ECON1000 Student Essay Exemplar 1 - Olive Oil Market(1)

7/23/2019 ECON1000 Student Essay Exemplar 1 - Olive Oil Market(1)

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ECON1000 Student Essay (Exemplar 1)

Olive Oil Market Analysis

ECON1000 Assignment – Student Essay (Exemplar 1)

Olive Oil Market Analysis: Lecture Topics L (Demand and Supply), L! (ed and !e"enue), L# (Economic

E$ciency)

C"ntents

1%0 &rticle Summary '

'%0 ntroduction '

%0 &rticle &nalysis '



%1 Demand and Supply o* Oli"e Oil '

%' rice Elasticity and Total !e"enue o* Oli"e Oil +

% ar-et E$ciency .

#%0 Conclusion.

+%0 !e*erences /



Page 1 of 9




1#0 Arti$le Summary

Te article, Olive oil prices set to rise sharply after Andalusia drought discusses te expected increasin prices o* oli"e oil due to continuous

drout in Soutern Spain and te 2acteria 3ylella 4astidiosa in ulia,

taly% Te lac- o* rain leads to an estimated #05 crop sortae in Spain,

te 6orld its top producer o* oli"e oil% &ltou oter ma7or suppliers

includin 8reece and Tur-ey are not a9ected, te decit in Spanis

production is sinicant as 6ell te demand as increased 2y .05 in te

past t6o decades, it is anticipated tat 6ill not 2e enou supply% &n

increase in price is necessary to clear te sortae and to reac

e;uili2rium% <ile an increase in price mit 2rin 2enets to producers itis arued tat a ood ar"est drop prices ea"ily, on te oter and poor

ar"est increase prices, 2ut tere is less sellin resultin in no=6in

situation *or oli"e oil producers (>uren '01#)%

#0 %ntr"du$ti"n

Tis essay explains te economic teories applied on te oli"e oil mar-et%t discusses te demand and supply *actors tat in?uence 2uyers and

sellers% Te essay explains o6 e;uili2rium in a mar-et is reaced to

eliminate te sortae% t also co"ers te elasticity o* demand and te

relationsip 2et6een te price elasticity o* demand and total re"enue, and

lastly te cane in price e9ects on consumer and producer surplus%

Arti$le Analysis

&emand and Supply "' Olive Oil

Te demand cur"e is a diaram tat indicates te relationsip amon te

price o* a ood and te ;uantity demanded o* tat ood, 6en e"erytin

else remains sta2le (Curtin @ni"ersity '01#)% &s te la6 o* demand a$rms,

6en te price o* a product rises te ;uantity demanded decreases, and

6en te price o* a product *alls, te ;uantity demanded increases(Au22ard et al% '01)% 4or instance, as >uren ('01#) points out

consumers a"e to pay more *or oli"e oil due to te increase in price *rom

'%#0 euros (%#/ &@D) to '%/0 euros (%B0 &@D), tis 6ill result in a



decrease in ;uantity demanded tat 6ill cause a mo"ement alon te

demand cur"e%

igure 1 A Movement Along the Demand Curve

Te increased price o* oli"e oil *rom %#/ to %B0 causes a mo"ement

alon te demand cur"e *rom point & to point > = a decrease in ;uantity

demanded *rom 0L to '0L%

Page 2 of 9




On te contrary, te supply cur"e is a diaram tat indicates te

relationsip o* a product and te ;uantity supplied o* tat product, 6en

unpriced "aria2les stay te same% Te la6 o* supply a$rms tat 6en te

price o* a product rises te ;uantity supplied increases, and 6en te

price o* a product *alls, te ;uantity supplied decreases (Curtin @ni"ersity

'01#)% Te article outlines tat poor ar"est is predicted *or tis year

2ecause o* te drout and te 2acteria tat in*ected a lare num2er o*

trees in ulia% Tese *actors cause a sortae in supply 6ic leads to an

increase in price ad7ustin te sortae% n tis case, supply 6ould not

increase due to oter "aria2les tat 6ere not sta2le, tus supply 6ill si*t

to te le*t%



igure A decrease in olive oil supply

& determinant tat in?uences te supply cur"e to si*t to te le*t is te

expected *uture prices% &s stated in te article, some producers a"e teincenti"e to decrease supply no6 and old some production to sell it later on

