Given the many factors that may shift both the demand and the supply curves, it is easy to imagine that markets can be in a constant state of flux. Just as the market is moving towards a new equilibrium, some other factor may change, necessitating an adjustment in an opposite direction. Given that such adjustment is not immediate, and the market conditions are constantly changing, it may be the case that equilibrium is never actually attained. It is even possible that very process of market adjustment can be destabilizing (see cobweb theory in Chapter 9). The constant movement of price implied by the analysis may also be detrimental to business. The firm might prefer to keep price constant in the face of minor changes in demand and supply.
BSE and the market mechanism
(This mini case has been taken from Worthington and Britton (1997) and is included to illustrate the of shifts in demand and supply.)
The scare over bovine spongiform encephalopathy (BSE) in cattle and its links with Creutzfeldt-Jacob disease (CJD) in humans in 1996 demonstrates well the working of the market mechanism and the all – pervading power of market forces.
The announcement on Friday 22 March 1996 that may be a link between BSE and CJD was followed very quickly the boycotting of British beef by consumers. There was a spectacular drop of 50 per cent in consumer demand for beef over the following weekend. The large grocery retailers at first reduced prices in order to clear stock and eventually withdrew British beef from supermarket shelves for a period of time. The supermarkets also offered reimbursement to customers who had previously bought beef from them.
The drop in demand for beef (see Figure 5.25) led to a dramatic fall in the price of beef cattle. By the end of the first week of the crisis the market price for steers had fallen by 18p per kilo. This would have been more dramatic but farmers chose to hold back their cattle from market because of the crisis; there was a 97 per cent fall in the numbers of cattle sent to market in that week. There was an accompanying increase in the demand for substitutes (see Figure 5.26) like lamb (where sales rose by 7 per cent), pork (where sales rose by 18 per cent) and poultry (where prices increased by 12 percent) over the weekend. The poultry industry held emergency meetings to decide how to meet this extra demand and to decide whether to limit price increases to avoid the charge of profiting out of the crisis. There was also a search by consumers for other alternatives like vegetarianism and the first horsemeat shop to be opened since the Second World War began trading in the West Midland on 9 April 1996.