The adjustment of the egg market to increasing supplier costs

This week in my ECONS102 class, we are covering supply and demand. Understanding how the market adjusts from one equilibrium to another (which we call comparative statics) is an important component of that topic. There are loads of real-world examples. For instance, in a very timely article, the New Zealand Herald reported last week:

Gilmour's, the country's largest supplier of wholesale food and beverages, is warning that the price of eggs is set to increase and the breakfast favourite may be harder to come by as egg farmers move to meet changes to the law.

In an email sent to customers today, the retailer owned by supermarket giant Foodstuffs, said "huge investment" was required by the industry to meet the Animal Welfare Code of Practice for Layer Hens which in turn would drive up the price of eggs.

"There is currently uncertainty around supply as farms struggle to gain resource consent for new production whilst other suppliers exit the supermarket sector and/or industry altogether. This is resulting in a shortage of eggs which is expected to continue over the short to medium term as the industry readjusts," the notice outlined.

Gilmours said due to higher production-related costs colony eggs would be sold at a premium as cage eggs are phased out.

Egg producers are facing increasing production costs. When costs of production increase, that results in a decrease in supply. As shown in the diagram below, the supply curve shifts up and to the left, from S0 to S1. If egg prices were to remain at the original equilibrium price (P0), then the quantity of eggs demanded (Q0) would exceed the quantity of eggs supplied (QS) at that price, because egg producers are only willing to produce QS eggs at the price of P0, after the supply curve shifts. There would be a shortage of eggs.

When there is a shortage, we expect the equilibrium price to increase. This is because some buyers, who are willing to pay the going price (P0), are missing out. Some of them will find a willing seller, and offer the seller a little bit more, in order to avoid missing out. In other words, buyers bid up the price. The result is that the price increases, until the price is restored to equilibrium, at the new (higher) equilibrium price of P1. At the new equilibrium price of P1, the quantity of eggs demanded is equal to the quantity of eggs supplied (both are equal to Q1). We can say that the market clears.