China’s rice supply and price relationship and Government’s intervention

By | April 22, 2014

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Contents
1.0 Introduction 3
2.0 Factors for market price in free market 3
2.1 Demand factor 4
2.2 Supply factor 5
2.3 Relationship between Market price and market supply plus demand 6
3.0 Relationship between the suppliers and the quantity supply for rice 8
4.0 Government’s intervention on price 11
5.0 Consequence from government’s intervention 300 12
5.1 Expected consequence 12
5.2 Actual consequence 13
6.0 Recommendations 13

 

1.0 Introduction

 

A great many of Asian countries have been attacked by the general surge in food costs worldwide beginning from the year 2007, and the rice price stand in the breach especially. The price of rice has nearly risen up more than 60% from the year 2007, which resulted from the shortages due to poor harvest, rising in demand both domestically and internationally, low stockpiles and poor agricultural investment (News.bbc.co.uk 2008). China, as one of the world largest rice producer, is also faced with the rice shortage problems because of the natural disaster such as the heavy snow disaster in 2008, severe floods as well as unusually hot weather (Sud 2008).

 

On the basis of the above situation and information on Chinese rice problem, This essay will make an analysis on four aspects including factors for rice’s market price in free market, relationship between the suppliers and the quantity supply for rice, government’s intervention on rice’s price, consequences from government’s intervention and recommendation for Chinese government to further control rice market.

2.0 Factors for market price in free market

 

The rice market is the classic example of pure competition, in which there are thousands of independent sellers as well as the indistinguishable output from each seller (Welch & Welch 2010). Meanwhile, in the pure competition which the rice market is in, the price is determined solely by the competitive forces of the market, in another word it is determined by the interaction of market supply and market demand but not controlled by any single rice suppliers (Welch & Welch 2010).

2.1 Demand factor

 

Generally speaking, the change of rice’s price causes a change in the quantity demand of rice and it is often the higher the rice’s price the less demand for the rice in the free market which is just as figure 1.0 shows.

Figure 1.0 Demand curve of price inelasticity

Figure 1.0 Demand curve of price inelasticity

 

Source: (Welch, P.J. & Welch, G.F. 2010: Economics: Theory & Practice)

In addition, as the justification from Yarbrough, B and Yarbrough, R.M. (2006), we can get the price of rice is inelastic which suggests a given percentage change in price of the rice results in a smaller percentage change in the quantity demanded of rice. This kind of situation is clearly showed in figure 1.0, that the consumers respond weakly to the price rise of rice, which means even the price changes a lot, the quantity demand for rice main only change a little due to rice is the necessities people are live on it so much (Welch& Welch 2010).

 

2.2 Supply factor

 

As refer to the relationship between the market price and market supply of rice in the free market, the supply curve slopes upward indicating that the higher price of rice related with larger quantity supplied rice as figure 2.0 shows.

 

Figure 2.0 Supply curve for rice based on price factor

Figure 2.0 Supply curve for rice based on price factor

 

Source: Welch, P.J. & Welch, G.F. 2010: Economics: Theory & Practice

 

 

Figure 2.0 shows due to the rice price rises from Po to P1, it results in the increase of quantity supplied of rice from Qo to Q1, which discloses the phenomenon that the rice suppliers may gain more profit based on higher price of rice. But based on the current situation as the form paragraph mentioned, there is a shortage of rice supply due to various factors, which the actual situation of China’s rice supply and price relationship may be described like figure 3.0 shows (Welch& Welch 2010).

Figure 3.0 China’s rice supply and price relationship

Figure 3.0 China’s rice supply and price relationship

 

We can conclude that the rice price increases mainly because of the shortage. Graphically the shortage of rice in China results in the supply curve shift left from So to S1, and this kind of shortage in supply also increases the rise of rice price from Po to P1 in Chinese rice market.

 

2.3 Relationship between Market price and market supply plus demand

 

Market demand and market supply for rice are the sole factors determining the equilibrium price and quantity of rice in the purely competitive market. The market in figure 4.0 is the rice market, in which the equilibrium price Pe and equilibrium quantity Qe occur at the intersection of the market demand and supply curve, that is, the quantity demanded in the rice market equals the quantity supplied at equilibrium (Sloman & Hinde 2007). Such kind of phenomenon is the ideal situation described by most economists. While in the real world, the market price of rice may be lower or higher than the equilibrium price determined by the changes of market supply and demand for rice (Sloman & Hinde 2007).

Figure 4.0 Equilibrium price for rice market

Figure 4.0    Equilibrium price for rice market

 

Source: Welch, P.J. & Welch, G.F. 2010: Economics: Theory & Practice

 

 

As far as we know, the rice market of China is faced with a shortage which is the exactly situation in figure 4.0 that the price for rice is at Po below the equilibrium price Pe, in which the quantity supplied Qso is less than the quantity demanded Qdo, that is the rice market in China encounters a shortage. Such kind of shortage in rice supply will further affect the price of rice to rise as the consequence in figure 5.0. The market price of rice is increased from Po to P1 due to the shortage of rice supply.

 

Figure 5.0 Relationships between rice price and market shortage

Figure 5.0 Relationships between rice price and market shortage

Source: Welch, P.J. & Welch, G.F. 2010: Economics: Theory & Practice

 

3.0 Relationship between the suppliers and the quantity supply for rice

 

The rice market belongs to pure competition market, in which there is a great many sellers acting dependently of each other and offer identical products as well as great freedom of entry and exit the market (Welch& Welch 2010). To maximize the profit, rice producers have to consider the relationship between the cost and revenue from rice production, when marginal cost equals marginal revenue, they can enjoy the largest profitability from rice production as figure 6.0 shows.

