SUPPLY AND DEMAND
An understanding of the balance between supply and demand is of fundamental importance. In a free enterprise exchange economy, as with agricultural and horticultural produce, prices are usually determined by the interaction between supply and demand. Other product prices are also determined this way but they don't normally fluctuate to the same degree.
Market Forces
The interaction of supply and demand and how that shapes a market economy is commonly termed as the ‘market forces’.
Demand
Without demand, supply will stagnate hence marketing sets out to stimulate demand. If demand is not sustained, production must slow down with resultant unemployment and loss of profits both in production and in every aspect of the distributive system.
Factors determining demands are:
• Consumer’s income.
• Price of produce.
• Price of competing produce.
• Price of complementary produce.
• Season, weather conditions, consumer tastes, trends, or other such factors.
Price increases normally produce a change in demand.
• A lower price (ie. P1), generally means a larger quantity consumed, (ie. Q2). If the price increases to P2, then the demand usually decreases and a smaller quantity will be consumed (ie. Q1).
• As income increases, consumption generally increases, but the buyer may change his/her priorities ie. 10 percent increase in income generally means only 1-2 percent increase in food consumption. However there is a general trend that this increase will be demand for processed or convenience foods.
For food consumption to increase, the population must increase!
• The price of competing/substitute goods may directly affect the demand of produce ie. an increase in price of competitive goods generally means the demand for other produce will increase eg. apples: pears are substitute goods. If the price of apples increases then the demand for pears may increase (if the pears are competitively priced).
• The purchasing pattern of salad vegetables shows a good example of complementary produce. When lettuce is in demand, tomatoes and other salad vegetables will also increase in demand, and consequently price.
Supply
If supply shifts leftward up the demand curve, the price will increase and quantity decrease.
Interaction of Supply and Demand
Where the demand and supply curves intersect is where the quantity demanded by consumers equals the quantity supplied by producers. At any lower price, amount demanded exceeds amount supplied. At any higher price, amount supplied exceeds amount demanded.
If demand should rise, the price will optimally increase as will quantity supplied.
Some Factors that Determine Supply
Supply can be interrupted due to diverse reasons and depending on the product; food products contend with weather, land availability, labour, pest and disease problems and so on.
Other factors include:
• Consumer attitudes - consumers expect a greater choice of quality products, value for money, safety and environmental issues are also becoming more of an issue ie. consumers awareness of ‘clean and green’ products ie. food safety concerns drives demand for safe food; environmental concerns drives demand for clean and green (environmentally sound and sustainable) products.
• Consolidation of markets - for example fresh food sales are now dominated by a limited number of retail chains - in some markets this comprises more then 70% of sales.
• Competition – global sourcing through open international markets; improved internal efficiency by large companies; improved relationships with suppliers leading to greater control over quality, price and availability to consumers.
• Alliances – between large stake-holders are formed to meet ever-changing market requirements ie. in relation to quality assurance, international trade regulations, and traceability requirements. This also improves and increases co-operative strength and competitiveness through an integrated supply chain from the producer to the consumer.
• Trade policies – introducing change to price and policy governing the sale of products by both domestic and foreign governments ie. restricting access to export markets or the introduction of subsidies to local producers etc.
• Organisational responses - ie. if demand for pink grapefruit rises, suppliers respond by encouraging greater production output by existing producers or by new producers entering the market. A sudden subsequent fall in demand could then create an over-supply – impacting on either the price or the producer (ie. prices go up and/or producers leave the market). Understanding and predicting change in the market is a complex but necessary part of business operations.
Elasticity
The degree to which a demand or supply curve reacts to a change in price is known as the curve's elasticity.
Elasticity varies:
• Inelastic products are essential products are less sensitive to price fluctuations, because demand is always high – consumers will usually continue to buy these irrelevant of price changes ie. bread, milk and other staples. Demand is not highly variable.
• Elastic products are services and goods that are not seen as essentials by consumers, these are more sensitive to price variation and therefore demand – a slight change in price may determine demand. Consumers will not buy these products or services if they consider that the price is too high to fit into a budget ie. the opportunity cost has become too high.