Analyses of the market for apples

Bizning Vakil By Bizning Vakil, 2nd Nov 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/21d4v4h8/
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The market for apples has expanded rapidly. With technological advances, apple is not just a fruit but an important input for many products such as juices. Therefore, demand for apples has been gradually increasing. Naturally, a high demand causes the price to rise. But there are other factors that affect the price. These factors are studied from demand and supply sides. This paper studies the demand and supply factors that affect apple prices.

Factors of Demand and Supply

The simplest law in economics is the law of demand, which states that “if supply is held constant, an increase in demand leads to an increased market price.” But the demand for apples is not stable, and neither is the price. Unlike other goods to which the law of demand works best, apple is subject to season. Of course, there are other factors, too and they play an equally important role in many cases. These factors are demand-side and supply-side.

The demand factors, called non-price determinants of demand are:
1) Tastes of people
2) Price of substitute goods
3) Price of complementary goods:
4) Income distribution
5) Expectations of people

And the supply factors, called non-price determinants of supply are:
1) The cost of production
2) Profitability of alternatives
3) The Aims of producers
4) Unpredictable circumstances and “random shocks”
5) Future expectations

Demand factors

Demand for apples has increased over the last century. The demand is not only by the families that consume apple fruit, but also by the firms and plants that produce fruit juice and fruit flavor. In particular, AGRANA, a world leader in its field of operation, currently operates 10 fruit juice concentrate plants in Europe and two in China that are located in the most important growing areas for apples and berries. Applesense, which gives apple flavor, has rolled out in Europe and North America, being originated in Asia-Pacific regions. Due to these and other apple-consuming parties, each year, the demand for apples, according to Lakso et al , tends to increase rapidly after bloom, reaching its peak within four to six weeks, then remaining quite stable to harvest. Yet, there are important demand factors that must be studied and analyzed. Each determinant of demand has certain level of effect on the demand for apples; it is easer the demand rises or demand falls, as shown in the graph above. When it falls or rises depends on the how each non-price determinant of demand affects it. They are explained separately.

Tastes of people
Consumer taste is an important factor in the economics field. If the consumers change their attitude about the product positively, they will want more of it. The demand for any given price rises. The firms cannot increase the supply immediately, so their first response is to raise the price. If consumers change their attitude negatively, the reverse occurs. However, for apple, the tastes of consumers do not differ greatly from time to time. Health related announcements about vitamins in apple do affect the demand but not extremely.

Price of substitute goods
The effect of the price of substitute goods on demand for apples is both great and small. Great because there are many substitutes for apples such as pears and other fruits. If the price of those substitutes falls, people consume more of those goods and less of apples. At the same time, it is small because whatever causes the price of those substitutes to fall is likely to cause the price of apples to fall, too. Besides, even if the price of apples does not fall, pears and other fruits cannot perfectly replace apples. On the tablecloth for guests, for example, there is as much space for apples as for pears or other fruits no matter how different the price of apples is from the price of other fruits. In the case of apple juice, however, the price of substitute is important because orange or other juices can easily substitute apple juice.

Price of complementary goods
The price of complementary goods plays an important role in the economics. The classic example is the car and petrol. As for the mere consumption of apples, there is hardly any complementary good! But the demand for apples is not the only demand by the individual consumers. It includes the demand by the firms that produce fruit juices or fruitcakes. In that case, the complementary goods for apple are the bottle and other materials used to make the packet to hold the juice. So, no matter how small, there is nevertheless an effect on the demand for apples by the changes in the price of bottles or other complementary goods for apple juice or fruitcakes.

Income distribution
Income distribution, despite being an important factor in the field of economics, has almost zero effect on the demand for apples in harvest season and some effect in other times of the year. No effect during the harvest period because, obviously, the poor do not need to be distributed a certain amount of the income of the rich in order to afford apples. Some effect during the other times of the year because if the poor have higher level of income, they may begin consuming apples or apple juices in winter or in spring when the prices are rocket-sky.

Expectations of people
The expectations of people can be very influential. People tend to act according to the flow of the actions of majority. Nevertheless, it has less effect on the demand for apples than other factors. For example, let’s say that winter revisited in late spring with snow, which destroyed many flowers of apples (and other fruits). People naturally expect the apple harvest to be much less, which means higher prices. But people do not react to this by purchasing more than they can store within a reason. On the other hand, firms do buy as much as their storerooms are filled, which will affect the demand to be higher than otherwise.

Supply factors

After the analyses of demand factors, more commonly known as non-price determinants of demand, now I explain the supply factors. I discuss the five non-price determinants of supply of apples, introduced at the beginning of this essay. Each of the determinant deals with either the supply rising or the supply falling, as shown in the graph on the right. When supply rises or falls, similar to the demand, depends on how each determinant of supply affects it. These will be explained separately.

