Rising costs mean higher beer prices in New Zealand

DB warns of packaged beer price rise next year - Breweries news - NZ Herald - NZ Herald News

The article presents the situation of suppliers in the packaged beer market. The suppliers are warning consumers that the price of beer will go up, due to the mounting costs of the factors of production, such as glass, aluminium and cardboard packaging. Due to this, the supply of beer, which is defined as the ability and willingness of suppliers to produce beer, shall decrease. The supply-curve of beer shall shift to the left, as shown below. Due to this, the consumer’s demand, which is defined as the ability and willingness of consumers to buy beer, shall also be affected.

Graph 1

As the supply of beer has changed, the quantity demanded of beer, which is the amount of beer brought by the consumers, also reduces. Thus, in the graph, we can see an increase in the price of beer from P₁ to P₂, and a complementary decrease in its quantity demanded from Q₁ to Q₂. Therefore, the equilibrium point of the market, which is the point where supply and demand are equal, also shifts from E₁ to E₂. Compared to the previous equilibrium point, supply and demand are equal at a higher price, and a lower quantity.

However, the article points out that the suppliers are still doing good business. To understand this, one needs to analyze the price elasticity of demand for the beer market.

Price elasticity of demand can be defined as the responsiveness of consumers to a change in the price of a product within a given time frame, ceteris paribus, i.e. holding all other things equal. The determining factors for this kind of elasticity are- the type of product, i.e. is it a luxury or a necessity? Is it habit forming? Does it have any substitutes? Do consumers have enough time to change their spending habits? What is its cost?

In the case of packaged beer, we can say that it is habit-forming and has very little substitutes, like wine. Further, it is has a relatively low cost. Thus, people would still prefer beer over wine. Therefore, it can be said that it is an inelastic good, i.e. consumers are not very responsive to change in prices.

But beer is not perfectly inelastic. This is due to the fact that the law of demand still applies to it. The law of demand states that as the price of a commodity rises, the amount of its quantity demanded decreases. So, as the price of beer is increasing, its quantity demanded decreases, albeit by a small amount.

Graph 2

Further, it can also be said that the beer suppliers may actually benefit from the increase in price, as beer is an inelastic good. As there is only a small decrease in demand for an increase in price, the total revenue of the suppliers will probably increase. However, one cannot be sure of this situation as the costs of production also go up. Therefore this is an ambiguous case.

The beer suppliers may take advantage of this situation by reducing their costs of production. This can be achieved by altering the factors of production. Instead of using glass bottles, they could use a cheaper alternative such as paper cartons.

It can be said in conclusion, that beer is an inelastic good, and the article rightly point out that it is “recession-proof”. The low cost of beer and its inelastic nature make it resistant to the recession being faced currently in markets around the world.