Economics for Business

Introduction

This essay is divided into two tasks. First task presents the explain supply and demand principles applied to the UK food supply in 2020 using economics theories from Krugman & Wells (2017) supported by graphs. The second task discusses market failures and UK government interventions for food supply and demand issued in 2020 by focussing of key UK government strategies such as quotas, price controls, taxation, fiscal policies, government transfers and other social welfare strategies.

Movement along the Supply Curve

It has been noted that the outbreak of COVID 19 pandemic has a significant impact on the food supply chain in the UK. The surge in the demand along with the disruptions caused by the COVOID 19 pandemic contributed to sustained spike in the retail prices of the food items in the UK (BBC, 2020). The rise in the retail prices of the food is further identified to have contributed to the changes in the quantity supplied resulting in the movement along the supply curve in response to the changes in the price of the food items, which is illustrated through graph 1.0:

Based on the above graph 1.0, it can be identified that prior to the outbreak of the quantity supplied (Q) was A at price (P). However, after the outbreak of COVID 19 pandemic the price of the food increased from P to P1 and quantity supplied Q increased to Q) resulting in the extension or movement of the supply S curve from initial A to B.

Shift in Supply (Right)

At the initial stage of the COVID 19 pandemic in the UK, the consumers started stockpiling of the food items to avoid shortage of the food items and avoid possible rise in the food prices. However, the consumer stockpiling contributed in the increase in supply of the food items in the UK to maximise the sale of food items by the retailers (Wentworth, 2020). This can be understood through graph 2.0 below.

Graph 2.0:

Based on the graph 2.0 above, it can be identified that at a constant price P the quantity supplied before the COVID 19 was Q but after the COVID 19 which resulted in the consumer stockpiling of the food items followed by the retailers intentions to maximise their sales of the food items, the quantity supplied at the same price increase Q1. This further contributed to the rightward shift in the supply curve from S to S1.

Shift in Supply (Left)

The COVID 19 pandemic which resulted in the disruption of supply also led to the rise in the cost of the factors of productions due to labour shortages and increase the transportation cost (Wentworth, 2020). This led to the decrease the supply of the food items as shown in the graph 3.0 below.

Graph 3.0:

It can be observed from the graph 3.0 above that at a constant price P the quantity supplied before the COVID 19 was Q but after the COVID 19 which resulted in the rise in the cost of the factors of production due to the labour shortage and transportation disruptions, the quantity supplied at the same price decrease to Q1. This further contributed to the leftward shift in the supply curve from S to S1.

Movement along the Demand Curve

The outbreak of COVID 19 has led to rise in the prices of the food items which resulted in the fall in the quantity demanded for the food as shown in graph 4.0 below (Wentworth, 2020).

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Graph 4.0:

Based on the above graph 4.0, it can be argued that at the initial stage of the outbreak of COVID 19, the quantity demanded Q for food item was A at the price P. However, as the COVID 19 pandemic intensified and the government implemented measures such as lockdown, the price of the food item increased to P1 and quantity demanded Q1 contracted to B thus resulting in the movement along demand curve D from A to B.

Shift in Demand (Right)

The COVID 19 pandemic has led to the certain increase in the demand of the food product. Accordingly, the fear and anxiety among the possible shortage of the food items resulted in the panic buying shifting the demand curve to right as shown in graph 5.0 below (Partridge and Wearden, 2020).

Graph 5.0:

It can be observed from the graph 5.0 above that at a constant price P the quantity demanded before the COVID 19 was Q but after the COVID 19 which resulted panic buying because of fear of shortage of the food items, the quantity demanded at the same price increase to Q1. This further contributed to the rightward shift in the demand curve from D to D1.

Shift in Demand (Left)

The disruption to the supply chain caused by the COVID 19 pandemic has led to the changes in the food demand curve in the UK due to factors other than the price such as fall in the income of the consumers limiting their purchasing power as shown in the graph 6.0 below

Graph 6.0:

It can be observed from the graph 6.0 above that at a constant price P the quantity demanded before the COVID 19 was Q but after the COVID 19 which resulted in the decline in the income of the consumers in the UK, the quantity demanded at the same price decrease to Q1. This has led to the leftward shift in the supply curve from D to D1.

Equilibrium Price and Quantity

The price at which the quantity supplied for food equals to the quantity demanded for food is referred as equilibrium price. Similarly, the equilibrium quantity is the quantity of food item bought and sold at the equilibrium price (Krugman and Wells, 2018).

An increase in the demand for food items that involves rightward shift in the quantity demand for the food items results in rise in the equilibrium quantity as well as equilibrium price while in decrease in the demand for food that involves leftward shift in the quantity demand for food contributes to decline in the equilibrium quantity and the equilibrium price (Krugman and Wells, 2018).

