Writing an essay showing the understanding of Supply and demand analysis, allows us to investigate and understand the operation of markets or sometimes the failure of markets.
(i) Using supply and demand analysis identify which you believe to be the main factors in determining the price of bottled water in the UK.
(ii) Identify and explain what are the main economic policies that the government can use to reduce the use of 'single use plastic' in the U.K.
Using supply and demand analysis to identify factors determining bottled water price in the UK
Water is acknowledged as life and without water life wouldn’t have sustained in the planet earth. Without having water for drinking not a single living organism would have sustained in the earth and all of the living being are dependable on the water source of the planet earth for living (Shiva 2016). Well, it is good to know that there is more than enough water to drink in the earth, however, over exploitation of the drinking water has made it a scare resource. Out of total water resource in the earth 3% in consumable, which is far more sufficient for the 700 billion population of the earth (Hisar, Kale and Ozen 2015). Now, is the situation really tensed! Yes, it is; due to the fact that out of total drinkable water only 1 part is available in liquid form and the remaining 2 part is available in the form of ice in the glaciers (Bennett et al. 2016). 1 part water, which is present in liquid form is available from the surface or ground water at free of cost because it is a common resource. However, over exploitation has made it scare resource and on the other hand water being an essential good cannot be substituted. Thus under this scenario bottled drinking water has come into existence, yet the issue has not resolved due to high price of the same.
Under this scenario, this essay is aimed to analyse the Main factors in determining the price of bottled water, with special focus to the UK due to the high demand of the clean drinkable water in the state. In addition to this, the essay will analyse the economic policies to reduce the use of 'single use plastic' in the UK in order to assess the programs of the government for ensuring better environment in the state. Finally, this essay will provide recommendation in order to gauge the situation and next to this it will portray a summarised overview of its findings.
Supply and demand framework is one of the simplest model that aids to determine the equilibrium price and quantity demand of a goods and services (Berry and Waldfogel 2015). In addition to this, it helps to determine the factors that can affect the pricing policy of the same. Under this scenario, if UK bottled water industry can be contested within the supply and demand framework, then it can easily be understood that which factors can affect the pricing of the same.
Main economic policies to reduce the use of single use plastic in the UK
Figure 1: Price determination through demand curve
Source: (Friedman 2017)
From figure 1, it can be stated that demand curve of the water is a downward slopping curve because as the price falls, quantity demanded of the packaged drinking water rises and on the other hand if there is rise in the price, the demand will fall considering the fact that packaged drinking water is available and it is superior in quality (Friedman 2017). However, water being the essential good the demand curve of the water has lowest elasticity that crowds out the price change effect on the demand of the packaged water by a large extent. Thus, in case of price fall marginal utility of consuming one additional unit of packaged water will keep the marginal utility same and in case of price fall marginal utility of consuming one additional unit will rise (Becker 2017). Consider that the initial price of the packaged drinking water was 50$ for each bottle and the demand was 20. Now if the price rises to $90, then the demand will fall and the marginal utility will rise. It showcase that in case of price rise of essential good there will be additional enjoyment for one additional unit of consumption and contrary to this, if there is price fall, then it will reduce the marginal utility.
Figure 2: Demand shift
Source: (Friedman 2017)
Now considering this, if there is rise in demand of the packaged drinking water, then it will lead to shift in the demand curve. And if there is fall in the demand due to change in the consumer behaviour, personal factors, market structure and others, then it will shift the demand curve leftward (Pinson and Madsen 2014). From the figure 2, it can be seen that, under a ceteris paribus situation, if the demand fall from initial D2 position to D1, then the price will also fall. At price P1, the quantity demanded of the packaged drinking water is Q1, not the Q2 because supply and demand equilibrium occurs at P1Q1 position. On the other hand, of the quantity demanded would have been represented by D2, then it would represent a new equilibrium, where the price and quantity demanded will be higher than the present P1Q1 position.
