ECON1000 Student Essay (Exemplar 1)

Olive Oil Market Analysis

ECON1000 Assignment Student Essay (Exemplar 1)

Olive Oil Market Analysis: Lecture Topics L2 (Demand and Supply), L3 (Ped and Revenue), L4 (Economic
Efficiency)

Contents

1.0 Article Summary

2.0 Introduction

3.0 Article Analysis 2

3.1 Demand and Supply of Olive Oil

3.2 Price Elasticity and Total Revenue of Olive Oil 5

3.3 Market Efficiency

4.0 Conclusion6

5.0 References

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ECON1000 Student Essay (Exemplar 1)

1.0 Article Summary

The article, Olive oil prices set to rise sharply after Andalusia drought
discusses the expected increasing prices of olive oil due to continuous
drought in Southern Spain and the bacteria Xylella Fastidiosa in Puglia,
Italy. The lack of rain leads to an estimated 40% crop shortage in Spain,
the world its top producer of olive oil. Although other major suppliers
including Greece and Turkey are not affected, the deficit in Spanish
production is significant as well the demand has increased by 60% in the
past two decades, it is anticipated that will not be enough supply. An
increase in price is necessary to clear the shortage and to reach
equilibrium. While an increase in price might bring benefits to producers it
is argued that a good harvest drop prices heavily, on the other hand poor
harvest increase prices, but there is less selling resulting in nowin
situation for olive oil producers (Burgen 2014).

2.0 Introduction

This essay explains the economic theories applied on the olive oil market.
It discusses the demand and supply factors that influence buyers and
sellers. The essay explains how equilibrium in a market is reached to
eliminate the shortage. It also covers the elasticity of demand and the
relationship between the price elasticity of demand and total revenue, and
lastly the change in price effects on consumer and producer surplus.

Article Analysis

Demand and Supply of Olive Oil

The demand curve is a diagram that indicates the relationship among the
price of a good and the quantity demanded of that good, when everything
else remains stable (Curtin University 2014). As the law of demand affirms,
when the price of a product rises the quantity demanded decreases, and
when the price of a product falls, the quantity demanded increases
(Hubbard et al. 2013). For instance, as Burgen (2014) points out
consumers have to pay more for olive oil due to the increase in price from
2.40 euros (3.47 AUD) to 2.70 euros (3.90 AUD), this will result in a

decrease in quantity demanded that will cause a movement along the

demand curve.

Figure 1 A Movement Along the Demand Curve

The increased price of olive oil from $3.47 to $3.90 causes a movement
along the demand curve from point A to point B a decrease in quantity
demanded from 30L to 20L.

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ECON1000 Student Essay (Exemplar 1)

On the contrary, the supply curve is a diagram that indicates the

relationship of a product and the quantity supplied of that product, when
unpriced variables stay the same. The law of supply affirms that when the
price of a product rises the quantity supplied increases, and when the
price of a product falls, the quantity supplied decreases (Curtin University
2014). The article outlines that poor harvest is predicted for this year
because of the drought and the bacteria that infected a large number of
trees in Puglia. These factors cause a shortage in supply which leads to an
increase in price adjusting the shortage. In this case, supply would not
increase due to other variables that were not stable, thus supply will shift
to the left.

Figure 2 A decrease in olive oil supply

A determinant that influences the supply curve to shift to the left is the
expected future prices. As stated in the article, some producers have the
incentive to decrease supply now and hold some production to sell it later on
when prices are expected to be higher. On the other hand, consumers tend to
buy more olive oil now to avoid paying more in the future. This shifts the
demand curve for olive oil to the right in anticipation of higher prices in the
future.

In particular, an increase in price for olive oil causes a decrease in

demands for the complement good such as raw vegetables. Consumers
will buy fewer vegetables that are used for salads shifting the demand for
the complement good to the left. The change in price, also leads
consumers to buy less olive oil and choose to buy a substitute for it that is
less costly such as vegetable oil, canola oil or sunflower oil.

The demand for sunflower oil goes up which shifts the demand curve to
the right because the price of olive oil increased.

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ECON1000 Student Essay (Exemplar 1)

Figure 3 Sunflower Oil Market

However, over recent years, the demand for olive oil increased
considerably as it becomes very popular for many nations, especially in
the European Union regions where olive oil is used constantly for cultural
and religious reasons (Vlontzos and Duquenne 2014).

Other factor that can influence the demand curve to shift to the right is the
demographic attribute such as age. For elderly consumers, olive oil is the
main component on the Mediterranean diet. Masala et al. (2007) have
found that a high consumption of olive oil added in salads could help

elderly to maintain their health as it could prevent the coronary heart

disease and cancer, also improves longevity.

A shortage take place when the quantity demanded is higher than the
quantity supplied (Hubbard et al. 2013). As mentioned in the article, the
demand in olive oil increased by 60% and the olive production is
anticipated to decrease by 40%; this will create a shortage in the olive oil
market. In order to eliminate the shortage and bring the market in
equilibrium, producers rise the price of olive oil. This alteration will
decrease the quantity demanded as only some consumers will agree to
buy the olive oil at the increased price, while others could not

Figure 4 Olive Oil Supply Shortage

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ECON1000 Student Essay (Exemplar 1)

A price below the equilibrium increases quantity demanded and decreases

quantity supplied. An increase in price decreases the quantity demanded
and increases quantity supplied which in turn will bring the market in
equilibrium.

