Project on Changes in Market

conditions and its Impact on Price

Case B: Demand remaining constant with decrease in supply

When there is decrease in supply with demand remaining constant, there is leftward
shift in supply curve from S1 to S2 as shown in above figure. The new equilibrium is
determined at E2. As supply decrease, equilibrium price shift to P2 from P1, but
equilibrium quantity falls from OQ1 to OQ2.
Real Life Example: Surge in Coffee Prices
Synopsis
Demand remaining constant and supply decreasing is a classic case in which the
market price rises due to shift in supply curve from S1 to S2
Explanation
This case of shift in supply curve perfectly fits the example of surge in coffee prices in
2014-15. Coffee is one of those crops that are heavily dependent on weather
phenomena and climate change. Approximately 35% of global coffee production and an
estimated 50% of the worlds Arabica coffee bean crop comes from Brazil. Some
commodities brokers have even likened Brazil's dominance in the coffee market to
Saudi Arabia's dominance in the oil market.
2014 was particularly harsh on the coffee crops in Brazil, owing to a severe and
protracted drought in the latter half of the year 2014 which has left many crops
destroyed.
Coffee futures prices had risen by as much as 25% the previous year. But in 2014, there
was a severe drought in Brazil. This had a serious impact on coffee production and the
supply reduced.
When the supply of coffee is reduced, global demand cannot be met and prices rise.
This is precisely what happened with Brazilian coffee. The regions which have been
hardest hit by the prolonged drought include Cerrado, Mogiana and Sul Minas, resulting
in the flowering period being delayed. This typically takes place between the months of
October and November. This has a knock-on effect on next year's crops, since the
absence of flowers automatically translates into the absence of coffee cherries.
The numbers speak volumes: 2014 production was reduced to 48 million x 60 kg bags
down 15% from 2013 causing coffee futures to surge as much as 36% in the 6-7
months to follow.
Case D: Decrease in demand with supply remaining constant with reduction
in price

Real Life Example: Steel Industry in China and Its Global Impact
Synopsis
Demand Supply dynamics of Steel Industry in China and Its Global Impact
Explanation
Looking at the current scenario of steel sector globally it can be seen that China is
responsible for the 50% of the global steel production. It produced around 1.6 billion
tons a year which has doubled since last decade. The government policies were
primarily made for modernisation of infrastructure and manufacturing industries which
leads us to how China had started high scale production of steel to provide as a raw
material for these industries. As time passed by there was over infrastructure
development which lead to development of ghost towns etc. and to sustain their heavily
dependent economy on infrastructure, desperate measures were taken. Demand for
steel steered down due to this slowdown which left no other alternative for Chinese
steel manufacturers rather sell it in the global market at dirt cheap prices. The supply
was constant but the demand had decreased drastically domestically in China which
lead to the decrease in the global prices. Relating to the curve the Equilibrium shifted
from Eo to E1.The global prices have steeply declined from US$460/ton to US$260/ton.
This has led to countries recognising the need to protect their domestic steel production.
To increase the prices globally most of the countries took a route of increasing
impositions on importing steel from China. Around 400 trade actions were taken against
China to safeguard their interest. The U.S. Department of Commerce has imposed
countervailing duties as high as 236% on steel from China in November, 2015. Further
in December, 2015, US imposed 256% import tariff on corrosion-resistant steel imports
from China. Brazil has also imposed import tariffs of 8-14% on steel products from
China. In Europe, Italy has spent 2 billion to support the Ilva steel mill in Taranto which
was under severe losses.
OECD and Belgium jointly held an international seminar to discuss the problems of
excess steel capacity and high decrease in prices. It was mainly held to discuss how to
put a halt to excessive steel supply by China. Looking at the curve above this was done
to increase the price and bring it back to the equilibrium
India had been facing a lot of challenges in the steel sector with the ban on the mines In
Karnataka, Goa and Odisha. The ban was lifted when the Chinese steelmakers were
flooding the market with it excess steel which led to huge losses for Indigenous steel
makers. It was directly affecting the domestic production of hot roll coils as it was a
direct competition to Indian steel makers. India imported 9.3 million tons of steel 71.1%
higher than the previous year. The Indigenous hot rolled prices were US$627/tons while
Chinese HRC were coming out to be US$520/tons even after considering transportation
cost and import duty. For any country a strong steel sustaining capacity is required.
Steel is an integral part of public infrastructure and urban development schemes like
Make in India and SMART cities.
Steel making crisis has not resolved. One needs to think of long term solutions like
reducing the cost of extracting steel and exploring for new untouched mines. Temporary
impositions like putting higher import duties cant deny the fact that China is the largest
producer of steel and one has to import steel from it in the long run
Case F: Large Increase in Supply and Small increase in Demand with small
reduction in Price and large increase in Quantity

In this case both the Supply and Demand are increasing in different proportions. If cost
of production or raw materials decreases then more producers start entering the market.
It causes a large increase in supply, downward and to the right. This is shown in the
above figure as rightward shift in supply curve from SS to S 1S1. This will lead to a large
decrease in equilibrium price along with large increase in quantity. Now, the decrease in
the price, will attract more buyers and there will be a small demand shift, upward and to
the right. This is shown in the above figure as rightward shift in demand curve from DD
to D1D1. At the same time there will be an increase in supply.
The increase in demand will pull the equilibrium price upwards. But this will be
compensated by a larger drop in price due to large increase in supply. The new
equilibrium is determined at E 1 equilibrium price falls from OP to OP 1 whereas,
equilibrium quantity rises from OQ to OQ1.

