A reduction in supply results in an increase in excess demand at the initial cost.
This wouldin turn develop a shift in demand, the potential and inclination to consume a commodity, inthis case the red meat. The demand curve moves to the right (from D to D1). For anyquantity, consumers now place a higher price on the goods, and producers must have ahigher cost in order to supply the goods, therefore, price will increase (from P to P1).Accordingly, the equilibrium would move (from A to B). A speculative situation would be anincrease in the quantity supplied (from Q to Q1).
{Figure-1}But however, it has been made clear in the article that in spite of an increase inexterminate, there has not been an excess of meat which would have resulted in lowerprices, due to exports and a strong demand for South African meat in the tourism sector.This means that the supply has decreased, hence pushing the supply curve inwards i.e. tothe left (from S to S1).
A reduction in supply will result in growth in the equilibrium price (fromP1 to P2) which is, 9 to 15% increase in the red meat prices as referred in the article and adecline in the equilibrium amount of red meat (from B to C). Altogether quantity produced willbe reduced. (from Q1 to Q2). {Figure-2}Evaluation:Increasing prices for red meat brings along with it both advantages as well asdisadvantages. Rising prices encourages producers to produce more red meat as it acts asan incentive for them.
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More prices provide more profits to the producers. Increased prices ofthe red meat help stimulate its production. However, too much of rise in the price of red meatdiscourages the consumers to buy more as they are not having enough purchasing power tobuy them, this in turn leads to hoarding of red meat in an anticipation of a rise in the price infuture level. It also leads to wage pull and cost push inflation and a raise the inflationary levelin a country. As fewer red meat are sold, less total revenue results.The article also mentions about disposable income. Expendable income is defined as thetotal amount of household income that's available for consuming and saving after payingincome taxes. If disposable income rises, households have more money to either save orspend, which naturally results to a growth in consumption.
The article further mentions that, ‘pork will also benefit from the increased price of red meat.’In a way pork acts as a substitute for red meat. The more possible substitutes there are for agiven good or service in this case pork, the greater the elasticity (Green Curve D). Whenseveral close substitutes are available, consumers can easily switch from one good toanother even if there is only a small change in price. This is basically an example of PED(price elasticity of demand).
It is the responsiveness of the quantity of a good demanded to achange in its price. We can see that as the price changes (from P1 to P2), the quantitydecreases by a lot. {Figure-3}The article presents a view that, in the future rain is expected which should start improvingthe situation for livestock farmers who have suffered financial losses as a result of thedrought. This is supported by the anticipation that the sector will not have to worry aboutpossible damage resulting from floods, torrential rains and heavy winds. The expectedrainfall would be sufficient for herd-rebuilding to begin, further helping livestock farmers toreduce costs in the long-term.
Finally, the article concludes with the thought that, withlowered grain prices (production input), the cost of the red meat i.e. output prices would fallas well.
