Prices of CNY goodies Shoot Up

Prices of CNY delicacies have increased during this Chinese New Year is attributed to supply side factors and demand curve. During CNY, demand for CNY delicacies & goodies have increased. This causes the demand curve to shift to right. For example, shark fin soup. Consumption of shark fin soup has risen dramatically with the middle class becoming more affluent, as communities around the world enjoy increasing income levels.

                             

Moreove, prices of delicacies such as mandarin oranges have increased were up 10% due to bad weather and floods which resulted in lower harvest. The supply curve for these delicacies will shift to left. Besides, prices of CNY delicacies have increased due to higher ingredient costs, wages and rent. Since profits of the firms are strongly influenced by the cost of inputs used in the production process, the cost of production will thus affect how much a firm is willing to supply. The higher ingredient costs, wages and rent imply that it now costs more to produce than before; profit consequently declines. Firms will now produce less at each and every price, causing the supply curve to shift left.

In the analysis above,i have explained why the price of CNY delicacies and goodies rise. However, why is it that businesses readily and willingly increase prices during this festive period when there is a possibility that higher prices will result in a fall in total revenue and hence profits, ceteris paribus? This is where the concept of Price Elasticity of Demand (PED) can be applied.

During the festive period, CNY delicacies and goodies are deemed necessities. As such, the PED for such goods are price inelastic (PED < 1), where consumers do not reduce their consumption of these goods by large amounts, even as prices rise. Hence, retailers willingly pass on the increased cost of production to the consumers in terms of higher price. This rise in price results in a less than proportionate fall in quantity demanded and total revenue will increases.

By, Lee Sin Yee
0315598