Market Structure and Elasticity of Demand
This paper presents an analysis of the agricultural industry with a specific focus on vegetables and fruits. Globally, vegetables and fruits are the healthiest food sources. All over the world, doctors recommend patients to take these foods in order to recover quickly. They are also recommended because they promote healthy lifestyles.
Unreal global hypothetical data will be used to examine statements that include elasticity of demand and market structure in relation to the goods that are produced by this industry. This makes estimating variable and fixed costs possible. Additionally, the paper will examine marginal effects that changes in the supplied quantity have as well as the industrial pricing policy. Non-pricing strategies as well as the effects of the variable costs in case of changes in the course of the basis will also be examined.
Economically, market structure is numerically the figures of the companies that supply similar homogeneous products (Kokemuller, 2014). There are different market structures. Their variation is based on the production field. For instance, vegetables and fruits fall in a monopolistic competition market structure. In this market structure, competition has a unique nature in which different products are sold by most manufacturers such that branding or quality leads to lack of perfect substitutes (Kokemuller, 2014).
When a market has a monopolistic nature, prices that competitors charge at the expense of own prices are accepted by the industry. In terms of vegetables and fruits, there is a relatively well-established and big market. Vegetables and fruits such as spinach, kales and sweet corn are important in the daily lives of humans because they are important foods for animals and humans. As such, these products are required by the market at any time of the year. Unfortunately, they have a seasonal production.
Elasticity of demand refers to economic assessment that demonstrates elasticity culpability for the quantity of the demanded products and services. Market economies have inelastic and elastic elasticity of demand (Dunn, 2009). Elastic demand refers to what rises or falls in relation to good’s pricing strategies. Vegetables and fruits have a tendency of adopting elastic demand in terms of their pricing fluctuations. Consumers purchase more fruits and vegetables when their prices drop.
For instance, consumers buy more vegetables during spring because vegetable production is high at this time. Prices on the other hand increase during summer because agricultural production is low. At that time, consumers tend to avoid buying fruits and vegetables. This reduces their demand. Vegetables’ demand is like a necessity when substitutes are readily available. Therefore, income fluctuation does not have a significant impact on their demand (Dunn, 2009).
Mixed costs are made of variable and fixed costs. Fixed costs do not depend on output. They have a uniform range throughout the specific period. Variable costs change alongside input. These types of costs multiply with a relative labor and capital rate. For variable and fixed costs to be estimated, hypothetical data should be considered.
In terms of agricultural produce that include vegetables and fruits, fixed cost can be land for production without including the machinery and plantation that are used in sustaining production. The variable cost includes wages, utilities and fertilizers. For example, when there is a high demand for fresh spinach, it means that more utilities that include laborers and fertilizers will be used to produce fresh spinach. However, when spinach demand is low, production will also be low. Thus, only a few laborers will be required to maintain low production.
There is a way by which pricing strategies relate to products’ elasticity with constant prices’ fluctuations. Considering the scenario discussed above, there is high production of farm produce during spring. At such times, agricultural products are available to consumers in the market. They are also sold at fair prices and sometimes lower prices. Their demands are high due to their easy availability and reasonable or low prices.
Due to high production of these products, there is an increase in the supplied quantity at affordable prices. Demand for these products increases. During summer, vegetables and fruits are scarce. There is a tendency for the prices of the supplied vegetables to increase. This compels consumers to look for alternatives. Hence consumer demand decreases. Consequently, product scarcity emerges. The supplied quantity in the market reduces and this reduces product demand by consumers due to increased prices.
Because of the variation in the pricing strategies, variation in the supplied quantity affects marginal revenue and cost. Profit maximization is the long term and short term procedure that businesses use to determine price and production that give them higher profits (Mark, 2009). When marginal revenue equals marginal cost, a company attains its climax. Revenue refers to the cash that a firm receives from its daily operations.
Marginal cost refers to a change in costs or proceeds in every production that is added (Mark, 2009). Considering that demand is low during summer due to increased prices, there will be a reduction in the supplied quantity in any market. This reduces marginal revenue and marginal cost. There are no extra units that are realized from production to maximize profit. Thus, the industry might succumb to the faced financial challenges.
A non-pricing strategy in form of government intervention can be employed to increase market obstacles to entry. Entry barriers are the hurdles that new competitors must overcome in order to venture into an industry. They are beneficial because they protect revenues and profits in an existing industry from emerging firms that compete in a similar production line. As the only regulator of different enterprises, the government dictates new industries in a country. Therefore, some new entrants can be denied licensing and therefore denied the right to run businesses similar to the ones that exist in an industry. This eradicates the possibility of increased competition in an industry where competitors already exist.
However, it is important to note that variation in business operations occurs including the discussed industry. These changes can be caused by different variable and fixed costs. In the agricultural sector, operations are done in a monopolistic competition set up whereby increased production causes escalated demands. Decrease in supplied quantity causes a decline in consumer demand. In case of changes in this industry’s scope, sales changes are altered by variable costs.
The sold goods’ cost is the same as every unit of every sale. This includes material cost that is involved in production as well as the labor cost that goes into hiring workers. In addition to alteration in variable cost, sales volume-based compensation, shipping and handling charges can also change the strategy in the industry. In terms of the fixed cost, no alteration is experienced because units remain the same regardless of the number of the sold entities.
Dunn, J. (2009). Fruit and Vegetable Marketing for Small-scale and Part-time Growers. Small-scale and Part-time Farming Project. Penn State University. Web. March 19 2014. Retrieved from http://extension.psu.edu/pubs/ua262
Kokemuller, N. (2014). What the Price Elasticity of Demand Shows and How Substitutes Affect Elasticity. Small Business: Demand Media. Web March 19 2014. Retrieved from http://smallbusiness.chron.com/price-elasticity-demand-shows-substitutes-affect-elasticity-74171.html
Mark, H. (2009). Managerial Economics (12th Ed.) Mason, OH: South-Western Cengage Learning.