IB Economics

Internal Assessment

March 20th, 2008

Word Count: 3688

Peter Frederiksen Svane

000134 – 031

The article, enlightening the effects of a rapidly increasing price (up to 30%) in the Chinese production of chopsticks, is a great example of how the hidden forces of supply and demand exerts its forces and thereby balance out the market to find its equilibrium. The increase in the price of Chinese chopsticks comes after a greater concern and rising production costs in its market. Providing almost 98% of Japan’s chopsticks, China’s decision to boost up the prices has a great impact on the regular Japanese consumer. Free chopsticks at restaurants, convenience stores, etc. have been the norm in Japan; people have simply taken it for granted. Nevertheless, the Japanese consumers and importers can no longer ignore the fact that the price of Chinese chopsticks is rising. They will have to respond to this minor crisis.

As mentioned, greater concerns about the deforestation and an actual increase in the production cost of chopsticks have lead to a significant decrease in the supply of Chinese chopsticks. In Diagram 1, the impact on the market is illustrated. Initially, the market was in balance. In other words, the quantity supplied Q* and the quantity demanded Q* was equal. Hence the price was at . Facing an increase in the input prices and the concern of deforestation, Chinese producers were forced to decrease the supply, since these are both factors that determine supply. At every quantity, the producers had to pay more. The effect of this upward shift in supply is shown in the graph as an increase in price from  - , and as a decrease in the equilibrium quantity, Q* - . According to the law of demand, which states that the price and demand are inversely proportional, the quantity demanded by the Japanese falls when the price of chopsticks rises. Broken down into simpler terms, the Japanese consumers and importers are now less willing and able to afford the given product, and thereby respond by demanding a smaller quantity.

Indeed China has a monopoly in the Japanese chopstick market, accounting for almost 98% of the market share. However, a few close substitutes do exist. These include Vietnamese and Japanese produced chopsticks. It is in human nature always to pursue one’s self-interest. In this case it means Japanese importers and consumers now will look toward more affordable substitutes for the Chinese chopsticks.

According to a theory in economics, an increase in a price of one good, leads to an increase in the demand for close substitutes. In this scenario, the increase in the price of Chinese chopsticks leads to an increase in the demand of the ones’ manufactured in Japan. In Diagram 2, this process is shown as an upward shift in the demand curve for the Japanese chopsticks. The equilibrium price as well as the equilibrium quantity increase ( - ;  - ). Different sources, as described in the article, now eye the opportunity of promoting and boosting the manufacturing of Japanese chopsticks, in order to strengthen and expand the Japanese businesses even further. Some even proposes that the Japanese government should take the initiative to impose laws that force the Japanese importers to stop providing chopsticks for free, so that consumers in greater numbers will start to buy the Japanese made. Other believes that the government ought to create a better management of local forests in Japan, in order to increase the efficiency of the chopstick production, by lowering the cost of production.

In theory, if the Japanese government decides to enact these laws, Japanese manufactures of chopsticks will now supply more at any given quantity because they have the incentive to do so at the prospect of greater demand and lower input prices. In Diagram 3, this is clearly illustrated as a downward shift in the supply curve. As can be seen, this causes the price to fall and the quantity supplied to increase, thus increasing quantity demanded.

As a conclusion, the increase in the price of Chinese produced chopsticks decreases it’s the market’s demand. Hence, importers and consumers will now look toward close substitutes such as the ones’ produced in Japan. With the government enacting laws that will stimulate increased efficiency in Japanese chopstick production, the supply will eventually increase, leading to a lower price, thus a greater quantity demanded. Overall, this scenario is a great example of how the hidden forces of supply and demand exert its forces and thereby is guided toward the equilibrium.

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