Chicken eggs have been getting expensive lately. Somehow this has caused some panic and it has become a political problem given that the egg is a cheap source of protein. If it is expensive, there are bound to be many public complaints.
And because of that, there are people who say that supply and demand, and market and prices just don’t work. These people think that we cannot rely on the market under conditions of “failure”. They are entirely mistaken.
As an example, we have this from Domestic Trade and Consumer Affairs Minister Saifuddin Nasution, recently: “According to theory, if there is more supply, the prices should come down but that doesn’t seem to be the case.”
Sure, not everyone in the administration goes with this line of thinking but it is still an important point that we need to make.
There’s supply of whatever it is and there’s demand for that thing, and then prices move around so as to increase or decrease one and/or the other so that the market actually clears.
To emphasise this point, imagine that chicken eggs were produced, managed and sold by the government. Even in such a situation, we would still want the prices to be determined by the market.
If we have anything other than the market clearing the prices then we would get either a shortage or surplus.
This is the reality. So the question is how should we deal with this reality? To begin, never pretend that reality is other than what it is. Agriculture and Agro Industry Deputy Minister Sim Tze Tzin deals with it as best as he can.
“We sympathise with them (layer poultry farmers) and will let market forces determine prices,” he said.
People do make mistakes and markets can fail. When market prices are not what people want them to be, it is not unusual for consumers to blame the market.
In this case, the prices of eggs are not what some people would like them to be. They want to buy eggs but can’t afford them.
Thus, a number of measures are being proposed such as taking action against the cartel, grow corn (the feed), or stop or limit egg exports.
All these are entirely the wrong things to do, but something needs to be done. What needs to be done in such a situation is simply to wait and allow prices to do their thing.
Prices are information, not just some arbitrary numbers we attach to things.
They are vital information for those who wish to consume something, and they are incentives (or disincentives as the case may be) to those who produce that thing.
Here’s when something is in short supply.
Why are prices going up? A shortage of supply. How do we know there’s shortage of supply? Prices are going up.
The higher prices of chicken eggs reflect the underlying reality. They reflect the fact that the supply of eggs is lower and demand is higher. It really is that simple.
Not only do we need to be very clear about why this happens: “The ministry has identified the soaring cost of imported chicken feed as one of the main reasons for the increase in the prices of eggs in the market.”
Saifuddin is mistaken again. Costs incurred don’t determine prices.
It is true that the producer must recover all costs plus a profit in order to stay in business.
But we must remember that the only relevant factor in trade at a particular moment is the value of what consumers receive is more than the value of money that they part with.
If costs were the only factor that determined the prices of eggs, then no producer would ever fail.
Higher prices are charged because producers can do so – a risk which every one of them must take.
And some people will pay no matter what a tray of eggs costs. Enough people will pay to make the producers’ tactic viable.
“If people cannot accept even a fair price, the local industry would collapse and it would affect food security, and then we would depend on imports,” said Federation of Livestock Farmers’ Association of Malaysia president Jeffrey Ng.
Only those who value eggs at higher prices buy them, which is what we want. If we have a limited supply of eggs, then we want that limited supply to go to those who want and value them the most. This way, we solve our shortage. Supply and demand are now balanced because the prices have changed to make them so.
We should be fine with prices rising in this case because that’s the solution to the problem.
But then people may think that producers would charge as much as they can for eggs. In other words, lust for profits. So what? This is why we have competition among producers.
Higher prices will motivate farmers to produce more eggs and make faster deliveries. Not to be outdone, importers will also bring in more eggs from abroad and so on. All these means that chicken eggs should become affordable again.
“We are watching the supply closely and if there is a shortage we are ready to allow the import of eggs to meet demand,” said Sim.
As we have seen, all these tell us how we should deal with such problem. We can leave the balancing of supply and demand to the market because, as I’ve noted, the market does in fact work. – Medecci Lineil
