Economics commentary Demand and Supply. Title of extract: Prices of TCM herbs shoot skyward

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Economics commentary number: # 1

Title of extract: Prices of TCM herbs shoot skyward

Source of extract: The Straits Times, Singapore

Date of extract: 28 December 2010

Word Count: 

Date the commentary was written: June 2011

Section of the syllabus to which the commentary relates: Microeconomics, Demand and Supply

Candidate name: Valerie Ng Suying

Candidate number: -

This article, enlightening the effects of an increasing price in traditional Chinese medicine (TCM), is an example of how the hidden forces of supply and demand affects the economy and thereby balance out the market to find its equilibrium. Prices of most herbs used in traditional Chinese medicine (TCM) in Singapore have risen by at least 20% in the past year. This is attributed to the strengthening of the Chinese yuan and two recent natural disasters in China, resulting in ruined crops and a decrease in supply. Rapid urbanization and possible hoarding and speculation by traders are other factors affecting prices of TCM herbs.

Great concerns about the natural disasters and strengthening of the Chinese yuan have led to a significant decrease in the supply of TCM herbs, as highlighted in the article – “supply shortages are the result of ruined crops in the aftermath of two major natural disasters in China”. The appreciation of the Chinese yuan has made the exports of Chinese herbs more expensive. On the other hand, herbal plantations are destroyed and less land is available for plantations due to rapid urbanization. These factors shift the supply curve to the left. As seen in Figure 1, the initial price and quantity of TCM herbs are P0 and Q0 respectively. As the 6.9 magnitude earthquake and massive landslide hits China, the supply of TCM herbs decreases significantly, causing a shift of the supply curve to the left from S0 to S1. At the original price P0, there is a shortage of herbs of Q0Q1. At P0, producers are only willing to sell Q1 herbs while consumers demand Q0. To eliminate this shortage and restore the economy back to the equilibrium price and quantity where consumers and producers are willing to pay and produce, TCM herb prices increase to P1. Producers will meet this price with Q2 amount of herbs. At new equilibrium, the new price P1 is higher than the original price P0 while the new quantity demanded and supplied has fallen from Q0 to Q2.

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Figure 1

 The extent in which the price increases and the quantity decreases depends on the extent of shift of the supply curve as well as the elasticity of demand. As seen in Figure 1, there is a disproportionate surge in price relative to the decrease in TCM herbs supply. This is due to the inelastic nature of the price elasticity of demand (PED) of TCM herbs, which, suggests that an increase in price leads to a smaller decrease in quantity demanded. The PED of herbs is inelastic as there is a lack of availability of substitutes ...

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