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Supply And Demand....Kimchi?

Updated on July 2, 2013

Koreans scramble to adjust to soaring Kimchi Prices

Source of article: Korean Times

You can find the article here : http://www.koreantimes.co.kr/www/news/include/print.asp?ne...

Source

“Supply is the quantity of good or service that producers are willing and able to produce at a given price in a given period of time (Blink, Dorton 27)” There was a downpour in the month of September and the crops suffered tremendously.

Because of the adverse weather conditions, there was a decrease in supply of cabbages. The supply curve shifted from S to S1. This caused a shortage or an excess demand of cabbages in the market putting an upward pressure on the price. The price hiked from 2400 won to 7400 won which led to a contraction in demand, from Q1 to Q2. “Demand is the quantity of a good or a service that consumers are willing and able to purchase at a given price in a given time period (Blink, Dorton 18)”. This signals the producers to produce more but because there isn’t any supply of cabbages, the shortage prevails in the market.

However, the demand of cabbages is price inelastic. “Elasticity of demand is a measure of how much the demand for a product changes when there is a change in one of the factors that determine demand. (Blink, Dorton 46)” Which means that the demand will change less than proportionate compared to the price. There are many factors affecting the elasticity of demand in this case, we know that Kimchi is a staple food of Korea and hence people won't stop buying cabbages to make Kimchi.

Source

The worst affected people because of the price hike will be the lower income group. Since Kimchi is the food of Korean households, people will have to pay much more to buy the cabbages. This will diminish the disposable income and there is a massive opportunity cost. “Opportunity cost is the next best alternative foregone when an economic decision is made. (Blink, Dorton 3)” They will have less to spend and their standards of living can deteriorate as well. Restaurants would like to maintain their standards and therefore they won't use any other cabbage but Napa cabbages. But due to price rise, their profits will drop as the costs will increase. In some cases, this can even lead to firing people and the unemployment level can rise. In long run, the Korean farmers will also have loss in revenue as there won't be any produce to supply.

In economic theory, if the demand for a product is inelastic and the price rises, there should be an increase in revenue. This is because producers would like to supply more if there is a rise in price but in Korea, the produce of cabbages was low and suppliers were not able to satisfy the demand. Thus, it will result in no gain in revenue, even though the demand is inelastic. If the price remains high for longer period of time then people will need to switch to alternatives.

“If products are substitutes for each other, then a change in the price of one of the products will lead to a change in the demand for the other product. (Blink, Dorton 20)” If the price of one product increases then the demand for its substitutes will increase. Restaurants would like to maintain their reputation and use the original Napa cabbages for Kimchi, but schools and offices, started switching to radishes such as ''Kkakdugi''. And if the demand of one product increases then the price of its substitutes should reduce.

Because of bad weather conditions, there is a shift in the supply curve shifting it from S to S1. This causes a shortage, pushing the price upwards from P to P1 leading to decrease in quantity demanded from Q1 to Q2. This makes the product unattractive to the consumers and so they will like to switch to other alternatives.

Because, people would like to buy cheaper alternatives, the demand will increase and the demand curve of the substitute product will shift from D to D1 and quantity demanded from Q1 to Q2. This will cause an excess demand, pushing the price upwards, shifting the price from P1 to P2

To satisfy the demand of the people, Korea started importing Chinese produced cabbages and gave subsidy to the local farmers. In short run, this is beneficial to both since Chinese producers are able to sell their produce and the Koreans are able to satisfy their demand. But in long run, it is harmful for local producers as there high priced cabbages won't be sold and the subsidy will cause opportunity cost to the government. The money they spend on local farmers can be used for education or health purposes. The farmers might have to spend the little profit they earned on improving their farm conditions, leading to even lesser revenue. And if they have a bumper crop next year, then there will be an excess supply and local producers won't be able to benefit from the bumper crop as much, because they will have to sell them at cheaper prices.

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