Essay: ECO1010F

Beef Cattle as well as maize are agricultural products. Agricultural products tend to exhibit
extreme fluctuations in price from season to season. In 2015, South Africa experienced the
worst drought to hit the country since 1982. (“South Africa grapples…”, 2015) The change in
the price of beef cattle will be presented according to the Cobweb Theory, and more
specifically, by examining a convergent Cobweb model.

The following assumptions apply to the argument presented in this essay: first, the parties
involved are rational, meaning that consumers want the greatest possible utility and firms
want to maximise profit. Any market fluctuations for maize are assessed in terms of maize
being a good related to beef cattle, and not independently as an agricultural good. The
following assumptions are also made when examining the Cobweb Theory. Firstly, the goods
produced are perishable and cannot be stored to be sold at a later stage; secondly, producers
make their economic decisions for the future based on decisions of the past

Following the severe drought, Minister of Agriculture Senzeni Zokwana declared the average
maize yield to be the lowest since 2008. (“Drought Grips South Africa”, 2015). This in turn
caused an increase in the price of maize, demonstrated on the following graph.

Market for Maize

Price (P)
S1
S

P2 E1

PE E

S1
D
S
QND QE Quantity (Q)

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The graph above shows the market for maize. The demand and supply curves are represented
by DD and SS respectively. At point E, the market is in equilibrium. Less maize is produced
due to production being curbed at Q2 as a result of the drought experienced, ceteris paribus.
Supply shifts left to S1S1. This creates a new equilibrium (E1) at a higher price P2.

The increase in the price of maize decreases the profitability of beef farmers because the
price of inputs (maize feed) has risen, but the cattle are still sold to abattoirs for the same
price. The profit to producers from selling the cattle is therefore less. As a result, cattle
farmers are expected to raise fewer cattle in the following agricultural season.

Where price elasticity of demand for one good is greater than the price elasticity of supply for
that same good, a convergent fluctuation occurs. For the purpose of this particular evaluation,
it is imperative that the price elasticity of supply is assessed in more detail than that of
demand. The price elasticity of supply of a good it dependent on the length of time that
elapses after the change in price. In the short run, most supply curves are inelastic as
suppliers cannot respond to price changes in the given time. This holds true with beef cattle:
if the price of beef increases, farmers need a full season to adjust their crop production in
response to the change in price. Should a decrease in the price of beef cattle occur in the short
run, supply will remain inelastic as farmers are most likely to sell off their produce at a lower
price, rather than to lose a significant portion of their income – this too suggests that price
expectations are important in determining in determining the elasticity of supply.

Elasticity of supply can also be affected by the prospect of stockpiling the product. Beef
cattle cannot simply be stored in response to a price change; instead, they are perishable –
demonstrating a more inelastic supply. The availability of inputs - in this case, maize feed –
also affects a producer’s ability to respond to a price change. If maize is unavailable, the
farmers cannot increase their output should an increase in the price of their product occur.

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 Market for Cattle

Price (P)

D S

P2 b c
PE E
P3 d

D
S
Q2 QE Q3 Quantity (Q)

The original demand and supply curves are demonstrated by DD and SS respectively. In the
2016 agricultural season, fewer cattle are produced, resulting in a downward movement along
the supply curve to point a, ceteris paribus. Those able to produce at quantity Q2 find that
they are able to sell their cattle at a higher price P2 as a result of the excess demand. As a
result of the decrease in supply, the market price of beef will rise.

When it comes to planning for the 2017/18 season, cattle farmers will reflect on the fact that
they were able to sell their cattle at price P2 in the previous season. They are therefore
encouraged to increase the number of cattle raised to quantity Q3 as a result of an upward
movement along the supply curve to point ‘c’, ceteris paribus. However, farmers will find
that they are only able to sell their cattle at price P3, as a result of the excess supply. As a
result of the increase in supply, the market price of beef will fall.

Continuing through the points on the graph, both production and price approach the original
equilibrium price and quantity, point ‘E’. This follows the general equilibrium theory, where
supply, demand (and the associated prices and quantities) return to a state of balance within
the market. It is therefore expected that the price of beef cattle on auction will behave the
same way.

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 The above time series demonstrates the fluctuations in the price of beef cattle in the United States of America
over a 40-year period between 1974 and 2005. Available at:
http://www.noble.org/imageFactory?f=/Global/ag/economics/DroughtEconomyCattleCycle/SwigertGraph.jp
g&w=315&bw=0

The market for beef cattle can demonstrated in the following graph, where the price elasticity
of both the demand and supply curves is relatively inelastic, with demand being relatively
less inelastic than supply. This is explained in detail above. A decrease in the supply of beef
cattle shifts the original supply curve SS to S1S1. This in turn demonstrates a large increase in
the price of the good to from price PE to price P1, ceteris paribus.

Market for Beef Cattle

Price (P) D S1
S

P1

PE E

S1 S D
Q1 QE Quantity (Q)

However, the price elasticity of both demand and supply of beef found in supermarkets is
relatively more elastic than that of beef cattle. More importantly, the price elasticity of supply
for beef in supermarkets is relatively more elastic than that of beef cattle.

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The ability to change the supply of packaged beef in response to a change in price can occur
fairly quickly: should the price of change, supermarkets can increase supply by importing the
product should it be unavailable locally. In much the same way, should the price of beef
decrease, supermarkets are unlikely to sell off the beef at a substantially lower price. Instead,
they will store the beef in large quantities as it is non-perishable when kept frozen. This is
demonstrated on the following graph.

Market for Beef in

Supermarkets

Price (P) D

S1
S

P1
PE E

S1
S
D
Q1 QE Quantity (Q)

A decrease in the supply of beef cattle shifts the original supply curve SS to S1S1. This in turn
demonstrates a much smaller increase in the price of the good to from price PE to price P1,
ceteris paribus.

It can therefore be shown that the price of beef in supermarkets will not exhibit the same
volatility as the price of beef cattle, as the vertical distance between PE and P1 is greater in the
market for beef cattle than it is in the market for beef in supermarkets for an equal decrease in
supply from QE to Q1.