Likewise, an increase in the supply of food item that involves rightward shift in the quantity supplied contribute to rise in the equilibrium quantity and decline in the equilibrium price. On the contrary, decrease in the supply of the food item that involves leftward shift in the quantity supplied contributes decline in the equilibrium quantity and rise in the equilibrium price (Krugman and Wells, 2018).

Shortage & Surplus

Surplus of the food items in the UK has caused fall in the price of the food items leading to rise in the quantity demanded decline in the quantity supplied unless the surplus of the food is eliminated. Likewise, the shortages of the food items in the UK has caused rise in the price of the food items leading to rise in the quantity supplied and fall in the quantity demanded (Krugman and Wells, 2018).

Market Failure

The food supply in the UK is fragile in nature. The nation imports around 47% of its food, comprising 84% of fresh fruits and depends crucially on just-in-time (JIT) supply chain, with little capability to maintain stocks. Although contemporary food supply chains are designed to cope with variable demand, JIT approaches are not able to considerably enhance the volume in short run, in case there is a big flow in demand within short time. Additional food supply chain concerns are developed by employee deficiencies generated by Covid-19. This influences each phase of supply chain and essentially makes it less elastic. Also, lack of migrant labour in certain portions of the supply chain, for example agriculture strengthens the issue.

The growth in food demand and consequent stock outs have generated accessibility concerns for certain individuals, for various causes, unable to go around trying to find food. According to the report of Grocer, supermarkets are considering taking the lead applying diverse activities to enhance the accessibility to food for individuals, for example restricting the number of products for purchasing, requesting suppliers to shorten product ranges to assist growth in production quantity, expanding product delivery hours, growing the workforce and assisting small suppliers which are influenced by low demand.

With the disruption in trade due to travel restrictions and closure of borders, food supply chain is inevitably influenced. The following figure demonstrates the imports and exports of food products in 2019.

From the above figure, it can be observed that in various categories of food imports are higher than exports, demonstrating certain dependence on imports. A big portion of this trade is with EU nations. The food suppliers in the EU are also confronting similar problems as the UK, and their supply is possibly disrupted. Travel restrictions have resulted in lower consumptions of food products imported from throughout the world. The food exports are also influenced. On the basis of the timescale of the pandemic, this change can lead to change in customers’ demand towards more local and seasonal foods, and a variation of suppliers’ commercialisation approach. The following figure demonstrates the exports of food products from the UK in 2019 and 2020.

From the above data, it can be observed that export of various food products from the UK has reduced significantly from 2019 to 2020. For example, the amount of export for whisky was £5.0 billion in 2019, which has reduced to £1.5 billion in 2020, representing 70% decrease. In the similar context, the value of export for cheese was £707.7 million in 2019, which has reduced to £304.5 million in 2020, indicating 56.97% decrease (Smylie LTD, 2019).

Government Intervention for Food Supply and Demand

Comprehensive agricultural reform in combination with a package of measures to support economic recovery after Covid-19 would assist the UK government to maintain its promise to build back stronger and greener supply chain. The government has supportive part to play by using well established methods of performing with food industry. This comprises broad and continuing involvement to support industry in preparedness for and reaction to possible supply chain disturbances. The government reaction comprises familiarising a diversity of measures in order to ease key regulations for supporting food supply, delivery times, food labelling and competition regulation. The government also performs closely with food retailers to help manage enhanced demand.

The government performed closely with supermarkets to develop and share messaging that intended to assist customers to understand the resilient characteristic of food supply chain and the influence of their individual activities when shopping. It performed with retailers and food and beverage industry to constantly adjust and to encourage messaging as the condition develops. Agents of supermarkets utilise this collective messaging in order to appeal on customers to shop thoughtfully at the pinnacle of the pandemic and retailers also proactively dispersed this message directly to the customers.

Fiscal Strategies

Government intervention includes fiscal strategies in order to support organisations throughout difficult time. For example, the government has initiated Coronavirus Business Interruption Loan Scheme (CBILS) to support every viable UK oriented businesses with annual turnover of £45 million in order to access loans, overdrafts, invoice finance and asset finance of about £5 million for maximum 6 years. The government also made business disruption payments in order to cover the first one year of interest payments and lender levied dues. This indicates small organisations are benefitted from upfront expenses and lower initial reimbursements. The government also provides 80% assurance on qualified lending. Within the Bounce Back Loan Scheme, government provides creditors with 100% assurance on loan (Parliament UK, 2021).