3.2 Price Elasticity and Total Revenue of Olive Oil

The price elasticity of demand is the responsiveness of the quantity

demanded to a change in price, measured by dividing the percentage
change in quantity demanded of a product by the percentage change in
products price (Hubbard et al. 2013, 92). Taking into consideration that
olive oil is an essential component on Mediterranean diet, and it is very
benefic for elderly its health indicates that consumers its willingness to
pay more for olive oil will not change considerably. Although the price for
olive oil rises the demand will respond weakly which means that the good
has an inelastic demand.

Total revenue is the amount that sellers earn from buyers when selling
their goods (Curtin University 2014). If the seller of olive oil increases the
price, its total revenue will rise because the demand for olive oil is
inelastic. The quantity demanded will drop only by small percentage. While
a decrease in price will reduce total revenue as the quantity demanded
rises by a small percentage.

Revenue Loss

Figure 5 Olive Oil Elasticity and

Revenue

Revenue Earned

An increase in price when demand is

inelastic increases total revenue.

A decrease in olive oil supply causes

price to rise more than quantity falls.

PEd = %Qd/%P
3/28.5 X 3.69/0.43
Qd/QAve X PAve/P
0.90

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ECON1000 Student Essay (Exemplar 1)

Conversely, if the olive oil demand was elastic, then an increase in price
would have caused quantity demanded to fall by a huge percentage
resulting in a fall in total revenue, but a decrease in price would have
caused an increase in the quantity demanded by a large percentage
resulting in a raise in total revenue.

3.3 Market efficiency

Consumer surplus is the discrepancy among the maximum price that a

consumer is willing to pay and the real price paid. Whereas producer
surplus is the discrepancy among the minimum price a firm is willing to
accept and the real price received (Hubbard et al. 2013). For instance, the
drought and bacteria caused a reduction in the production of olives and
less oil will be produced, which shifts the supply curve to the left, as a
result consumer surplus declines by area B, C, D and producer surplus
increases by area B and decreases by area F and G.

Figure 6 Olive Oil Market Efficiency

4.0 Conclusions

The raised prices predicted for olive oil make consumers worse off as their
additional benefit will be reduced because more money have to be paid for
the consumption of olive oil. If buyers are not happy with the competitive
equilibrium price can ask government to intervene in setting a ceiling price
that is under the equilibrium price which will give consumers the
opportunity to buy more olive oil. The downside of this action is that will
lead to lower the economic efficiency as a shortage may result which in
turn will give rise to unauthorized arrangements such as a black market.

On the other hand, economic incentives may be necessary to be provided

from government to compensate and encourage producers from the
significant losses suffered for being forced to burn a large number of trees
to prevent others from getting infected with bacteria Xylella Fastidiosa. For
producers it will take longer to repopulate the trees, therefore a
government implication will bring benefits to producers which in turn will
contribute to the economic growth.

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ECON1000 Student Essay (Exemplar 1)

References

Burgen, Stephen. 2014. Olive oil prices set to rise sharply after Andalusia drought. The
Guardian, August 26. http://www.theguardian.com/business/2014/aug/25/oliveoilpricesrise
andalusiaspaindroughtpoor harvest

Curtin University. 2014. Lecture 2: Demand and Supply. PowerPoint lecture notes.
https://lms.curtin.edu.au/webapps/portal/frameset.jsp?tab_tab_group_id=_4_1&url=
%2Fwebapps%2Fblac kboard%2Fexecute%2Flaunche r%3Ftype%3DCourse%26id
%3D_6458_1%26url%3D

Curtin University. 2014. Lecture 3: Elasticity. PowerPoint lecture notes.

https://lms.curtin.edu.au/webapps/portal/frameset.jsp?tab_tab_group_id=_4_1&url=
%2Fwebapps%2Fblac kboard%2Fexecute%2Flaunche r%3Ftype%3DCourse%26id
%3D_6458_1%26url%3D

Hubbard, Glenn R., Anne M. Garnett, Philip Lewis, and Anthony P. OBrien.2013. Essentials
of Economics. 2nd ed. Frenchs Forest, N.S.W.: Pearson Australia.
Masala, Giovanna, Marco Ceroti, Valeria Pala, Vittorio Krogh, Paolo Vineis, Carlotta
Sacerdote, Calogero Saieva et al. 2007. A dietary pattern rich in olive oil and raw
vegetables is associated with lower mortality in Italian elderly subjects. British Journal of
Nutrition 98 (2): 406415. doi:10.1017/S0007114507704981. Vlontzos, G. and M. N.
Duquenne. 2014. Assess the impact of subjective norms of consumers behavior in the
Greek olive oil market. Journal of Retailing and Consumer Services 21 (2): 148157.
doi:10.1016/j.jretconser.2013.09.003.

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ECON1000 Student Essay (Exemplar 1)

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 Iznajar. Spain produces 50% of
the worlds olive oil. Photograph: Cristina Quicler/AFP/Getty Images

Stephen Burgen in Barcelona

Tuesday 26 August 2014 01.43 AESTLast modified on Tuesday 26 August 201401.50 AEST

Hold the bruschetta: olive oil prices are expected to rise sharply after a prolonged drought in the
world's biggest producing region in southern Spain, 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 is
predicted 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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ECON1000 Student Essay (Exemplar 1)

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 products embargoed 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 Pic 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/business/2014/aug/25/olive-oil-prices-rise-andalusia-spain-drought-poor-harvest

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