6en prices are expected to 2e ier% On te oter and, consumers tend to

2uy more oli"e oil no6 to a"oid payin more in te *uture% Tis si*ts te

demand cur"e *or oli"e oil to te rit in anticipation o* ier prices in te

*uture%

n particular, an increase in price *or oli"e oil causes a decrease in

demands *or te complement ood suc as ra6 "eeta2les% Consumers6ill 2uy *e6er "eeta2les tat are used *or salads si*tin te demand *or

te complement ood to te le*t% Te cane in price, also leads

consumers to 2uy less oli"e oil and coose to 2uy a su2stitute *or it tat is

less costly suc as "eeta2le oil, canola oil or sun?o6er oil%

Te demand *or sun?o6er oil oes up 6ic si*ts te demand cur"e to

te rit 2ecause te price o* oli"e oil increased%

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igure ! Sunower Oil Market

Ao6e"er, o"er recent years, te demand *or oli"e oil increased

considera2ly as it 2ecomes "ery popular *or many nations, especially in

te European @nion reions 6ere oli"e oil is used constantly *or cultural

and reliious reasons (lontos and Du;uenne '01#)%

Oter *actor tat can in?uence te demand cur"e to si*t to te rit is te

demorapic attri2ute suc as ae% 4or elderly consumers, oli"e oil is te

main component on te editerranean diet% asala et al% ('00/) a"e

*ound tat a i consumption o* oli"e oil added in salads could elp



elderly to maintain teir ealt as it could pre"ent te coronary eart

disease and cancer, also impro"es lone"ity%

& sortae ta-e place 6en te ;uantity demanded is ier tan te

;uantity supplied (Au22ard et al% '01)% &s mentioned in te article, te

demand in oli"e oil increased 2y .05 and te oli"e production is

anticipated to decrease 2y #05F tis 6ill create a sortae in te oli"e oilmar-et% n order to eliminate te sortae and 2rin te mar-et in

e;uili2rium, producers rise te price o* oli"e oil% Tis alteration 6ill

decrease te ;uantity demanded as only some consumers 6ill aree to

2uy te oli"e oil at te increased price, 6ile oters could not

igure Olive Oil Supply Shortage



Page 4 of 9




& price 2elo6 te e;uili2rium increases ;uantity demanded and decreases

;uantity supplied% &n increase in price decreases te ;uantity demanded

and increases ;uantity supplied 6ic in turn 6ill 2rin te mar-et in

e;uili2rium%

!# *ri$e Elasti$ity and +"tal ,evenue "' Olive Oil

Te price elasticity o* demand is Gte responsi"eness o* te ;uantity

demanded to a cane in price, measured 2y di"idin te percentae

cane in ;uantity demanded o* a product 2y te percentae cane in

productHs priceI (Au22ard et al% '01, B')% Ta-in into consideration tat

oli"e oil is an essential component on editerranean diet, and it is "ery2enec *or elderly its ealt indicates tat consumers its 6illinness to

pay more *or oli"e oil 6ill not cane considera2ly% &ltou te price *or

oli"e oil rises te demand 6ill respond 6ea-ly 6ic means tat te ood

as an inelastic demand%

Total re"enue is te amount tat sellers earn *rom 2uyers 6en sellin

teir oods (Curtin @ni"ersity '01#)% * te seller o* oli"e oil increases te

price, its total re"enue 6ill rise 2ecause te demand *or oli"e oil isinelastic% Te ;uantity demanded 6ill drop only 2y small percentae% <ile

