Determine the factors that have significant affects on choosing clean vegetables of consumers in ho chi minh city

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

VIETNAM - THE NETIIEQLANDS PQOJEcr
FOQ M.A IN DEVELOPMENT ECONOMICS

DETERMINE THE FACTORS
THAT HAVE SIGNIFICANT AFFECTS
ON CHOOSING CLEAN VEGETABLES OF CONSUMERS
IN HO CHI MINH CITY

BY

NGUYEN VAN DU

BQ GIAO C<.<-~ ·..., ,
TRUONG fJH K!~m ·: ,_ .

THYu ·f VI-£:'N
.i\.~1

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY JULY 2007

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

VIETNAM -

Tim NEMRLANDS PROJECT FOR M.A ON DEVELOPMENT ECONOMICS

DETERMINE THE FACTORS
THAT HAVE SIGNIFICANT AFFECTS
ON CHOOSING CLEAN VEGETABLES OF CONSUMERS
IN HO CHI MINH CITY

BY

NGUYEN VAN DU
THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT
FOR THE DEGREE OF MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Supervisor: Dr.NGUYEN NGOC HOA

HO CHI MINH CITY JULY 2007
11


CERTIFICATION

"I certify that the substance of this dissertation has not already been submitted for any
degree and is not currently submitted for any other degree.
I certify that to the best of my knowledge and help received in preparing this dissertation
and all sources used, have been acknowledged in this dissertation."

Signature

Nguyen Van Du
Date: 30th July 2007

111


ACKNOWLEDGEMENTS
I would like to thank more than those respectable name that I will mention following.
Without them, I can not get knowledge as today and this thesis may not even have existed.
First, I would like to express my special thanks to all organizations and member
those found this programme. All lectures and staff of the project help me having useful
lessons, interesting seminars and new information.
Next, I wish to express sincere appreciation to my academic supervisor Dr. Nguyen
Ngoc Hoa for his helpful guidance and assistance during the writing of this thesis. I also
deeply thank to Dr. Nguyen Trong Hoai, Dr. Le Cong Tru, Dr. Nguyen Hoang Bao,
Mr.Thuy, Mr.Vu for their valuable suggestion and ideals about earlier draft of this thesis.
Following, I send my thanks to Libran, Ms.Chi, who helps help me in finding
necessary document and reference books. Thank to Board of Managers of Co-Op Mark
supermarket channel helping me in survey consumers. Thank to Mr.Dung, agriculture
chief, Agricultural and Rural Development Office of Ho Chi Minh City who provides
data for this thesis. Many thanks go to my classmate, who shared with me joys and
hardness during the time I study in this program.

My thanks send to my family, my parents, my wife who help me in supporting time,
money and belief. Share my joyful with my daughter who helps me understood the
meaning of happiness and life.

lV


Topic title: Determine the factors that have significant affects on choosing clean
vegetables of consumers in Ho Chi Minh City.

ABSTRACTS
According to International Labor Organization, yearly in the world, there are around
40000 in 2000000 who got vegetables poisoning were killed and the loss in economic is
so big1. Vegetables poisoning is one of the big problems in many countries because it
does not only give direct effect but also give the indirect effect to health and economy in
future. Using vegetables that have contaminants at levels well above maximum residue
limits, including pesticides, nitrate and heavy metals can get some kind of disease; even it
is the reasons of some kinds of cancer in future 2 . However, in Ho Chi Minh City (HCMC)
and other provinces in Vietnam, the percentage of clean vegetables are used is limited.
So, in this thesis, I hope to answer the questions that which factors affecting the choice of
clean vegetables of consumers in HCMC. In addition, I hopefully give out some
recommends to farmers, producers, and retailers in order to raise clean vegetables
demand. For the benefit of using clean vegetables, my thesis aim to build process that
contributes to the successful propaganda of using clean vegetables. My theses may
become reference document to run clean vegetable programme of the government or the
other organizations.

