In the wake of the Braai season, meat prices are set to rise. The prices of red meat and pork will all set a huge price attached to it. According to a Senior Agricultural Economic at FNB, Paul Makube, the prices will be responding to increased demand, which will create a shortage in red meant. Therefore, more of people disposable income will be directed to making the purchases. People will have to reallocate a fraction of their income from luxury to meat purchases. Others will opt to make huge purchases to cut on the average cost. However, high-income people will not be affected as the income people who might need to abandon meat consumption.
Economic Analysis
In a competitive market, the market forces of demand and supply determine the price. The suppliers are price takers; they do not determine the price. Also, it is assumed that there is perfect knowledge of the market. The case is not always right. An increase in prices is a reaction of the market to the expected shortage. According to the market demand and supply concept, when price demand increases more than supply, the price will certainly go up. When demand for pork and red meat goes up due to the braai season, a shortage is created. The shortage is covered with price increases, and the market goes back to equilibrium quantity and prices. The case for poultry is different, when demand increases, more will be imported to cover the shortage, thereby, and there will be no price increases. The concept of equilibrium demand and supply can be illustrated by the graph below..
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Figure 1: Increased demand with constant supply
Source: http://blogs.yis.ac.jp/14turnerg/category/classes/economics-ib-2012-3/
When demand increases from D1 to D2, which constant supply, price will be expected to increase by moving from P1 to P2. The least effective argument for perfect competition is that firms and buyers do not always have the same level of knowledge. There is a presence of information asymmetry.
By increasing prices of red meat, the producers will make huge profits in the short run. However, in the long run, the market cannot sustain the huge profits and will back to normal. Supernormal profits can only be made in the short run.
Figure 2: Profitability of Perfect competitive market in the long run.
Source: http://www.colorado.edu/economics/courses/econ2020/Unit6/Unit6-main.html
When firms enjoy profits in the short run, more firm will enter into the market and the profits will be diluted in the long run. Therefore, they ought to enjoy while it exists. Supply will increase and the prices will reduce (coming back to the original position).
Poultry will not follow suit with the increased prices due to high demand. When domestic demand increases, foreign producers will bring their products into the country to control the surging demand.
Results
The graphs above elaborate how the forces of demand and supply create the equilibrium price and quantity. An adjustment in supply will affect the price. When supply is less affected as demand, the price will shoot up but only in the short run. More firms will come to enjoy the share of profits and supply increases. The increase will make the market forces to stabilize the price as illustrated in figure two.
Discussion
Does increased demand for meat in a season affect prices and ultimately the number of firms in the industry? Increase demand will increase the price, which increases supply and finally reducing prices.