a decrease in price 6ill reduce total re"enue as te ;uantity demanded

rises 2y a small percentae%

!e"enue Earned

!e"enue Loss

igure - Olive Oil Elasticity and

evenue

&n increase in price 6en demand is

inelastic increases total re"enue%

& decrease in oli"e oil supply causes

price to rise more tan ;uantity *alls%



Ed J 5KdM5K

KdM&"e 3 &"eMK

M'%+ 3 %.BM0%#

0%B0

Page 5 of 9




Con"ersely, i* te oli"e oil demand 6as elastic, ten an increase in price

6ould a"e caused ;uantity demanded to *all 2y a ue percentae

resultin in a *all in total re"enue, 2ut a decrease in price 6ould a"e

caused an increase in te ;uantity demanded 2y a lare percentae

resultin in a raise in total re"enue%

!#! Market e.$ien$y

Consumer surplus is te discrepancy amon te maximum price tat a

consumer is 6illin to pay and te real price paid% <ereas producer

surplus is te discrepancy amon te minimum price a rm is 6illin to

accept and te real price recei"ed (Au22ard et al% '01)% 4or instance, tedrout and 2acteria caused a reduction in te production o* oli"es and

less oil 6ill 2e produced, 6ic si*ts te supply cur"e to te le*t, as a

result consumer surplus declines 2y area >, C, D and producer surplus

increases 2y area > and decreases 2y area 4 and 8%



igure / Olive Oil Market E!ciency

#0 C"n$lusi"ns

Te raised prices predicted *or oli"e oil ma-e consumers 6orse o9 as teir

additional 2enet 6ill 2e reduced 2ecause more money a"e to 2e paid *or

te consumption o* oli"e oil% * 2uyers are not appy 6it te competiti"ee;uili2rium price can as- o"ernment to inter"ene in settin a ceilin price

tat is under te e;uili2rium price 6ic 6ill i"e consumers te

opportunity to 2uy more oli"e oil% Te do6nside o* tis action is tat 6ill

lead to lo6er te economic e$ciency as a sortae may result 6ic in

turn 6ill i"e rise to unautoried arranements suc as a 2lac- mar-et%

On te oter and, economic incenti"es may 2e necessary to 2e pro"ided

*rom o"ernment to compensate and encourae producers *rom tesinicant losses su9ered *or 2ein *orced to 2urn a lare num2er o* trees

to pre"ent oters *rom ettin in*ected 6it 2acteria 3ylella 4astidiosa% 4or

producers it 6ill ta-e loner to repopulate te trees, tere*ore a

o"ernment implication 6ill 2rin 2enets to producers 6ic in turn 6ill

contri2ute to te economic ro6t%

Page 6 of 9




,e'eren$es

>uren, Stepen% '01#% GOli"e oil prices set to rise sarply a*ter &ndalusia drout%I "he

#uardian, &uust '.% ttp:MM666%teuardian%comM2usinessM'01#MauM'+Moli"e=oil=prices=rise=andalusia=spain=drout=poor= ar"est

Curtin @ni"ersity% '01#% GLecture ': Demand and Supply%I o6eroint lecture notes%

ttps:MMlms%curtin%edu%auM6e2appsMportalM*rameset%7spta2Pta2ProupPidJP#P1QurlJ

5'46e2apps5'42lac -2oard5'4execute5'4launce r54type5DCourse5'.id

5DP.#+P15'.url5D

Curtin @ni"ersity% '01#% GLecture : Elasticity%I o6eroint lecture notes%

ttps:MMlms%curtin%edu%auM6e2appsMportalM*rameset%7spta2Pta2ProupPidJP#P1QurlJ

5'46e2apps5'42lac -2oard5'4execute5'4launce r54type5DCourse5'.id

5DP.#+P15'.url5D

Au22ard, 8lenn !%, &nne % 8arnett, ilip Le6is, and &ntony % OH>rien%'01% Essentials

of Economics% 'nd ed% 4rencs 4orest, N%S%<%: earson &ustralia%

asala, 8io"anna, arco Ceroti, aleria ala, ittorio Rro, aolo ineis, Carlotta

Sacerdote, Caloero Saie"a et al% '00/% G& dietary pattern ric in oli"e oil and ra6

"eeta2les is associated 6it lo6er mortality in talian elderly su27ects%I $ritish %ournal of

&utrition B ('): #0.=#1+% doi:10%101/MS000/11#+0//0#B1% lontos, 8% and % N%

Du;uenne% '01#% G&ssess te impact o* su27ecti"e norms o* consumersH 2ea"ior in te