Real Life Example: Potato Prices

Synopsis
We are taking the case of potato prices hitting Rock bottom despite increase in demand.
Explanation
Potatoes cultivated in the Malwa region of Madhya Pradesh are gaining popularity in
Gulf countries. Export of the potato is used for making snacks has increased in the last
few years and will grow further with rising demand, exposure the International Exhibition
of cold chain expose said on Friday.
To meet this demand the farmers have shown vegetable that include potato and garlic
on 30000 hectare is in the region this Ravi season as against a target of 22000
hectares.
Despite this increase in supply there has been no major outcome as the capacity to
store so much potato is not available in the country. This has led to drastic fall in prices
vary prices have come down to as low as Rupees 1 per kg.
We can also use this to explain the bullwhip effect in supply chain management wearing
due to a small increasing demand there is a huge increase in supply leading to
problems. Due to an increase in demand from the Gulf region the farmers anticipated
more sales and cultivated more potato were let down as most of their produce was
going waste. This happened as the storage was not sufficient and the stockers under
prepared, similar to what happens in bullwhip where the retailers wholesalers and
producers fall prey to small increase in demand by meeting it with stocking of good thus
leading to excess unnecessary stock which needs to be sold off at break even or even
lower as the cost of storing is higher than the loss they make selling at break even.
Case H: Increase in price of any product or service due to decrease in
demand and comparatively higher decrease in supply

In the figure given above, there is a leftward shift in the demand curve and there is a
comparatively more leftward shift in supply curve, signaling the decrease in both the
curves, therefore, price is increasing and quantity is decreasing.

Real Life Example: Algal Boom in Chile (Salmon Price rise)

Synopsis
One of the recent example of this phenomenon is increase in prices of Salmon, due to
algal boom. In 2015, the same country had seen salmon available for very cheap prices.
Explanation
Factors that drastically reduced salmon supply:
1. The Algal Boom:
It is a phenomenon which has been observed in the country of Chile from the
month February 2016, in which a rapid growth of microscopic algae takes place due to
increase in marine water temperature. This led to death of millions of salmon near the
coastline of Chile, which affected the farmed salmon production in the country severely.
100,000 tonnes of salmon were killed due to algal boom in Chile.
2. The Wastage of salmon stock with farmers:
While some of the salmon farmers preferred using antibiotics for infected salmon
stock, many of them needlessly got rid of stock of wild salmon for safer side, by
throwing it away in the sea. According to scientists, this throwing away of salmon again
in sea intensified the algal boom causing further decrease in salmon supply.

Decrease in demand of supply:

Initially, the demand of salmon was hardly unchanged, but as the time passed by
and toxic algal boom became a well-known thing, it decreased slightly. This decrease in
demand was less than the decrease in supply. Prime reason behind this decrease was
people being sceptical about consumption of salmon, as it was infected with toxic algae.

Effect of large decrease in supply and small decrease demand:

This respective decrease in both supply and demand caused increase in prices
of Salmon by about 60% year on year. Salmon prices in Chile were greater than that of
Canada in spite of Canada being a small producer of salmon.
Real Life Example: Price rise in Kinnow Fruit
Synopsis
In Punjab, a type of orange fruit, called as Kinnow fruit is sold in large quantities in the
month of January and February. The prices of the fruit experiences a significant rise
during the month of March.
Explanation
Decrease in Supply:
Supply of Kinnow decreases on a larger scale because maximum sales takes
place in January and February.
Decrease in Demand:
Even the demand of Kinnow decreases because most of the people prefer to buy
them in January and February. This decrease in demand is very less as compared to
the decrease in sales.

Increase in price:
As a result of fall in demand and supply, Kinnow price tend to rise in March.
Case N: Small decrease in demand with a small decrease in supply with price
remaining constant

When decrease in demand is proportionately equal to decrease in supply, then leftward

shift in demand curve from DD to D1D1 is proportionately equal to leftward shift in
supply curve from SS to S1S1 as shown in above figure. The new equilibrium is
determined at Er As demand and supply decrease in the same proportion, equilibrium
price remains same at OP, but equilibrium quantity falls from OQ to OQ1.
Real Life Example: Hindustan Ambassador
Synopsis:
This case can be perfect fit for Hindustan Ambassador manufactured by Hindustan
Motors of India which loose its buyers due to its competitors and ultimately they had to
reduce the production of the cars. But as it was dubbed as Grand Old Lady of Indian
Roads, it continues to sell at same price in Indian market.
Explanation:
The Hindustan Ambassador was an automobile manufactured by Hindustan Motors of
India. It was in production from 1958 to 2014 with few improvements and changes over
its production lifetime. The Ambassador is based on the Morris Oxford series III model,
first made by Morris Motors Limited at Cowley, Oxford in the United Kingdom from 1956
to 1959.The Ambassador was the first car to be made in India. There was a time when
people had to wait for over a year from the date of booking to the delivery of the new
car. Despite its British origins, the Ambassador is considered as a definitive Indian car
and is fondly called the "king of Indian roads" the Ambassador car enjoyed a monopoly.
But the cars dominance began to slip, first in the 1980s when the joint Indian-Japan
venture Maruti Suzuki began producing low-cost hatchbacks, M-800 and then again the
following decade when the global automakers began setting up shop in India in the mid-
1990s, offering models with contemporary designs and technology. There was certainly
a change in demographics of people buying ambassador. Maruti-800 made inroads into
market share of ambassador and brand itself as affordable car causing ambassador to
reduce the supply in the market.
Although there was decrease in demand and proportionate decrease in supply, The
Ambassador has remained the choice of a dwindling share of bureaucrats and
politicians, usually in white with a red beacon on top and a chauffeur at the wheel. It
was also a first choice of taxi car. This all things help ambassador to keep prices
constant with the change in equilibrium quantity that is change in the number of cars
sold during the period of 1983-1995.
So despite simultaneous decrease in supply and demand, price of the ambassador
remained constant when others substitute cars lured the customer.