1
2

Nguyen Sa- vnexpress.net 16/04/2005.
Dr Iran Thi Ngoc Son- rice Mekong delta home

v


TABLE OF CONTAINS
CHAPTER I: INTRODUCTION
1.1

Problem statement ........................................................................................... 2
1.1.1 The food poisoning picture in recently years ...................................................... 2
1.1.2 The product, harvesting and distribution ofvegetables ...................................... 2
1.1.3 Clean vegetables demand ...................................................................................... 4
1.1.4 The role of government and consciousness of citizens ....................................... 4

1.2 Research objectives ........................................................................................... 5
1.3 Research questions and hypothesis .................................................................. 6
1.4 Methodology ...................................................................................................... 6
1.5 Scope and limitation of research ...................................................................... 7
1.6 Structure ofthe study ........................................................................................ 8

CHAPTER 2: THEORETICAL FRAMEWORKS
2.1

Supply and demand curve ................................................................................................. 11

2.1.1

Supply and demand concepts ........................................................................... 11

2.1.2

Elas~icity of supply and demand ·········································:··························· 13

2.2 Theory of consumer's choice .......................................................................... 15
2.2.1

Consumer preferences ...................................................................................... 15

2.2.2

Budget constraints ........................................................................................... 17

2.2.3

2.2.2.1

Budget line .......................................................................................... 17

2.2.2.2

The effict ofprice ............................................................................... 18

2.2.2.3

The effict ofincome ........................................................................... 19

Consumer choice ..................................................................................................... 20

2.3 Markets with Asymmetric Information .......................................................... 22
2.3.1

Asymmetric Information and adverse selection ............................................. 23

2.3.2

Market signalling ............................................................................................. 24

2.3.3

Brand name ........................................................................................................ 24

2.3.4

The value of information ................................................................................... 25
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2.3.5

The principal- agent problem ........................................................................ 26

2.4 Distribution channel ........................................................................................ 26
2.4.1

The rule of distribution channels to the development of market .................. 27

2.4.2

The structure of distribution channel ............................................................... 28

2.5 Empirical studies ............................................................................................. 29

2.6 Suggested research model. ............................................................................... 31
2.7

Chapter remarks ............................................................................................................... 32

CHAPTER 3: AN OVERVIEW OF CLEAN VEGETABLES IN HCM CITY
3.1 The characteristic of HCM city ........................................................................ 35
3.2 An overview of vegetable production in HCM city ........................................ 36

3.3 The policies of HCM city government about clean vegetable ........................ 39
3.4 Distribution and management vegetable in circulation ................................... 40
3.5 Chapter remark .................................................................................................. 43

CHAPTER4: ECONOMETRIC ANALYSIS AND RESULTS
4.1 Model specification ........................................................................................... 44
4.1.1

Model selection ................................................................................................. 44

4.1.2

Model specification .......................................................................................... 46

4.1.3

Analytical framework ............................................................................... .' ....... 48

4.2 Data description ................................................................................................. 52
4.3 Descriptive statistics .......................................................................................... 5.2
4.4 Result of estimations ......................................................................................... 54
4.4.1

Model test ......................................................................................................... 54

4.4.2

Result of regression .......................................................................................... 55

4.4.3

Comment on results .......................................................................................... 55

4.5 Chapter remarks ................................................................................................. 57

CHAPTER V: CONCLUSION AND POLICY RECOMMENDATIONS
5.1 Conclusion ......................................................................................................... 59
5.1.1

Conclusion basing on result regression ........................................................... 59

5.1.2

Compare the result with hypotheses ................................................................. 61
Vll

5.2 Policy recommendations .............................................................................................. 61

5.2.1

The consumer policy recommendations ........................................................ 61

5.2.2

The policy recommendations ........................................................................... 62

5.2.2.1 Policy recommendations for producers ............................................... 62
5.2.2.2 Policy recommendation for distributors .............................................. 63
5.2.2.3 Policy recommendation for government and manage ......................... 64

5.3 Limited of thesis and suggestion for further studies ........................................ 64

Appendix ................................................................................................................... 66
Questionnaire ............................................................................................................ 68
Reference .................................................................................................................. 71

Vlll


LIST OF TABLES
Table 3.1: Statistic sheet about vegetables in HCM since 2002 to 2006 .................... 36
Table 3.2: The vegetable area developing plan from 2005 to 2010 ............................. 39
Table 3.3 Method name and time for testing vegetables quality ................................. 41
Table 4.1: Summary of chosen variables and expected signs ...................................... 48
Table 4.2: Customer point of view about price of clean vegetables ............................ 53
Table 4.3: Distinguishing able of customers about clean vegetables .......................... 53

