SRJC H2 ECONS 9757 Q1 MS

Q1. Organic food such as fresh fruits, vegetables and dairy products is grown without synthetic pesticides, chemical fertilizer s or genetically modified seeds. 2015 was a year of significant growth for the organic food industry despite the continued struggle to meet the seemingly unquenchable consumer demand. There was also an increase in the number of farmers converting to organic farming over time. Source: Organic Trade Association Discuss the demand and supply factors that determine the output of organic food and evaluate which is the most important factor. [25] Introduction In the farming industry, organic produce has become such an appetite for consumers to the point where the demand cannot be met due to a huge shortage of growers. Producers have responded to this growing demand by making the transition to certified organic food production. Definition: Market equilibrium occurs when buyers and sellers come together and exchange at a mutually agreeable price and quantity. When the market is in equilibrium, there is no tendency for the price or the quantity exchanged (that is, the quantity bought and sold) to change as quantity demanded equals to the quantity supplied. Demand and supply in the free market will determine the equilibrium output. Hence, changes in the demand and supply will impact the market equilibrium. Direction: The factors which determine the output of organic food are technological advancements and economies of scale which affect supply as well as factors such as tastes and preferences, and income level that influence demand. Body Selecting food is one of the most common activities that consumers pursue many times each day. But this selection requires taking into account different factors (e.g. price and taste) and may involve a complicated decision-making process in order to satisfy these different factors. P1: Although the organic food sector comprises only a small percent of all food sales, the perceived environmental and health benefits of organic food have received increasing recognition and broader acceptance among consumers, hence a shift of taste and preference from inorganic food to organic food. As the technology advances, people have easier and more convenient access to Internet and social media to find out more informati on about the enhanced health benefits of consuming organic food. Furthermore, since society has been adopting health-conscious eating habits and government has been promoting healthy lifes tyle, the demand for organic food has only been steadily growing. In the minds of consumers, this trend of “eat good, feel good, look good” is convincing and rapidly growing as it has greatly contributed to why the majority of consumers are choosing organic. Environmentally conscious consumers are willing to pay a much higher price for sustainable products such as organic and locally-produced foods as ethical considerations are becoming important fa ctors in their decision making process. Rise in demand for organic food  rightward shift of DD curve from DD0 to DD1. Price Quantity of organic food P0 Q0 S0 D0 0 D1 E0 E1 P1 Q1 Q2

 Ceteris paribus, at the original price of the organic food 0Po, there is now a shortage of the good Q0Q2. The resulting shortage causes the price of the organic food to increase. As the price of the organic food increases, its quantity demanded falls while the quantity supplied increases. These changes are illustrated by a movement up the demand curve D1 and a movement up the supply curve S0 respectively. L1: Price will continue to rise until the market is in equilibrium at price 0P 1 and there is a rise in equilibrium output of 0Q1 of organic food being traded. P2: The global economic growth in the last decade contributed to a rise in demand for organic food. Since organic food is considered a luxury good, any change in consumer income directly affects the percent change in demand, which will constitute how much consumers are willing and able to spend. If the amount of disposable income increases within consumers, they will feel more confident and compelled to spend those extra dollars towards better quality luxury goods, in this case organic foods. Conversely, the same transpires when there is a decrease in income where consumers will choose inferior food as opposed to purchasing the luxury good. Due to the relatively more rapid growth in emerging markets and developing economies such as India and Philippines, as the income increases, consumers shift their purchases away from higher quantities of food and into higher quality food. This simple analysis of the relationship between income and consumption is crucial for understanding and/or forecasting the likely future of the organic food industry. L2: As the standard of living increases, consumers are very likely to purchase more quantity of organic products. P3: Income growth, and the high standard of living that is enjoyed in the high-income nations of the world, is likely to be the single most important determinant of organic food consumption. Because any perceived benefits, no matter how small, become affordable to wealthy consumers. Price premiums also become inconsequential to individuals and families with high incomes. As per capita incomes rise, we can expect a shift into organic food. An important implication of this is that low-income individuals in the USA, and low-income nations will be less interested in organic food, if it is more expensive than conventional food. For individuals and nations with low level so purchasing power, the perceived benefits of organic food are unlikely to outweigh the lower prices of conventional food. As incomes increase above subsistence levels, health issues shift from a lack of food and starvation to healthy diets and nutrition. Those who can afford it will purchase products that are perceived to be healthy, including organic food, even if the purchase price is considerably higher than conventional food. L3: To summarize, market information about the benefits and costs of consuming organic and nonorganic foods will determine the future market shear of organic food in the food and beverage industry. P4: The price elasticity of supply for organic food is likely to be less than one and hence, the rise in demand due to the 2 factors analysed earlier will likely lead to a mild rise in equilibrium output. Although retailers have been flocking to the industry to capture the customers’ high willingness to pay, farmers have not followed suit. Despite the opportunity to fetch higher prices for their products, farmers have been slow to convert to organics. One reason is the high transition costs (barrier to entry) to be labelled a certified organic producer. In order to be titled a certified organic grower, one must follow and go through a three-year transition period in compliance with organic restrictions and requirements. During this time period farmers experience much lower crop yields making their costs surge; a primary element for

which growers won’t go organic. Also, the benefits that come with organic growing such as receiving higher and premium prices for those organic products are not included in this 36- month process, yet another hindrance for farmers to transition to become certified organic producers. Additionally, organic farm operations are subject to added fees and regulations. Organic production practices are often management-intensive, requiring greater managerial time, skill, and decision making. Organic certification requirements can also require that a farmer not use chemicals or synthetic fertilizers for three years prior to the land becoming available for organic food production. Thus, some of the transition costs are incurred prior to reaping the benefits of organic conversion. Hence, the supply of organic food is price in