The government performed closely in executing groceries exclusion order, which given a certain and temporary lessening of components of the UK competition regulation, empowering grocery retailers, their suppliers and logistics services to perform cooperatively for the objective of feeding the country people throughout the unprecedented conditions. The grocery exclusion order specifies the types of contracts, which are temporarily allowed. It does not comprise the direct sharing of information associating to expenses or prices. During Covid-19, the government has performed closely with proper units to certify the safety of customers and suppliers. It also performed with representatives of small retailers to certify they are supported throughout pandemic (Shanks & Schalkwyk, 2020).

The government performed closely with retailers, local authorities and charities to assist them make connections and create partnerships to perform cooperatively to support people and to put in place variety of services for those who required it, comprising those who are not shielding, but possess other vulnerabilities. Through these partnerships, the government is able to develop measures comprising the growth of retailer capability for online delivery and click and collect slots. Government has secured access to restricted number of delivery slots with two key supermarkets and developed online portal to empower local authorities and national charities to refer vulnerable people for access to the supermarket delivery slots on priority basis.

Social Welfare Strategies

During pandemic, the UK government has performed closely with food bank providers to deal with the impact of Covid-19 on vulnerable individuals. Government grants have been made accessible for both small and large redeployment organisations. It provided £16 million in funding to support food to charities which are liable for feeding vulnerable individuals. £5 million is allocated to Covid-19 specific grants to support the food redeployment organisations with different sizes. The total welfare spending of the government in 2019/20 was more than £227 billion, comprising £110 billion on working age welfare advantages for those who require them.

Taxation

The government intervention also comprise cutting VAT to 5% and business tax rates reliefs and billions of tax deferrals.

Poverty Programs

In reaction to Covid-19, the government acted rapidly to give emergency food to those in the shieling population who had no other ways of obtaining food supplies, comprising no extensive support network. It coordinated with supermarkets to guarantee they had priority access to online groceries and developed food parcel scheme, which would supply shielding people with necessary foodstuffs. The government has intervened to certify that no child go hungry due to poverty as the country take initiatives to deal with Covid-19. Therefore it initiated free school meals. The government continued to give schools with their likely funding, comprising funding to cover free school meals. Schools continue to give food choices for children and food are free of cost for pupils with poverty. Furthermore, schools were given freedom to consider the best method for giving support to poor pupils who are staying at home (Government of the UK, 2020).

Conclusion

In conclusion, it can be stated that the Covid-19 pandemic has disrupted the food supply chain and influenced the supply and demand of food products. In this way, the pandemic has resulted in shifts in equilibrium position of supply curve of foods. It has created shortage in supply and therefore government has intervened in order to deal with the situation. It has taken various strategies like fiscal strategies, taxation, poverty programs and social welfare strategies among others in order to reduce the problems created from supply chain disruptions and changes in supply in food products. Through its various strategies, the government has effectively addressed the food market failures

References

BBC, 2020. Clothes and food price rises push inflation higher. BBC, [online] (Last updated 18th November 2020). Available at: [Accessed on 03 March 2021].

Costa-Font, M. & Revoredo-Giha, C., 2020. Covid-19: the underlying issues affecting the UK’s food supply chains. LSE, [online] (Last updated 25th March 2020). Available at: [Accessed on 03 March 2021].

Government of the UK, 2020. School funding: exceptional costs associated with coronavirus (COVID-19) for the period from March to July 2020. Department for Education, [online] (Last updated 7th December 2020). Available at: .[Accessed on 03 March 2021].

Krugman, P. and Wells, R., 2018. Microeconomics. 5th ed. New York: Worth Publishers.

Partridge, J. and Wearden, G., 2020. British households face disposable income fall of £515 per month. The Guardian, [online] (Last updated 6.05 PM on 20th April 2020). Available at: [Accessed on 03 March 2021].

Parliament UK, 2020. COVID-19 and food supply: Government Response to the Committee’s First Report. Parliament UK, [online] (Last updated on 10th October 2020). Available at: [Accessed on 03 March 2021].

Shanks, S. & Schalkwyk, M., 2020. Covid-19 exposes the UK’s broken food system. Business Management Journal, [online] (Last updated 6th August 2020) Available at: [Accessed on 03 March 2021].

Smylie LTD, 2019. What food does the UK export? [online] Available at: [Accessed on 03 March 2021].

Statista, 2020. Leading food and drink products exported from the United Kingdom (UK) in 1st half 2020, by value. [online] Available at: [Accessed on 03 March 2021].

Wentworth, J., 2020. Effects of COVID-19 on the food supply system. [online] Available at: [Accessed on 03 March 2021].