Sep 07 2007

Supply and demand shifters and the price of pork in China – Ethanol affects price of pork, China’s staple

What does the biofuel we put in our cars have to do with the meat we eat with our noodles and rice? Economics has an answer to this question! This week in AP Economics we learned that market supply of a product is determined not only by the price of the product but also by several “non-price determinants of supply”. To help remember these we learned an acronym:

S- subsidies and taxes
T- technology
O- other related goods prices
R- resource costs
E- expected future prices
S- size of the market (# of firms)

The article above talks about the relationship between the demand for ethanol, which is a corn-based biofuel being manufactured in record quantities all over the world, and the price of China’s staple protein source, pork.

Read the article, and discuss which determinants of supply are being affected, and describe the impact on the pork market (think of the supply and demand curves and equilibrium price).

Discussion Questions:

  1. As the price of pork goes up, what do you think is happening in the market for substitutes in consumption, such as chicken?
  2. How will the rising pork prices affect demand for chicken?
  3. Assuming that pork and chicken are also substitutes in production, how will the changes in the pork market affect the supply of chicken?
  4. What can we expect to happen to the price of other related goods as pork prices continue to rise?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

11 responses so far

11 Responses to “Supply and demand shifters and the price of pork in China”

  1. yunqimokon 08 Sep 2007 at 4:08 pm

    It is shocking to see the price of pork raise by about 30% over the past few years. This is due to a change or resource costs, because corn is no longer used to feed the pigs (hence there are fewer pigs) and instead used as alternative fuel which is supposedly cleaner. However, pollution kills people over a long period of time, whereas starvation is quick. Yet, if the CHinese government puts a ceiling oon the price of pork, there will be a greater shortage of pork since it is not profitable to make (other substitute goods).

  2. Katherine Yangon 08 Sep 2007 at 8:41 pm

    The rising pork prices will naturally cause many consumers to buy other substitutes like chicken, especially since many Chinese are quite thrifty. This means that there will be a rise in demand for chicken which in turn will mean an increase in the quantity of chicken supplied. This could also mean that the increase in the quantity of chicken means a decrease in the price of chicken and other pork substitutes. I feel a little alarmed that this might happen.

  3. Nicole Wongon 09 Sep 2007 at 1:36 pm

    Several supply shifters are playing into this event: other related goods' prices, resource costs and size of the market. As the price of corn increases, the price of pork should rightfully decrease. However, there is a clear increase in pork prices due to the scarcity of this good. This leads to the size of the market. With pigs dying for no clear reason, fewer companies would be able to supply the economy with pork. As pig feed comprises mostly of corn, the price of pig feed is also increasing and many breeders would not be able to afford raising pigs any longer. With the price of pork increasing, there would be a higher supply of chicken, which is a cheaper alternative to pork. The price of other related goods to pork, such as chicken, would decrease, causing a rightward shift in the supply curve for pork.

  4. Jessica Ngon 09 Sep 2007 at 9:02 pm

    Some determinants of supply that are affected in this case include resource costs and other related good's prices. As mentioned in the article, one of the reasons of the shortage of pigs supply is because the increase of price of pork. One of the main reasons is of pig feed, a related good's price determinant of supply. As pig feed comprises mostly of corn, and a lot of corn is used to generate energy fuel, prices for corn resources for pig feed are going to increase. In turn, this will lead to the increase of resource costs for pigs,thus the supply curve will shift in.

    On another note, if pork and chicken are substitutes in PRODUCTION, then as the price of pork increases, firms will most likely produce a less supply of chicken in order to gain a profit. But if chicken and prok are substitutes in CONSUMPTION, then as the price of pork increases, consumers will turn to purchase the cheaper alternative: chicken.

  5. Phoebe Suenon 09 Sep 2007 at 9:59 pm

    It is actually quite embarrassing that i had NO idea about this before i read the article, this is not only about raising a certain food's price, it actually has a greater effect in our daily lifes. What i see is actual "chain reaction": More demand for clean air, more demand for ethanol; then all the elements that make up ethanol increases, which means corn prices increases, the prices of the animals that feeds on corn also increases, which basically means a sudden increase of food prices, aka. inflation. Although on the surface, increase in prices might not seem dangerous, it's actually a kind of poison to the country. If one were to look back in history, many revolutions and uprisings are caused by inflation: 1989 Tian An Men Square, 1789 French Revolution. Therefore, it's crucial for the Chinese government to realize its possible consequence. This leads the government to consider the opportunity cost involved and weight the marginal benefits and costs in order to make the optimal decision. Would the Chinese government sacrifice the lives of the people–increase food price makes lives more difficult, which could result in starvation and a serious degree of poverty–or to sacrifice the air quality–which could lead to sicknesses in people and other serious consequences for the state?

