Sunday, 28 October 2012

Changes in prices of meat due to Eid ul Adha


Changes in prices of meat due to Eid ul Adha
Looking at the article, http://www.khaleejtimes.com/nation/inside.asp?xfile=/data/nationgeneral/2012/October/nationgeneral_October89.xml&section=nationgeneral , Eid Al Adha is one of the most important festivals for Muslims in which all Muslims sacrifice sheep, camels, goats or cows. The amount you sacrifice varies with size of the family, income and prices of these animals. This tradition of sacrificing on Eid Al Adha is followed in respect of Prophet Ibrahim’s obedience to Allah, as he was willing to sacrifice his offspring when Allah commanded him to do so. Muslims follow this practice all around the world and the demand of these animal increases during Eid Al Adha. We can demonstrate through an economic model of demand and supply how the pricing mechanism works and how demand and supply is affected.

Equilibrium Price of Goat
 


            




In the above shown graph, one can see a vertical axis that represents price of a goat and the horizontal axis represents the quantity of the goat. In a simple model the demand and supply meet at an equilibrium point setting the price and quantity reflecting the quantity demanded and quantity supplied. This point E1 is the equilibrium price and quantity that is sold in a market. Additionally, in the graph above the red line depicts the supply schedule and the blue line depicts the demand schedule. The point above the equilibrium is the surplus of goats and the point below E1 is the shortage is goats.

Referring to the article “Livestock prices shoot up ahead of Eid  AlAdha” , we can draw that due to seasonal/festival changes, supplier can charge a higher price being aware that the consumers will be wiling to pay at any point; in this scenario consumers are bound due to religious constraints.  However, the Ministry of Economy in this case had given assurance to citizens that they would monitor the prices and took radical measures against the ‘Unscrupulous traders’, from this it can be drawn that the prices of goods have been increasing, as the festival gets closer.
Following is a table that shows the change in price of Somali sheep.
Somali sheep:
Time period
Weight
Price
Before
10 kg
400-500 Dh
After two weeks
10 kg
600 Dh

Over a period of two weeks, the price of Somali sheep weighing 10 kg increased from between 400-500 to 600 Dirhams due to the increase in price of Somali sheep the quantity demanded has decrease but by less than 1, which shows that the demand curve is inelastic and a change in price of the lamb will cause a minute or no change in demand as consumer still require to fulfill their religious commitment. In graph 1, the will be movement along the demand curve where as the supply curve will stay the same.

Following is a table that depicts the increase in price for Pakistan mutton:
Time Period
Weight
Price
Before
1 kg
26-28 Dh
After a month
1 kg
33-34 Dh

Subsequently, if we talk about the price elasticity of demand in this case we see that with the although the price has increased by more than 25% but the quantity demanded has remain the same showing that demand for meat is inelastic.

Price Elasticity of Demand showing it is inelastic as it is a necessity




Likewise, we are aware that beef or chicken can be used as a substitute for meat since they suit the same purpose. Lets assume that the price of meat has increased by 25% and that led to increase in demand for beef or chicken. If this takes place it means that they both are substitute. This can be proved by showing that when the price of one meat increases by 25% the demand for beef or chicken also increase by 25% or more which shows that cross elasticity is equal to 1 or more than one. When this happens the goods are treated as substitutes.

CROSS ELASTICITY OF DEMAND SHOWING MEAT AND BEEF ARE SUBSTITUTES


         

In the above diagram we have shown that when the price of meat increase from 26-28 dhs to 33-34 dhs in the graph 1. It leads to quantity demanded being decreased from q to q1 but this does not only affect the graph of meat at the same time it leads to shift in the demand curve from D to D1 at the same price. This means that with the increase in price of meat quantity demanded of meat decreases and people shift towards beef.
Now let’s see if meat is a normal good or inferior good. This deals with income elasticity of demand means when a person’s income increase would the demand of a product increase or decrease. If it increases and income elasticity of demand is greater than 1 then it is a normal good if it does not then it is an inferior good.

INCOME ELASTICITY OF DEMAND SHOWING MEAT IS A NORMAL GOOD


In the above diagram we have shown that when the income increase from I to “I1” the demand of a product increases from Q to Q1 showing a direct relationship between income and demand of a product.

We know that there are 4 types of market structure starting with perfect competition in which the demand is perfectly elastic because there are so many players in the market and the product is homogenous where as the monopoly deals with demand being completely inelastic as there is only one player controlling the market and influencing the price. Meat comes in the category of perfect competition as there are no major players in the market. The product is homogenous, there are no barriers to entry and exit and the consumer have complete information about the product. People usually buy meat looking at their convenience because they feel everywhere they would get the same meet and they do not differentiate in terms of quality or any other factor.


DEMAND CURVE IN PERFECT COMPETITION SHOWING DEMAND CURVE IS PERFECTLY ELEASTIC



As the Ministry of Economy has assured the citizens of watching the prices of livestock they could lower the price of these by subsidizing the sellers of the livestock. It would lower the price for the buyers and make it cheaper for them.


The above graph shows the fall of price this had shifted the entire supply schedule down reducing the price. This is a useful mechanism the government usually reduces to decrease the price of the good; the post-subsidy would become the new supply schedule for the market.


In conclusion, the government needs to start subsidizing for consumer protection or most individuals will not be able to afford to buy animals to sacrifice. Several locals intended on purchasing the animals before the festival arrived but the prices for the animal were rather high. Subsequently the goats and sheep on display were skinny. Hence buyers are being overcharged as skinny animals mostly have bone weight rather than meat.

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