Question

The following questions are about long-run equilibrium in the market for cage- free eggs. a. As described in the chapter opener, in 2017 was the market for cage-free eggs in long-run equilibrium? Briefly explain. b. What would we expect to happen to the price of cagefree eggs and the quantity of cage-free eggs produced in the long run? Briefly explain. c. As of \(2017,\) the U.S. Department of Agriculture (USDA) did not have detailed guidelines for egg farmers to follow before they could claim that the eggs they sell were laid by cage-free chickens. Some animal rights activists were pushing for the USDA to enact stricter guidelines than many egg farmers were following voluntarily. Such guidelines would be likely to significantly raise the cost of producing cage-free eggs. Suppose that the USDA begins to require these stricter guidelines. What effect will this increase in cost have on the long-run price of cage-free eggs? In the long run, will the quantity of cage-free eggs be larger, smaller, or the same as it would have been without the USDA adopting the guidelines? Briefly explain.

Short answer

In 2017, further data would be required to definitively say if the market for cage-free eggs was in long-run equilibrium. In the long run, if demand continues to increase, it's expected that both the price and quantity of cage-free eggs would increase. If the USDA imposes stricter guidelines, the cost of production would increase significantly, possibly leading to a rise in the long-run price of cage-free eggs. The quantity of cage-free eggs in the long run would depend on the elasticity of the demand.

Step-by-step solution

Determine if the Market was in Long-run Equilibrium

In economics, a market is said to be in long-run equilibrium when both the supply and demand have fully adjusted to changes in the market, and the price of the product aligns with the supply and demand of the market. It's inferred that the market is in equilibrium from the problem statement, although verification with factual data is required.

Predicting the Long-run Changes to Price and Quantity

In the long run, economic forces will adjust to changes, affecting the price and quantity of the product. If the demand for cage-free eggs keeps increasing, while all other factors are held constant, the price for cage-free eggs will rise and more will be produced to meet this increasing demand.

Effect of Stricter Guidelines on Long-run Price

Assuming the USDA enforces stricter guidelines, this would result in a greater cost for producing cage-free eggs, which is likely to be reflected in a higher long-run price for the eggs. The quantity of cage-free eggs in the future will be determined by the elasticity of the demand. If the demand is inelastic, the quantity will be relatively smaller compared to a scenario without guideline imposition. If the demand is elastic, the quantity could potentially be the same or even higher, since consumers are responsive to price changes.

Key concepts

Market Adjustment

In the context of economics, market adjustment refers to the process by which a market returns to a state of equilibrium after experiencing some form of disturbance. This process is generally guided by the invisible hand of supply and demand as price acts as the signaling mechanism.

When considering the market for cage-free eggs, if initially, the market is not in long-run equilibrium—perhaps due to a surge in demand for cage-free eggs—over time, we expect producers to react to the higher prices by increasing their output, thereby gradually moving towards equilibrium. Similarly, if the supply is too high, prices will decrease, causing some producers to exit the market until supply equals demand at a lower price level. It is the self-correcting nature of markets that ensures that in the long run, they adjust to an equilibrium point where the quantity supplied equals the quantity demanded at a particular price.

Supply and Demand

The supply and demand framework is foundational to understanding how markets operate. In the simplest terms, supply represents how much of a good or service producers are willing to sell at different prices, while demand illustrates the quantity of a good or service consumers are prepared to purchase at varying prices.

Applying this to the cage-free egg market, if demand for these eggs increases, under normal conditions, the price will rise. This is because consumers are competing for a limited supply, which signals producers to increase production to take advantage of higher prices. Over time, this results in a new equilibrium where the supply of cage-free eggs meets the elevated demand at a new, higher price. However, any change that influences either supply or demand, such as the introduction of stricter production guidelines, can disrupt this balance and lead to a new market adjustment process.

Price Elasticity

Understanding price elasticity is critical for predicting how changes in market conditions will affect the equilibrium. Price elasticity measures the responsiveness of the quantity demanded or supplied to changes in price. A product with high elasticity will see significant changes in demand or supply with a small change in price, while a product with low elasticity (inelastic) will see minor changes in demand or supply despite large price shifts.

In regards to cage-free eggs, if the demand for cage-free eggs is inelastic, stricter USDA guidelines and the associated cost increases will result in a relatively small decrease in the quantity demanded—even as prices rise. Conversely, if demand is elastic, the same price increase could result in a significantly larger decrease in quantity demanded. For producers, understanding the elasticity of their product is crucial for anticipating how a change, such as new regulations, will affect their sales and pricing strategy in the long run.