Figure 3: Market equilibrium condition
Source: (Friedman 2017)
Figure 3, highlights the equilibrium situation of the UK packaged drinking industry. Equilibrium occurs at the place, where the where the demand and supply equates with each other and at this position market becomes clear due to the fact that, whatever goods and services are produced, became absorbed by the consumers (Caballero, Farhi and Gourinchas 2016). Thus considering the basic principal of the market equilibrium, it can be seen that the equilibrium occurs at point E, where the price is P and the quantity demanded of the packaged drinking water is Q. if there is any change in the demand or the supply, then the equilibrium situation will be alter, while reflecting the then situation of the market.
Analysis of factors affecting bottled water price in the UK
Assessing the demand and supply framework of the packaged drinking water in the UK it can be seen that the factors like consumer behaviour, personal factors, market structure governmental policies, production cost can aid to determine the pricing of the bottled water in the UK. Considering this, moving forward, this essay will portray these factors and elaborate on the same, how these are responsible for the price determination.
Present market scenario of 21st century is becoming complex day by day with the fact that brands are indulging itself with different segment of the consumer. Consumer preference is the key element to understand the final customer preference for the product (Feldmann and Hamm 2015). It determines whether the final consumer prefers to consume it or they prefer something else. In addition to this, consumer behaviour plays a crucial role because different consumer provides different preference. When it comes to the packaged drinking water in UK, then it can be seen that the consumer demand for the same rises at 2% annual growth rate, which is higher than the other developed nation in the European Union (Quansah, Okoe and Angenu 2015). Out of total water consumed by the citizen of the UK 87% is plain packaged drinking water that highlights the demand of same (Wttc.org 2018). Consumer of the UK prefer plain packaged drinking water over the coloured, flavoured and sweetened beverages that highlights the difference in consumer behaviour of the state. Thus, considering the trend of consumption of the drinking water in the UK it can be stated that most of the people prefer plain drinking water and it aids to determine the price of the packaged drinking water (Lemon and Verhoef 2016). If the demand of the plain drinking water is higher, then it would be costlier. As mentioned above in the supply and demand equilibrium section, higher demand will shift the demand of the packaged drinking water upward, leading to rise in price as well as the quantity demanded.
As stated by Tomek and Kaiser (2014), personal preference is one of the major factor that leads to determination of the price of a product. If more people demand same good, then the aggregate demand of that product will rise and will lead to the rise in price as well. In addition to this, Rothman (2016) has argued that blue collar worker will opt for working clothes, lunch boxes and working shoes and on the other hand president of a company will buy, dress suits, air travelling ticker and membership of the country club. Thus the occupation, personal taste and choice, brand loyalty are the things that comes under the personal factors, which can effectively aid the firm to determine the price of a product. If the firm observes that consumers are eager to buy their product, then considering the perceived demand, the buyer will put a high price mark on the product and if the demand of the product is low, then it will be labelled with lower price (Godey et al. 2016). Under this situation, it can be seen from the demand of the packaged drinking water in UK is higher that leads the price to be marked higher as well.
Consumer behaviour, personal factors, and market structure affecting bottled water price in the UK
Health and well-being consciousness of the buyers:
Certain things like health and well-being are the major factor that determines the price of product. If the product is healthy and safe for consumption, then more people will like to have the same. It will lead to rise in the aggregate demand of the product and it will attract a higher price label of the same. According to the Farb et al. (2015), clean packaged drinking water is in the right place at right time due to the fact that the natural source of water is becoming scare and the people of UK are not agree to consume recycled waste water due to the health and hygiene factor (Schoonveld 2016). Packaged drinking water is pure, enriched with minerals and comes with secure packaging that does not allow the germs to penetrate it. Thus, the demand of the packaged drinking water is cannon balling the market demand and the price is largely dependable upon this factor.
