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Supply and Demand Changes: Pork and Oil Prices Essay

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Updated: Jun 1st, 2021

Introduction

Supply and demand are fundamental economic concepts that determine the price of a good. The former reflects the quantities of the product that are being offered for sale in the market. The latter corresponds to the amounts of the commodity that are being purchased. Sellers and buyers tend to come to a consensus with regards to prices based on whether supply meets demand, falls short, or exceeds it. The mechanism through which this adjustment occurs is known as the law of supply and demand. The purpose of this assignment was to find two examples of changes in supply and demand and explain them using the graphs provided in the course materials.

The Rise of Pork Prices

The first article, published in the Detroit News on May 20, details the increasing prices of pork, particularly in Southeast Asia. According to Mcdonald and Mcneil (2019), the reason is outbreak of African swine fever in Chinese pigs, which has led the government to begin culling herds to contain the disease. As China is the world’s biggest pork producer and consumer, the situation may lead to severe consequences, particularly if the illness continues spreading. Other countries that are dependent on pork exports were also affected by the condition, as China began expanding its imports (Mcdonald & Mcneil, 2019). As a result, foreign producers have started expanding their operations.

The smaller quantity of hogs available corresponds to a significant decrease in the supply of the good. At the same time, the population did not meaningfully change, meaning that the demand remained mostly the same. Among the graphs presented in the course, option D best describes the situation. The supply curve shifted inward, and producers could bring smaller quantities of pork to the market. They then set higher prices for it because they were aware that demanders would pay a premium, as they lacked alternatives. The assertion was economically valid, and the new prices held and became the norm until some new change in the future.

Graph D is also applicable because it mentions demanders choosing to purchase smaller amounts of the good. Mcdonald and Mcneil (2019) noted that Chinese consumers were choosing to switch from pork to other kinds of meat, such as chicken and duck. This behavior is consistent with the law of demand, described by Khan, Siddiquee, Kumar, and Abidi (2018) as a shrinking of demand when prices rise and vice versa. In this case, the buyers compensated their lowered consumption of pork with other meats. Nevertheless, the cost of pork kept increasing, mostly because the supply was still shrinking, and producers struggled to rebuild.

The Oil Price Crash

The second article, submitted to Reuters on May 22, concerns the reduction in oil prices that follows significant growth in early 2019. Kearney (2019) notes that prices fell approximately 2% on that day, mostly due to an increase in the United States inventory. The situation compounded the tensions between the U.S. and China as well as Iran, which contributed to lowered market expectations and, therefore, reduced demand. Nevertheless, according to Kearney (2019), Morgan Stanley expected prices to rise toward the end of the year. The global supply reductions may contribute to such a change, but so far, indexes have been dropping.

The situation that occurred on May 22 can be described using Graph C, in which increased supply causes a decrease in price. Kearney (2019) claims that the stockpile growth occurred despite projections suggesting the opposite, partially because refineries began operating at a slower pace. With higher quantities of the product available, suppliers could bring more oil to the market at lower prices. As such, prices fell further, though no increase in consumption as per the law of demand was observed in the article.

With that said, supply remained tight, which was the basis for Morgan Stanley’s predictions of price increases in the future. Kearney (2019) stated that the losses were limited by potential supply disruptions caused by the Iran tensions and the output cut pact between members of the Organization of the Petroleum Exporting Countries. As such, it is possible that the situation will unfold in accordance with graph D in the future, and prices will begin rising again. The increase in demand caused by the falling oil prices may also contribute to a rise as per graph A.

Conclusion

This essay discusses two situations that involve price changes happening due to microeconomic reasons. Pork has been becoming more expensive in China and Southeast Asia due to an epidemic among pigs. This situation corresponds to graph D, as the supply of the item fell, prices increased, and demanders began purchasing lower quantities of the product. In the second scenario, oil prices fell because the United States stockpiles showed significant growth, defying projections. The event happened according to graph C, with increased supply leading to lower costs. However, there was no information about changes in demand, and the indexes are expected to rise by the end of the year.

References

Kearney, L. (2019). . Reuters. Web.

Khan, Z. A., Siddiquee, A. N., Kumar, B., & Abidi, M. H. (2018). Principles of engineering economics with applications. Cambridge, United Kingdom: Cambridge University Press.

McDonald, J., & McNeil, S. (2019). . The Detroit News. Web.

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IvyPanda. 2021. "Supply and Demand Changes: Pork and Oil Prices." June 1, 2021. https://ivypanda.com/essays/supply-and-demand-changes-pork-and-oil-prices/.

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IvyPanda. (2021) 'Supply and Demand Changes: Pork and Oil Prices'. 1 June.

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