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 bread in the UK.
(ii) Identify and explain what are the main economic policies that the government can use to reduce obesity in the U.K.
Supply and Demand Analysis
i) The concept of supply curve and demand curve of any product shows the equilibrium level of quantity and price of that product in a market economy. In an upward rising supply curve, the producer will produce more output if the price of that product will increase (Kimbrough and Murphy 2013). The reason behind this positive relationship between price and quantity supplied is that, producer can earn more revenue by producing more quantity of its output, as price increases.
However, it should be kept in mind that, there are some other external economic factors, which can influence the supply curve of a product. In the concept of supply law, some external factors are considered as fixed. Those external factors are production costs, which include wages of workers, prices of raw materials, interest rates of capital and rent of the land. Other external factors are exchange rate of a country, taxes or subsidies, technology of production and weather. The supply curve can shift either from right to left or from left to right, if any of these external factors will change. Shifting of supply curve indicates that the producer can produce more amount of its product or less amount of its product at the initial price level.
The above figure shows that the initial supply curve is S0. If any of those external factors will change, then the supply curve will shift either to the right, that is, S2, or to the left, that is, S1. The producer will produce more amount of output, at the initial price level, if the supply curve will shift to the rightward direction. On the other hand, the producer will produce less amount of output, if the supply curve will shift to the left.
Production Cost: The producer can supply more output at a given price level, if the production cost of this particular product will decrease. On the other hand, the producer will produce less amount of its output at the same price level, if the production cost will increase. The production cost of any product will be increased if the prices of raw materials and wages of workers will rise. The production cost can also be increased if the interest rate of capital and rent of land will increase. Hence, as the production cost will increase, the producer has to produce less amount of output as the amount of savings will decrease. The opposite case can be happened, if the production cost will decrease.
Exchange Rate: Supply curve can shift to the rightward direction, if the exchange rate of a country will increase. The reason behind this shifting of supply curve is that, an increasing exchange rate of a country will decrease the price level of all imported goods of that country. Hence, this will lead to an increase in the supply level of raw materials and other components of production. However, the supply curve can move to the leftward, if the exchange rate of this country will decrease.
Taxes and Subsidies: The government of a country can increase or decrease the rate of indirect tax for any particular product, based on its nature. This imposition of indirect tax can shift the supply curve of this particular product to the right side or left side from its initial position. The supply curve will shift to the rightward if the government will decrease the indirect tax on this product. The opposite situation can also be happened, if the government will increase the tax rate on this product.
Factors Influencing the Supply Curve
The government can also provide subsidies to some products, which are essential of an economy. In this situation, the supply curve of a good will shift to the right, if the government gives subsidy.
Technology: Every production process has a particular production technique. The producer operates its production function under this technology. However, this technology can be upgraded. The amount of output can be increased if the technology will improve (Antonelli 2016). This increasing level of technology will shift the supply curve to the right.
Weather: There are some agricultural raw materials, which are completely based on weather or climate of the country, for example, coffee and tea. This change in climate can greatly influence the supply the raw materials as well as supply of the product. Favourable weather will help to increase the production of raw materials and this will lead to increase the supply of a product (Busse et al. 2015). This shifts the supply curve to the right. However, unfavourable weather will decrease the production of raw materials. This will lead the supply curve to the left.
The demand curve of a product generally establishes an opposite relation between price of any product and quantity of demand of that commodity (Rios, McConnell and Brue 2013). Hence, the demand curve has a negative slope. It indicates the consumer will buy less amount of output if the price of that product will increase.
However, in this situation, it is considered that other external factors, which can shift the demand curve to the left or right, are fixed. These external factors are income of the consumer, prices of other relative goods, that is, substitute and complementary products, quality of the product, tastes and preferences of the consumer, expectation of the consumer, size of population and weather.
Prices of the relative commodities: Relative commodities of a product mean complementary goods and substitute goods. The demand of a product will be increased, if the price of its substitute goods decreases. This is because people will demand more amount of that product, at the same price level and will reduce the amount of consumption of its substitute goods. Hence, this will shift the demand curve to the right. The opposite situation will happen, if the price of the substitute good falls. On the other hand, the demand curve of a product will shift to the right, that is, the demand will increase, if the prices of the complementary goods will decrease. In this situation, people will demand less amount of each output. However, the demand of a product will decrease, if the prices of its complementary goods will increase. Hence, the quantity of demand for any product is completely depend on the price level of its substitute goods and complementary goods.
Income of the Consumer: The demand curve will shift to the right at a given price level, if the income of the consumer will increase. With its increasing level of income, a consumer can demand more quantity of output than before at the same price level. However, the demand curve can be moved to the left, if the income of the consumer will decrease. In this situation, the consumer will not be able to buy same amount of output with a lower level of income.
Factors Influencing the Demand Curve
Quality of the Product: The demand of a product can be increased, if the quality of that product will increase. People will buy this product more for its good quality. However, the demand of the product can be decreased, if the level of quality of that product will become low.
Tastes and Preferences of a Consumer: The demand of a product can also be influenced by a consumer’s taste and preference. The demand curve of a product will shift rightward, if the taste and preference of the consumer for a particular product will increase (De Pelsmaeker et al. 2017). The opposite situation will happen, if the consumer will decrease his or her taste and preference on that product. In this situation, the demand curve of that product will shift leftward.
