Microeconomics

1.0 INTRODUCTION

There are three main issues that addressed based on the article. Firstly, there is a shortage existed and this will be the largest short-term changes of the local restaurant as mentioned in the article. This can be strongly connected to the economics as whenever shortage occurred, this will cause the market to loss its equilibrium. This disequilibrium will lead to imbalance between demand and supply level which will affect the price as well.

Secondly, the price of eggs increased from $30 to $30 due to lack of supply. This will affect consumer surplus such as the Monterrey Cafe and Whataburger as well as producer surplus. This is due to these restaurants are rely on eggs to cook for dishes. For example, scramble eggs for breakfast. When the market is not at competitive equilibrium, this will cause deadweight loss (the reduction in society welfare).

As mentioned in the articles, even the price of eggs have raised up to $38 per case, the manager of a Weslaco restaurant still have to get eggs in order to operate their business. This can be linked the concepts of elasticity. In this case, they are less sensitive towards the changes in price of eggs.

2.0 MICROECONOMICS CONCEPTS

2.1 Market Equilibrium

Market equilibrium can be interpreted as which quantity demanded is equivalent to quantity supplied. Demand curve describes the relationship between price and quantity demanded of a good (Hubbard and O’Brien, 2015) while supply curve depicts the relationship between price and quantity supplied of a good, ceteris paribus. These two curves determine the market equilibrium where the point they intersect each other.

Surplus and shortage will happen when quantity demanded or price changes. Shortage is a situation which quantity demanded of product exceeds the quantity supplied beyond the equilibrium price (McConnell, Brue & Flynn, 2012). Hardin (2003) highlighted that a shortage of supply could be recognized as a ‘longage’ as they are conversely related.

Figure 1: Shortage of eggs in the market

The attack of avian influenza has caused the supply of eggs to be reduced. The price has been driven up in the market.

Figure 1 illustrates how avian influenza pushes up the eggs price. Assume that the price of an egg is $3.00 at market equilibrium which quantity demanded equals to quantity supplied (100 million eggs). This is due to the fact that at a price of $3.00 and a quantity of 100 million eggs, the demand curve, D0 crosses the supply curve, S0. The avian influenza resulted in a decrease in supply of eggs. Thus, the market supply curve will shift to the left, from S0 to S1. The equilibrium price increases from $3.00 to $3.40 and the equilibrium quantity drops from 200 to 150 million of eggs. Next, at the initial price of $3.00, there is a shortage of eggs. At price of $3.00, the quantity demanded will not change and remain as 200 million of eggs. However, the quantity supplied will drop from 200 to 100 million of eggs. Thus, shortage in the market exist due to the quantity demanded is surpass the quantity supplied when the price is at $3.00.

When there is excess demand, the market is said to be disequilibrium. The shortage of eggs in the market is removed as the price raise to a new equilibrium at $3.40 as shown in Figure 1. The market reached its equilibrium again because quantity demanded is same as the quantity supplied which intersects at price of $3.40 and equilibrium quantity of 150 million of eggs. As the price of egg increased to $3.40, the quantity demanded which move along the demand curve decreased as restaurant will change their recipe by serving tofu scramble instead of scramble egg (Shah, 2015).The quantity supplied of eggs increased with limitations due to bird flu.

Market equilibrium can help to indicate whether the unit of production fully utilized and reflect the satisfaction level of every individual in the market. Most importantly is that it can acknowledge the firms about the changes in market.

2.2 Consumer Surplus, Producer Surplus, Deadweight Loss

Based on the article, consumer surplus is the difference between the highest price that a consumer is willing to pay for an egg and the actual price the consumer pay. Producer surplus is the difference between the lowest price that a firm is willing to supply for an egg and the actual price the firm produce. Both the consumer and producer surplus measure the net benefits in the market instead of the total benefits. Graphically, the area of consumer surplus will be above the market equilibrium price and below the market demand curve while producer surplus will be the area below market equilibrium price and above the market supply curve when the price of a good is not zero.

Figure 2: Demand and supply of eggs in competitive equilibrium

The suppliers of the restaurants in Weslaco have to raise the price of eggs from $30 to $38 due to reduction in supply. Based on Figure 2, marginal benefit can be defined as the additional benefit gain by a customer from buying extra one more unit of egg while marginal cost is the additional cost that a firm incur to produce one more unit of egg. Assume that it is a competitive market, $3 is the market price of an egg and 50 eggs are being produced where marginal benefit equal to marginal cost. This is the point when market equilibrium occurs in perfectly competitive market where many purchases and vendors, products sold are homogenous and no restrictions for new firms to enter the market (NDSU, 2010).

Demand curve and supply curve determine the willingness of consumers buy eggs at different prices and compute the total consumer and producer surplus. Both consumer and producer surplus indicate what they gain from trade. Consumer surplus at market equilibrium will be fallen on the area A, B and C while area D, E and F will be the producer surplus. The areas under the demand curve symbolize the total benefit of consumer’s consumption in the market. Thus, the economic surplus (social welfare) which is the total consumer and producer surplus are maximized at the competitive market equilibrium.

Figure 3: Demand and supply of eggs when price increased.

Due to shortage of eggs, the price of one egg will be increased and above the equilibrium price. Assume the price will be $3.40 as shown at Figure 2. The quantity of eggs willing to pay by consumers is decreased from 200 to 100. Consumer surplus is reduced to just area A because lesser eggs are sold at a high price of $3.40. When the price is at $3.40, the area of producer surplus changes and will be B, D and F. The economic surplus has been declined to A, B, D and F. This is due to the fact that all eggs between the 100th and 200th which should be produced in the competitive equilibrium, are not being supplied. Hence, the market is suffered from deadweight loss which is area E + F, which refer to the loss of society welfare. Therefore, when the market is not at competitive equilibrium, the total benefit to society will be greatly reduced.

2.3 Elasticity

The price of elasticity demand measure how sensitivity quantity demanded of eggs to the price. If the quantity demanded for eggs has a big respond towards to the changes in price, the demand is said to be elastic. In contrast, when the quantity demanded for eggs is less responsive to the changes in price, it is demand inelastic.

Figure 4: Demand inelastic of eggs

One of the factors that determine price elasticity of demand will be the availableness of close substitutes of eggs (Mankiw, 2014). As mentioned in the articles, local restaurants are less responsive towards the changes in price of eggs. Figure 4 shows the quantity demanded of eggs in respond to price of eggs. Assume the price of eggs increase from $ 1.60 to $ 3.40, there is only slight decrease in quantity demanded from 220 to 180 eggs. This is due to there is less close substitutes for eggs compared to other necessities such as butter, which can easily replace by margarine. Thus, a rise in price of eggs does not bring a drastic drop in quantity demanded of eggs.

The matter of time will also influence the quantity demanded of eggs in respond to the changes in price. This is due to the fact that time is needed for consumer to adjust their buying habits when the price of eggs changed. In short-run, the quantity demanded for eggs is relatively inelastic when the price increased as consumer do not get used to it. In long-run, consumer might have decided to cut down the consumption of eggs by replacing it by tofu. Therefore, the quantity demanded of a product will be more elastic as more time passes.

By knowing the price elasticity demand of eggs, it can help to decide set a price for eggs. Since quantity demanded for eggs is less elastic compared to other necessities, it will attract more revenues to the firms. Thus, it can predict the effect of changes in price on the company profit as pricing will influence total revenues.

3.0 Conclusion

In conclusion, market equilibrium, consumer surplus, producer surplus and deadweight loss as well as elasticity will help to determine the flow of complex structure of a market.