Considering the clean UK packaged drinking water market, it can be stated that it is an oligopoly market, where 30% of the market share is enjoyed by the top five brands. On the other hand if he top five water plus brands are considered, then they are accounted for 5% of total packaged drinking water that showcase the market is highly collusive (London.gov.uk 2018). Market leader is absent in the packaged water market due to the fact that there is no scope to differentiate the products and the pricing strategy is almost same. Thus, the firms considers collusive pricing strategy and promotion plans to provide stimulus to the market demand on behalf of them. Under this scenario, pricing is highly competitive and the brands considers the strategy of the other players, while setting its own price.
Production is one of the essential factors that determines the price of any product and so does in the case of the packaged drinking water in the UK too. Considering the fact that a standard 2000 LPH packaged drinking water plant required 800 Sq. Ft of area and at lead 65 HP of power along with 3000 LPH of raw material, the cost of packaged drinking water varies to a large extent depending upon the place of its operation (Cosgrove and Rijsberman 2014). Essential factors mentioned above can be costly at one place and it may be easily available at another place. Thus the price of the final product vires too. Considering the case of the UK, the price of the power is considerable, however the land and other raw materials are way costly than any other EU nations that makes the packaged drinking water costlier in the state. So, considering these facts it can be stated that the price of the packaged drinking water is largely dependable upon the factor like production cost.
Production cost affecting bottled water price in the UK
Every year more than trillions of single use plastic bags are being used worldwide and when it comes to the UK, then the state is accounted for 1.1 billion sale every year that can goes up to 1.3 billion in coming years according to the estimation (Walker 2018). Litter that the plastic bags poses to the society that is no more a tolerable nuisance because plastic waste is one of the major issue faced by the environmental authorities of the state. According to the statistics, sale of the single use plastic bottles has faced galloping rate of development during the last two decade. And according to the same data, usage of the single use plastic bottled water has enhanced from 5 billion to 25 billion from 1995 to 2015 (Chandra 2018). This whopping change in the usages of the packaged drinking water has caused huge amount of debris to the society and time has arrived, when competent authority need to take serious steps in this regard.
As the mechanism of reducing the usage of single use plastic in the UK various plans have been taken into consideration and some of them are mentioned below:
Taxation on the single use plastic bags:
During November 2017 UK government took a bold step by introducing taxation policy on the single usage plastic bags, which is aimed to reduce the aggregate demand of the plastic bags through rising the price of the same (Walker 2018). As opined by the Xanthos and Walker (2017), it is estimated that a tax on the single usage plastic bags will reduce the demand of the plastic by 85% and it will not only aid the country’s environment to become better compared to as it is now, rather it will aid the world environment by shading thousand tons of carbon di oxide (London.gov.uk 2018).
Charging the plastic bags:
Government of UK has took an initiative to charge the plastic bags at the rate 5p in order to reduce the overall demand of the same. It was estimated that charging the bags will reduce the demand and eventually it will crowd out the usage of the plastic bags (London.gov.uk, 2018).
During February 2017, Greater London Authority introduced recycled carrying bags and coffee cups through the designated 300 outlets in order to make the city free of plastic bags and single usage plastic bottles (London.gov.uk 2018). As the outcome, Canary Wharf Estate has become free of plastic bags and the mayor of the place has suggested the state to utilise the same model for reducing the usage of the plastic bags (Wttc.org 2018).
Exploration of economic policies to reduce single use plastic in the UK
From the above discussion it can be seen that over the time packaged drinking water has become an essential source of consumable water in the state. Due to the preference of the customer and owing to the fact that packaged drinking water is safe from disinfectants, people of UK prefer this over the other source of the drinkable water. Presently usage of the packaged drinking water is on the rise and according to the estimation it is going to rise if there is no plans from the competent authority to control the same. As the mechanism of controlling the usage of single used packaged drinking water it has been observed that UK authority has taken steps, however there is more to be done. As the controlling mechanism, government need to encourage community to use reusable water bottles at first place. To conclude it can be stated that, providing alternative source of packaged drinking water which is safe and pure as the packaged water, will be beneficial.
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