Expectation of the Consumer: The consumer can expect that the price of a particular commodity can be increased in future. Hence, the consumer can buy this product at present. Hence, in this circumstances, the demand curve of this product can be shifted to the right, at a given price level.
Size of Population: The market demand curve of an economy can be shifted to the right, if the population of that country will increase. The number of population can be increased by a large number of migration, large amount of birth rate and low level of death rate. However, if the number of population in a country decreases, the market demand of the country will also decrease.
Weather: The demand curve can also be influenced by the changing condition of a country’s climate. Different countries will demand different commodities according to their weather.
In U.K, the price of bread can be analysed by the general demand and supply concept. There are large numbers of bakery firms in U.K. Hence, the number of substitute good of bread is large. Therefore, an increase in the price of a company’s bread can increase the demand for bread of another company. However, at present, consumer’s taste and preference is changing. People of U.K are becoming health conscious. Hence, they are demanding foods with low level of carbohydrate. Hence, the demand of bread will decrease. On the other hand, the price of loaf has risen by 4 % during last year. This is because the cost of wheat and other components of bread production have been increased. This has increased the production cost of bread. Hence, producer has charged a higher price for bread. Hence, during last two years, the people of U.K have decreased their consumption of bread from 52 % to 42% (Han et al. 2017).
- ii)The rate of obesity among people is increasing rapidly in many developed countries, especially in U.K. People are becoming more addicted with fast foods like sandwich, pizza and different kinds of beverages and so on. The reason behind this high rate of obesity among people in U.K is due to their fast life. This high rate of obesity is not good for an economy. It will bring a negative externality in U.K. High rate of obesity among people will cause serious health problem among people. The life expectancy of each people is becoming low over the last few years. People are suffering from various types of health problems, like, cancer (Wren 2017). This negative externality reduces the working capacity of workers. This again reduces the national income of the country. Hence, high rate of obesity bears some social costs, which is greater than private costs in the economy of U.K. Hence, it increases the market failure of the economy. In an economy, two types of negative externalities can be seen. These are negative externalities related to production and other is related to consumption. However, in this particular context, the negative externality related to consumption of unhealthy foods will be analysed. In this negative externality, the consumption habit of a person has reduced the well-being of that person and of others. This high rate of obesity in U.K can be seen among different people of different age group. Children are consuming fast food every day in their schools and colleges. This food habit is reducing their standard of health and their life expectancy. Hence, to reduce this habit, the government should imply some policies. The government can apply various instruments to reduce these negative externalities (Nolan 2017). These various kinds of public health policies are taxes on unhealthy foods, which are harmful for people, different types of government rules in schools and colleges, spreading awareness among people through social media, providing subsidies for healthy foods and mention the level of nutrition while packaging the food and so on.
The government of U.K can impose those public health policies to decrease the obesity rate in U.K. The government can start different health schemes in schools and colleges, like, providing nutritional meals during their lunchtime. The government can also decrease the amount of junk food intakes in schools by reducing the fast-food vendor machines (Maynard, Baker and Harding 2017). Physical education helps children to remain fit and healthy (Leal et al. 2017). The government can implement a policy, which will state that there should be a period for physical education, in each school. The government should impose its health policy in a workplace also. The negative externalities related to health are harmful for employers and for the organisation as well. People with poor health quality cannot work properly. Hence, the levels of productivity in different workplaces are becoming low.
However, the main instrument of government to reduce the health condition among workers is imposing taxes on unhealthy foods. The government can impose taxes on those foods, which have negative impacts on heath. It will increase the price level of those goods. Hence, people will not consume those foods for its higher price.
The government can provide subsidy to farmers for producing fresh fruits and vegetables. The government also can supply those healthy foods as meal in different schools and colleges. It can also conduct different health oriented programs to promote health awareness to all citizen of U.K. The government can spread this awareness through different social media, different social campaigning program and face-to-face interaction with students and workers in different public places.
Antonelli, C., 2016. Technological congruence and the economic complexity of technological change. Structural Change and Economic Dynamics, 38, pp.15-24.
Busse, M.R., Pope, D.G., Pope, J.C. and Silva-Risso, J., 2015. The psychological effect of weather on car purchases. The Quarterly Journal of Economics, 130(1), pp.371-414.
De Pelsmaeker, S., Schouteten, J.J., Lagast, S., Dewettinck, K. and Gellynck, X., 2017. Is taste the key driver for consumer preference? A conjoint analysis study. Food Quality and Preference.
Han, T.S., Correa, E., Lean, M.E., Lee, D.M., O’Neill, T.W., Bartfai, G., Forti, G., Giwercman, A., Kula, K., Pendleton, N. and Punab, M., 2017. Changes in prevalence of obesity and high waist circumference over four years across European regions: the European male ageing study (EMAS). Endocrine, 55(2), pp.456-469.
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Maynard, M., Baker, G. and Harding, S., 2017. Exploring childhood obesity prevention among diverse ethnic groups in schools and places of worship: Recruitment, acceptability and feasibility of data collection and intervention components. Preventive Medicine Reports, 6, pp.130-136.
Nolan, A., 2017. Health: Funding Access and Efficiency. The Economy of Ireland: Policy-Making in a Global Context, 6(1), p.356.
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