  6. Helen Chuon 10 Sep 2007 at 8:19 pm

    The determinant of supply that is affecting the price of pork here is resource costs.

    First, ethanol is in a sense a substitute in production of pig feed. Corn growers can use either use the corn for ethanol or pig feed. As ethanol is more profitable than pig feed, more and more corn are put into industrial use of ethanol production, and less are being used for pig feed. This shift of the pig feed supply curve to the left thus causes a price increase.

    This then leads to another determinant of supply, resource costs, that as a result affects the price of pork. As pig feed is considered a resource for pig farmers, an increase in the price of pig feed would mean a decrease in supply. This shift to the left for the pig, or pork, supply curve then causes the increase in price for pork, which is what China is experiencing today.

    As the price of pork goes up, the demand for chicken, which can be considered a substitute, will rise, since the price of chicken will now be relatively cheaper. If pork and chicken were substitutes in production, the supply of pork would increase and the supply of chicken would decrease, as farmers would raise more pigs, the animal which would bring in more profit due to its increased prices. As pork prices continue to rise, the price of substitute goods will eventually follow, as the increase in demand for these substitute goods would mean a higher equilibrium price.

  7. Bryan Bockon 10 Sep 2007 at 11:58 pm

    When i saw the title of this article, i was very interested and started reading right away. This topic interested me because of the effect that it will affect everyone in China. For Asians, pork is a very widely consumed meat. The raising of pork's price will upset many people who are not willing to pay so much or not able to afford it. Some people might say that a substitute for pork can be found, for example chicken or fish. Even though if the people of China are willing to eat less pork and more of other food products, the stability of the economy will be shaken. The demand for other food product like chicken will rise, thus, resulting in the increase of supply. This sudden shift in price for pork's substitution might cause chaos to China's economy.

    Another problem that will do damage is the increase production on ethanol. The environment and other living organism is being affected by this mass production of ethanol. While the environment continue to worsen, the people of China will also suffer from this act. 30 million people have already died because of famine 50 years ago. If this goes on, the death toll will rapidly increase.

  8. SoYeon Yoonon 11 Sep 2007 at 1:21 pm

    In this article, the price of pork is affected by the high price of resource cost. Corn producers use corn with ethanol in generating energy, so the corn supplied for pig feed decreases and thus the pork price rises. As the price of pork goes up, consumers will buy substitutes such as chiken of fish, and supply for chiken will greatly increase since they are also substitutes in production. Also, the high price of pork will prevent complement goods of pork from being popular among the consumers.

  9. Elaine Lungon 11 Sep 2007 at 10:34 pm

    The higher resource costs, i.e. the cost of corn for pig feed and as a result, the high cost of live pigs, is the determinant of supply. Since it's more profitable to put corn into ethanol production, less corn is going to the pig feed and at higher prices; this increase in production costs means an increase in the price of pork. Since price is higher for pork, people are willing to buy less of it, probably in favor of substitute goods like chicken, for which the price hasn't gone up. This would result in an increase in supply of chicken, since the higher prices makes chicken suppliers happy.

  10. kevin maon 27 Sep 2007 at 10:57 pm

    I posted on this blog weeks ago and for some reason it is gone so i'm just going to repost.

    So the chinese govt. decided to use corn to produce a more environmentally friendly fuel, ethanol. The effect of this is raising pigs will cost more and it results in pork prices going up. It raises the price of raising pigs because pigs eat corn but the chinese government decided to actually try and lower their pollution problem by a tiny bit and use ethanol as fuel. So because pork prices are going up, people will turn to substitutes such as chicken. So the demand for chicken will rise. And because pork is not demanded as much, the demand for complements to pork, for example some speical pork sauce, will also go down.

  11. Ji Eun Hwangon 30 Oct 2007 at 12:02 am

    There are several factors that affects the price of pork. First, the blue-ear disease killed a tremendous number of pigs, which shifted the supply curve of pork to left. It is beacuse the amount of supply of pork itself had decreased.

    Another factor that dropped the price of pork is the increase in demand of corn. The number of buyers had increased, which is one of the determinants of demand, due to the emergence of ethanol industry which needs corn as well as the pork industry. The price of corn is thus increased, because the demand curve shifts to right.

    Corn is the resource of pork, because corns are used to feed the pigs. One of the determinants of supply is the cost of resource of a product or service. As the cost of corn increases, the cost of production of pork also increases, discouraging the suppliers from producing pork. As a result, the supply curve of pork shifts to left, increasing the equilibrium price.

    I found interesting that the ethanol industry is realted to pork industry, to which people do not easily compare each other. The world is all about economics. 🙂