Table 4.4: Believed of consumers in brand name ......................................................... 53
Table 4.5: Clean vegetable distribution process ........................................................... 53
Table 4.6: Parking and information requirement ofvegetables ................................... 54
Table 4.7: Estimated probability changed of variables ................................................ 55

lX


LIST OF FIGURES AND PICTURE

Figure 2.1: Supply and demand ..................................................................................... 12
Figure 2.2: New Equilibrium following shifts in Supply and Demand ...................... 13
Figure 2.3: An Indifference Curve ................................................................................. 16
Figure 2.4: A Budget line .............................................................................................. 18
Figure 2.5: Effect of change in price on the budget line ............................................. 19
Figure 2.6: Effect of change in income on the budget line ......................................... 20
Figure 2.7: Maximizing consumer satisfactions ........................................................... 21
Figure 2.8: The popular consumers' good distribution channels ................................. 28
Picture 2.1: Farmer sense is low in using chemical........................................................... 38
Picture 2.2: Farmer maintain pesticide in wrong way .................................................. 3 8

Figure 4.1 : Logit an probit cumulative distributions ................................................... 46

X


ABBREVIATIONS

HCM:

Ho Chi Minh

IPM:

Integrated Pest Management

GAP:

Good Agricultural Practice

KN:

Knowledge

INC:

Income

BN:

Brand name

DIS:

Distribution

FAO:

Food and Agriculture Organization

WHO:

World Health Organization

USD:

United State Dollar (American Currency)

VND:

VietNam Dong (Vietnamese Currency)

Xl


CHAPTER I

INTRODUCTION
The first chapter is used to introduce and to give the main summary of this thesis.
First of all, I will give out the existences of safe food, general speaking, and clean
vegetables privacy in section 1.1-Problem statements. Safe food becomes serious
problems when the number of food poisoning is increasing and for vegetables, the
insecticide residuum in vegetables is still in high level. Under economist and management
views, there are many reasons that lead to this situation such as production processing,
distribution processing and the role of management organization. From the fact of safe
food, many consumers must change their favourite food because of safe reason. Even
some consumers choose foreign food in our agricultural economic.
The reason why I choose this thesis is due to the problem statement and especially
the antilog when the producers say superabundance while the consumers say deficiency.
In section 1.2-Research objects include both general objective and specific objective. The

main objective of this study is to identify the factors that have significant effects on
chosen clean vegetables of consumers and thus affecting demand of the whole market.
Basing on the finding result and combining with the main objective, I also supply the
relevant information to producers, distrib~tors, managers or some organizations.
In section 1.3-Research question and hypothesis, I will give out the questions and
hypothesis that come form my observations and relative theories. Those questions and
hypothesis will help me determine how the factors affect on choosing clean vegetables.
Next, I would test to illustrate whether the hypotheses are right or wrong?
I also mention methodology in section 1.4 where I discuss model specification, the
variables, data and the method that are used to test the hypothesis.
The last section, 1.5 is structure of the study where I will describe the structure of
this thesis. I provide you with the chapter title and the summary of the information of
those chapters.

1


1.1.

Problem statement

In this part, I will give out the food poisoning picture in recently years including
food poisoning, the processing of procedure, business and reactive of customers. I also
mention on the clean vegetables demand curve, the roles of government and reactions of
consumers.
1.1.1 The food poisoning picture in recently years

Food poisoning becomes serious and frequent to the health of citizens. Many
organizations have given out warning and the laws are issued in order to control poisoned
food. However, in recently years, the number of poisoned food increases yearly.

According to annual statistics of HCM committee, during 2004, there were 18 cases and
1803 people were poisoned. In 2005, the number of poisoning case increased by 27 cases
and 1771 people were poisoned in which four people died (HCM General Statistic Office,
2006). There are many kinds of food poisoning such as foodstuff poisoning, drink
poisoning, vegetables poisoning, etc ... , but in this thesis I just mention the reasons that
concern vegetables.
The vegetables poisoning is difficult to control because vegetables is a kind of
food that is used every day. We knew that vegetables are major component of Vietnamese
diets. Moreover, with its characteristic, vegetables wou"ld be quickly distributed and used.
So we suffer the serious result in case vegetables are sold on market but still contain
unhealthful elements. It is difficult for consumers to distinguish the quality ofvegetables,
especially the chemical residuum that is used to kill insects or to maintain after harvest.
That is the reason why some articles said that consumers must change or give up the
vegetables they like because of safe reason. This is the reason that leads to the
Vietnamese meals which are becoming unbalances (Lam Vu, 2006).

