Effective product promotional campaigns have a positive impact on the consumers’ preferences for the product. In our example when a celebrity is promoting the grill products of a particular brand the marginal utility will increase resulting in an upward shift of the marginal utility curve.
The news clip on beef prices suggests that the beef prices are sky-rocketing due to a number of factors. Let us discuss the implications of this increased price on the relevant sectors of the economy.
Income and Substitution Effect
As the price of beef increases the purchasing power of the consumers decrease as their money income remains the same. That means their real income declines. They can buy less beef from the budgetary expenditure allocated for beef and its substitutes. Thus they consume less of beef. This is the income effect of the rise in the beef prices. The rise in price also leads to substitution effect. The consumers shift their preferences towards the cheaper substitute. They curtail the consumption of beef and consumes substitute like pork or poultry. Thus demand for beef declines due to two effects, income effect and substitution effect . These two effects constitute the total price effect that leads to a fall in consumption as price rises.
Demand for Grill Products
Grill products and beef are complementary goods as they are used together. A grill product will be useless if beef is not available. As beef prices rise it becomes costlier to have grilled beef dishes. So the demand for grill products decline. The demand curve for grill products shifts to the left. In such a situation even the advertisement campaigns with celebrity brand ambassador will be unable to increase the demand significantly.
Rationality of Choice
The aim of the rational consumer is to maximize utility given her income or budget allocation and the prices of the product . If the price of the product increases the consumer can buy less quantity with the same budget allocation. The budget line shifts leftward for the product in which the price rise has occurred. If the good is a normal good then consumption will fall as real income falls so that the consumer can maximize utility. Substituting the good whose price is increasing with a close and cheaper substitute also demonstrates rationality of choice. The higher price of the complement reduces the demand for a good. This is reflected in the fall in demand for grill products with the rise in price of beef.
Future Effects on Beef Prices
Beef prices are expected to fall due to three reasons. First, the price of corn, that is used to feed cattle, is on the decline. Thus the cost of input for cattle rearing is falling leading to a rise in the supply of beef and consequent fall in the beef price. Secondly, with the high price of beef the demand is being curtailed as people are shifting towards cheaper options. Thus the fall in demand will lead to the fall in the beef prices. Thirdly, there had been increased export of beef in the past two years to countries like Mexico. But the increased price will lead to a fall in the export of beef. The fall in export of beef will increase the domestic supply of beef leading to a fall in the beef prices.
Works Cited
Economist. (2014, July 24). Economist: Beef Prices Could Stay High Into 2015. Retrieved from Clip Syndicate: http://www.clipsyndicate.com/video/playlist/10833/5242860?cpt=8&title=cengage_broadcast&wpid=6424
Pindyck, R., & Rubinfield, D. (2009). Microeconomics (7th ed.). Prentice Hall.
Varian, H. R. (2010). Intermediate Microeconomics A Modern Approach (8th ed.). New York: W. W. Norton & Company.
