Tuesday, 18 October 2016

Explaining changes in the price of chicken

I just love how the simple economics we teach in ECON100 and ECON110 can explain things we see in the newspaper. The simple workhorse model of supply and demand is a pretty useful tool for this. Take this article from the New Zealand Herald last week on chicken prices:
Enjoy cheap chicken prices while they last.
That's the message consumers can take from a sharebroker's report that says a glut in New Zealand's favourite meat will shortly come to an end.
Average prices for fresh chicken pieces were 9 per cent lower in August than in March, according to the First NZ Capital research.
And whole frozen chickens were 16 per cent cheaper.
NZ poultry production rose 11 per cent year-on-year in the 12 months to June 2016, to reach 210,000 tonnes, according to the report.
First NZ said "oversupply conditions" had resulted in a build-up of frozen chicken inventory.
But the glut is expected to recede in the next few months as operators adjust production, according to the report.
And here's the simple supply and demand model at work, in the figure below. In March, the market is operating with demand D0 and supply S0, with an equilibrium price of P0 and quantity Q0. Chicken production increases, shifting the supply curve to the right (to S1). The price of chicken falls to P1 (9 per cent lower than March, according to the quote above), while the quantity of chicken traded increases to Q1.


Then, "as operators adjust production" (by reducing supply back towards S0), the price of chicken can be expected to rise (back towards P0). Nice!

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