly demanded in developed nations.
The curve DD is drawn flatter to show elasticity of demand. A comparatively small decrease in price from P1 to P2 leads to a larger increase in quantity demanded from Q1 to Q2 (Coto-Millán 2013).
Some commentators suspect that the rising price of Quinoa may have an inverse effect on welfare of sub Saharan inhabitants because of lower affordability. However, in reality an opposite relation is found. A positive relation is found to exist between price increase of Quinoa and household welfare (Maurice and Thomas 2015). The price elasticity of quinoa with respect to household welfare turns out to be statistically significant. When price of Quinoa increases by 1% then wealth of the household consuming Quinoa in Peru increases by 0.07%, indicating a positive association.
The report has made an economic evaluation of article on some super foods. Popularity of quinoa, acai and chia have been growing. Only a decade before, quinoa was known only to some parts of the world. However, now a wide variety of this is available across the world. There are disparity in prices because of a mismatch of supply and demand. However, government of different nations has tried to make maintain steady supply in the domestic market by allowing exports. The production of Quinoa has increased to meet the demand. More areas are brought under cultivation to increase production volume. It is also found that rising price of Quinoa increases wealth and hence welfare of the households. Acai and Chai are two other types of food consumed in forms of juices, cereals and pudding. Therefore, world is now introduced with a wide variety of new agro items with changing taste and preferences.
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