 

And when marginal revenue is larger than marginal costs, rice producers can earn more profit which may lead to more rice production. While when the marginal revenue can’t cover or even less than the average cost, rice producers may face a loss, which may result in the deduction of rice production (Sloman & Hinde 2007).

 

Generally speaking, the quantity of rice production largely depends on the cost of production; the larger the revenue can cover the cost, the more rice they will produce, which will influence the entire rice market (Sloman & Hinde 2007).

 

 

Figure 6.0 Profit maximization point

Figure 6.0 Profit maximization point

Source: Hubbard, R. G. & O’ Bnen, A.P. 2006: Economics

 

 

Based on the above information, we can get the following two situations on the relationship between suppliers and the quantity supply for rice.

 

In figure 7.0 and 8.0, point a is the short run position of the rice industry, in which the total revenue (TR) is greater than its total cost (TC) (TR=P× Q > TC=C1 × Q1). That is to say, in point a, rice producers can earn supernormal profit, which may lead more new rice producers to enter into this market as figure 7.0 shows the supply curve for rice shifts from S1 to S2. Until more and more rice producers enter into this industry, the existing market share of these previous rice producers will decrease due to more producers’ shares in the market. Until rice producers only earn the normal or zero profit in this industry in the long run as the situation in point b in figure 8.0, in which no more rice producers would like to enter this industry.

 

 

Figure 7.0 suppliers’ short termand long term situation (scenario 1)Figure 8.0 Equilibrium situation for suppliers   (scenario 1)

Figure 7.0 and 8.0 suppliers’ short term and long term situation

D= AR= MR

 

Based on the data in figure 9.0 and figure 10.0 point a is the short term situation that the rice industry is in, in which it makes a loss in the rice business just as figure 10.0 shows that the total revenue is less than the total cost (TR=P1× Q1 < TC=C1 × Q1). In this situation, some rice producers may exit this industry and then there are fewer producers to share the marketing share of this industry, which is as figure 9.0 shows that the supply curve shifts from S1 to S2. Due to the exit of some rice producers in this industry, the market shares of these remained rice producers will increase, they are going to have zero profit in the long run just as the situation in point b of figure 10.0, in which total cost equals total revenue .

 

 

Figure 9.0 suppliers’ short termand long term situation (scenario 2)Figure 10.0 Equilibrium situation for suppliers   (scenario 2)

Figure 9.0 and 10.0

D= AR= MR 

 

 

The situation of China’s rice market is more like this second situation, due to farms can’t cover the cost of rice production or even make a loss, they may adjust the quantity of rice supply to balance the relationship between the revenue and cost of rice production in order to maximizing their profitability.

 

4.0 Government’s intervention on price

 

Due to rice is the necessity, which is essential for people’s life, people have to consume it even it has a high price. To alleviate the price pressure from the rice, Chinese government has carried out measures to help its people to afford rice consumption.

Figure 11.0 Government intervention on price

Figure 11.0 Government intervention on price

Source: Welch, P.J. & Welch, G.F. 2010: Economics: Theory & Practice

 

 

 

Figure 11.0 is the price ceiling means implemented by Chinese government to limit the maximum rice price below the equilibrium price Pe, which can help control the price of rice from rising above certain level (Welch& Welch 2010).

5.0 Consequence from government’s intervention 300

5.1 Expected consequence

The above intervention means from Chinese government are aimed at alleviating the attack from high rice price. Referring to the price ceiling measure, Chinese government is willing to see the fear for rice shortage of Chinese citizens can be moved and the rice binging and hoarding can be solved in the short term (Trade and markets 2009).

 

 

 

In the long run, the stability of society can be maintained, people’s needs on every day life’s necessity can be well satisfied and the domestic economy can go on smoothly are the best consequence which Chinese government is willing to get via these measures (Trade and markets 2009).

 

5.2 Actual consequence

 

On the one hand, the price ceiling policy carried put by Chinese government did help Chinese consumers to afford normal rice consumption, and removed their panic for rice shortage at a large extent. While the side effect of such kind of means can’t be ignored either. The price ceiling lead some farmers have to sell their rice in a relatively lower price domestically compared with the international rice price, which means less profit for these rice producers, such kind of phenomenon may decrease the working morale and even results in less rice production. It may put great pressure on the future development of farming (McCartan 2008).

 

6.0 Recommendations

 

Besides on the above measures for price control, it also recommends the Chinese government to adopt the following measures.

 

In the short run, Chinese government can carry out series policies to lower the rice exports. Such kind of means can help alleviate the pressure of rice shortage in domestic market. Meanwhile, the relatively increasing the export price for rice while decreasing the export amount may not only help china maintain the balance between rice supply and demand in domestically market but also help these exporters maintain their profit as precious(McCartan 2008).

 

 

In the long run there are two suggestions for Chinese government. At first, it is necessary for Chinese government to increase the investment on agriculture. For instance, the investment on agricultural research and development on the new disease resistant development as well as higher-yielding varieties innovation play a significant role in solving the future rice problems (Trade and markets 2009).

 

Secondly, increasing the rice reserves moderately can help Chinese government to be more powerful to overcome future rice problems. For instance, Chinese government can purchase and store sufficient amount of rice during the rice harvest time to help ease the rice shortage in the tough time, which can not only help reduce the price pressure and also help stabilize the society(Trade and markets 2009).