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Supply and demand analysis of price change of product

a. Use demand and supply analysis to illustrate the changes in chicken prices described in the article.

b. Describe what has happened in the corn and soybean-meal markets and how that has influenced the chicken market.

It has been a tough year in the poultry business, with supply outpacing demand and feed-grain prices rising substantially. But producers are hoping all that changes when the summer cook-out season starts.
The seasonal upswing in chicken consumption, along with the anticipated jump in spot-market poultry prices, could bring some relief to producers whose profit margins have been slashed by surging corn and soybean-meal costs.
Rising feed-grain prices, accelerated by the diversion of corn to make ethanol, have pushed up the cost of producing a live chicken by as much as 65% over the past two years.
Three factors make analysts more optimistic:
Companies are cutting production, weekly egg-set numbers are declining (egg sets are fertile eggs placed in incubators), and prices are responding positively to the decreasing supply.
The production slowdown is a response to the surge in feed-grain prices last fall.
Profit margins at producers will not improve unless spot-market prices for chicken move up fast enough to cover costs paid for corn and soybean meal to feed chicken flocks.
Production cutbacks and seasonal demand have helped fuel a 20-cent increase in boneless, skinless breast-meat prices to $1.46 a pound. Prices are expected to reach at least $1.80 by summer 2008.

Solution Preview

The way to analyze this question is to look at the determinants of changes in demand and supply and changes in quantity demanded and quantity supplied. I am giving a few pointers for you to start the analysis. For each of the following scenarios, you need to draw a demand/supply equilibrium graph for the chicken market (or another related market), to see how chicken prices are influenced by the events narrated in the article. In each case, assume ceteris paribus except the effect you are looking at.

I have tried to offer suggestions for each sentence of the article, and they are numbered accordingly. So 1. implies the first sentence, 2. is second sentence etc. Once you have analyzed each statement, you will be able to sort them into the specific two questions above. Please note that some sentences have multiple parts.

1a. The first sentence in the article describes the current situation where supply is much higher than demand. What happens to price when supply increases and demand ...

Solution Summary

This solution helps students understand how to use the demand and supply models to analyze equilibrium and changes to equilibrium when demand and supply change.