The cost of production
The first determinant is the cost of production as any change in it is a very important determinant of supply. That change might be because of the change in:
• Input price: wages, interest rates, taxes, etc.
• Technology: the technological revolution has made production of many products faster, cheaper, and profitable, though this has little to do with apple production.
• Organizational structure: last few decades have seen many ways of communication such as internet; so naturally, there has been much change in organizational structure, minimizing cost of production, though, this, too, has little to do with apple apple.
• Government policy: new laws or regulations affect the cost of production. For example, if government imposes a new regulation regarding the use of chemicals for trees, the cost of production could be affected by it, which in turn affects the level of supply.
Some of the above mentioned changes do not apply to apple production, as mentioned. However, the cost of production (supply) of apples plays a major role.

Profitability of alternatives
Profitability of alternatives is also important determinant of supply. However, in the case of apple production, the effect is over a wide time horizon because the apple tree cannot be chopped down and a pear tree can be planted in its place. According to New World Encyclopedia, it takes two to five years for young apple tree to grow apple fruit. So for a farmer whose land is full of apple trees, no matter how high the profitability of alternatives, he can’t switch to them; he must continue producing apples.

The Aims of producers
The aims of the producers play important role, too. An excellent example is when Russia in 2008 stopped temporarily supplying Ukraine with oil for political reasons, which caused gas price to rise. However, farmers – the suppliers of apples, usually aim to satisfy the existing demand and, in this way, make profit. Therefore, there cannot be a noticeable effect on the supply, unless something beyond the farmers’ control must happen, which is explained in the next subsection.

Unpredictable circumstances and “random shocks”
Circumstances always happen and they affect all aspects of our lives. For example, if any accident such as big fire or breakdown of major equipment occurs in the firm, the supply of the firm’s products falls excessively. But the unpredictable circumstances are not just that; earthquakes, floods, field/plant deceases, etc are other examples. And the level of effect these circumstances have on the supply of apples is various from being little to being tremendous. For example, a strange decease apple gardens in China caused the apple and fruits to be extremely scarce in 1998.

Future expectations
Future expectation is important factor that affects the supply level. This determinant of demand is related to all other determinants in some way or other in the long-run and in the short-run. For example, if farmers believe that the price of pears will continue to grow in, say, ten years, some farmers may use the land for growing pear trees (chopping down old apple trees). In the short-run, for example, if farmers believe that the price of apples goes up, they will take extra care of the trees, protecting them against decease or other harms.

Price elasticity of demand

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. The formula is: (Percentage change in quantity demanded) / (Percentage change in price).

When the price increases, the quantity demanded decreases. Therefore, the price elasticity of demand is negative and, usually, the absolute value is used as a representing number.

The price elasticity of demand for apples is different during the different times of the year. For example, during the harvest season, it is very elastic because a small change in price leads to large change in quantity demanded. In winter, however, it is very inelastic, a large change in price leads to small change in quantity demanded.

Price elasticity of supply

The price elasticity of supply measures the responsiveness of quantity supplied and a change in price. The formula is: (Percentage change in quantity supplied) / (Percentage change in price).

However, there are a great number of printer producers. Therefore, it is almost impossible to find the data, which can be used to find the price elasticity of supply.

The price elasticity of supply for apples is not dominated by the market price. Because during the harvest season, no matter how much the demand is, farmers cannot supply more than the apples trees have produced.

Conclusion and Bibliography

In this essay, I discussed the market for apples. I discussed the factors of demand and supply, which affect the market price of apples. I also explained the price elasticity of demand and supply and the role of season, which plays important role in the case of apples. It is concluded that the price elasticity of demand for apples is elastic during the harvest season and inelastic during the other times of the year.

Bibliography

A. N. Lakso et al, Aspects of Carbon Supply and Demand in Apple Fruits, International Society for Horticultural science, at: http://www.actahort.org/members/showdpf?booknrarnr=466_1

Anthony Fletcher, Quest Taps Global Demand for Fruit Flavors, available at: http://www.foodnavigator.com/Science-Nutrition/Quest-taps-global-demand-for-fruit-flovurs

Begg D., Fischer S., Dornbusch R. (2000), Economics

New World Encyclopedia. Apples. New World Encyclopedia. Available from: <http://www.newworldencyclopedia.org/entry/Apple>

Sloman J. (2003) , Economics

Sloman J. (2007), Essentials of Economics

http://www.investorwords.com

http://www.agrana.com/en/1508.asp

Tags

Market Analyses, Non-Price Determinant, Price Equilibrium

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author avatar Bizning Vakil
An economist by definition, a teacher by practice, a journalist by nature, I find it hard to find any one permanent place to settle down...

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