Supply And Demand

Supply and Demand
an analysis of organic food (2009)

Contents:

Introduction
Body
Conclusion
References

The most basic law understood in the market place is that, “if a consumer doesn’t ‘desire’ a particular product, they will not buy it”. When speaking in terms of demand and supply, the desire that people have is classified as demand and so if that demand is therefore low, no-oneis buying. Now if no-one is buying, products are left just sitting there, in demand and supply terms the products left are classified as supply and so if they are just there supply is high. With this concept in mind it can be said that the current demand for organic food products can be described quite similar to the one just mentioned now. In November 2008, reports show that the growth of organicfood sales had dropped 14% in just one year; a prediction of a decline of around 5% for 2009 has also been made Vaughan (2009) Demands for organics products are low, leaving supply to high, but for what reasons?If we look at the demand side first, when it comes to factors affecting demand, price and income are known to be one of them. Price and income go hand-in-hand because you can’t spend if youdon’t have the money to and how much you are willing to spend/pay (on particular products) depends on how much you have. A rule in the demand theory states that, “If all other factors remain equal, the higher the price of a good, the less people will demand that good.”   In other words the higher the price, the lower the quantity demanded and it is the same vice versa. Putting this theory intocontext of the organic food market, as mentioned earlier, demand for organic products has declined. Shoppers today value price over nutritional value. According to research carried out by Jonathon Banks for Neilson Europe, Vaughan (2009) many shoppers can’t justify paying “50% more for an organic red pepper than a pesticide-sprayed one.”   So since the prices of organic products are higher, they areoften being seen as superior goods rather than normal goods. With this, people tend to buy more of the inferior goods (the non organic products) as it is cheaper, therefore demand for organic products remain low. Throwing income into the mix, ‘As people get richer, they spend less on inferior goods and switch to better quality goods’ Sloman (2009) Therefore, the higher incomes of people beforeallowed the increased demand for organics products, now that the current climate is in a downturn and people’s incomes have dropped a consequence is the drop in demand for organic products to. Generally, the higher the income, the lower the opportunity cost of buying a good and the higher its demand. When the price of a good goes up, so does the opportunity cost of buying that good. As a result,people logically avoid buying the organic products since that would force them to miss the consumption of something else they value more.Also on the demand side is the amount and price of substitutes, Sloman (2009) states that ‘the higher the price of substitute goods (i.e. competitive goods) the higher the demand for this good as people switch from substitutes.’ In the organic food market, the onlysubstitute good is non organic foods, prices in the past were at ‘a peak’ so people switched to organic products. Recently as the recession hit the price of the substitutes have been lowered, as a result people are buying more of them.   Figures from the market research company TNS Worldpanel show that some foods have been hit hard within an overall 20 per cent drop in sales: organic bread hasfallen by 31 per cent; fruit by 16.5 per cent and vegetables by 10 per cent. The company monitored the shopping habits of 25,000 households in the UK from February 2008 to February 2009 Bignell, Birchall (2009).One other factor on the demand side is the taste of the consumer. According to Sloman (2009), “the more desirable people find the good, the more they will demand.” Tastes are affected by...