8ree- oli"e oil mar-et%I %ournal of etailing and Consumer Services '1 ('): 1#=1+/%

doi:10%101.M7%7retconser%'01%0B%00%





Page 7 of 9




Olive oil prices set to rise sharply after Andalusia drought

Anticipation of poor harvest has already pushed up wholesale price from €2.40 to €2.70 per kg over past few weeks

Olives gathered in a net on a farm in the southern Spanish village of !na"ar. Spain produces #0$ of

the world%s olive oil. &hotograph' (ristina )uicler*A+&*,etty mages

Stephen Burgen in Barcelona

-uesday 2 August 20/4 0/.4 A1S-ast modified on -uesday 2 August 20/40/.#0 A1S-

Hold the bruschetta: olive oil prices are expected to rise sharply after a prolonged drought in the

world's biggest producing region in southernSpain, at the same time as a blight has hit the crop in

Puglia, Italy's main olive-growing area.

While there is still time for rain to save the day in Andalusia, as harvesting takes place from October to

January depending on the olive variety and location, without better weather soon this year's crop ispredicted to be 40% down on the bumper 1.77 million-tonne harvest of 2013-14.



"Not even the most optimistic are predicting a million tonnes," said David Erice of Spain's Small

Farmers Union. "We're expecting something closer to 2012, when production was around 700,000

tonnes."

Spain produces 50% of the world's olive oil, with 73% of that coming from the province of Andalusia in

the south and 16% from Catalonia in the north-east. In 2013 olive oil exports from Andalusia were

worth €1.5bn (£1.1bn).

The drought isn't the only problem. Bumper harvests leave the trees exhausted, said Erice, and they

produce far fewer olives the following year.

Anticipation of a poor harvest means that in the wholesale market, where it is priced per kg, virgin olive

oil has already risen from €2.40 to €2.70 per kg over the past few weeks, according to Infaoliva, the

Spanish olive oil federation. The drought in 2012 led to a 13% price rise.

Prices are predicted to rise by as much as €0.50c a litre – although extra virgin olive oil retails in

supermarkets at around €3.00 a litre in Spain and is a popular loss leader in supermarket wars, to the

detriment of producers who in recent years have complained that supermarkets have pushed the price

down to below the cost of production. Some analysts predict that supermarkets will absorb any price

hike in order to maintain their competitive edge.

Virgin olive oil futures for September are at their highest level since June 2013, and some suppliers

say that speculators are contributing to the rise in futures prices by capitalising on the uncertainty

caused by the drought. The bets they are making are driving prices higher.

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There are also claims that some producers are withholding stock in anticipation of selling at a higher

price later in the year. However, for all but the biggest producers the olive oil business has become a

no-win proposition. If the harvest is good, the price slumps; a poor harvest means selling much less for

only slightly more.

The oil is exported principally to France, Portugal and Italy. Italy often repackages Spanish oil as

"estate bottled", giving consumers the impression that it is an Italian product.Italy is the second largest

producer after Spain, accounting for 15% of world production, with Greece producing 13%.

This year Spain has overtaken Italy as the market leader in olive oil in the US and Japan. Worldwide

demand for "liquid gold" has risen by 60% over the past 20 years, driven by increased demand in

China, the US, Canada and Australia.

Olive oil has been left off the list of agricultural productsembargoed by Russia in its ongoing spat with

the European Union. "If Russia had included it in the list of banned products it would have been a great

setback," says Rafael Picó of Asoliva, the oil exporters' association.

While it is drought that threatens the Spanish harvest, in the southern Italian olive-growing region of

Puglia the trees have been afflicted by the bacteria Xylella fastidiosa.

"There is no cure. The only solution is to burn the infected trees to stop the bacteria spreading quickly,"

Raffaele Piano, a local grower, said. "Prices will rise by 30% to 40% but quality will not be affected," he

said.

While harvests in other major producing countries such as Greece and Turkey are expected to be at

average levels this year, they will not be able to make up for the shortfall in Spanish production, and

price rises seem inevitable.

Source' http'**www.theguardian.com*3usiness*20/4*aug*2#*oliveoilpricesriseandalusiaspaindroughtpoorharvest



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ECON1000 Student Essay Exemplar 1 - Olive Oil Market(1)