1.1.2 The product, harvesting and distribution ofvegetables

The production processing, collection and retail contain many problems. Firstly,
production that is small, manual and lack of synchrony leads to low productivity and
more pestilent insect. With the limited size of their plots, usually less than 500m2 ,
2


vegetables growers use large quantities of fertilizer and pesticide in the expectation of
high yields (MOUSTIER, 2000). When the consciousness of farmers is low and the
production processing is not controlled, the vegetables quality is sold on the market would
have problems. Using pesticides is an example, the custom of Vietnamese farmers in
using chemicals to kill pestilent insect and use in common jobs are reasons that lead to
low quality product. According to Trade Deputy Minister Phan The Rue in 2006,

chemicals and additives that cost 1.2 million USD are imported and used to produce and
to maintain food, vegetables, etc . . . .. On vnexpress.net 26/7/2006, True Ngon, the
Vnexpress reporter, describes that: the number of the farmers who go to pump insecticide
is as crowded and cheerful as go to the fair everyday. They open the packs of chemicals,
throw the packs to the drainage naturally, then pump chemicals over the vegetables until
the fields become as dark as the thin dew and the smell of insecticide makes your eye and
your throat become pungent. He also pointed out that there were some kinds of
insecticides that are banned to use as "Thasodant", but the farmers still use widely. He
said that this pesticide is so obnoxious that with only small quantity can kill all fish in the
pond. The consequence is that the level exceeds maximum residue limits, including
pesticides, nitrates and heavy metals. If compared with the standards of Codex
Alimentarius that FAO and WHO, the residue Cypermethrin (Sherpa) is 6 times higher
meanwhile Carbendazim is 3 times higher than permitted level. Especially for some
vegetables that still contain Thasodant at the high level. It makes the experts surprised
when customers have used these vegetables to cook or even eat without cooking (True
Ngon, 2006).
The harvest and distribution also have problems. According to deputy director
Science and Technology for Agriculture and Rural Development (Nguyen Kim Vu, 2006),
we need to keep vegetables in good condition after harvesting in order to raise the good
value in circulation. However, it is necessary to perform in right process, in right
chemical and right dosage. In case these are done in wrong process, consumers can get
food allergy, the digestion diseases, soft poison or even these are the reasons that lead to
acute poison or some kinds of cancer because toxin have been accumulated and kept in

3


liver for a long time. The other problems are business in vegetables. Usually, from
producing to consuming will run as following:
Producers

(i}

Wholesalers

Q

Retailers

_@

Consumers

When we analyses the diagram above, we fmd out that vegetables from producers to
consumers may go through many segments. It is difficult to control the quality of
vegetables. The producers produce clean vegetables and of course the input cost must be
higher than normal vegetables. This leads to the higher price of clean vegetables.
However, to maximise benefits, collectors, wholesalers, retailers may mix normal
vegetables with clean vegetables. Even though clean vegetables have well-known marks,
they still contain insecticide residuum at the high level. That leads to consumers to turn
their back upon to clean vegetables.

1.1.3 Clean vegetables demand

We are living in the developing country with over 80 millions people; therefore, the
demand of vegetables is increasing. Moreover, the demand to balance nutrition is
necessary. Usually, everyone needs 300 gram per day (Vu Lam, 2006) so with more than
80 billions citizens, our vegetables demand is so great. The fact shows that the percentage
of the children adiposity is increasing, and of course the number of people who need to
have diet is increasing, too. However, the quality of vegetables becomes the warning to

them. This leads to the fact we have agricultural economy, but we must import vegetables
and the consumers have used vegetables at the lower necessary level. Some hotels and
schools must use vegetables that are imported from foreign countries (Bich Thanh, 2005).

1.1.4 The role of government and consciousness of citizens

How about the role of the government in managing clean vegetables? There are
many deeds referring to clean vegetables such as conferences, propaganda posters and
policies that are enforced in order to control our vegetables market. However, at the
national conference about sanitation and safe food that was organized in 2007, Deputy
4


Minister Agricultural and Rural Development, Bui Ba Bong said that there were not
enough majored force and test method to control safe food programs. Moreover, some
ideas said that those policies are run in an irregular way. For example, to answer the
question who is responsible for managing the quality of vegetables in the market; Health
of Ministry, Agricultural and Rural Development of Ministry or Trade of Ministry? In
conferences, the delegates said that we need to make clear own responsibility in managing
and distributing vegetables.
The sense and the knowledge of citizens about the affect of vegetables are low. This
causes difficulty to run clean vegetables program. It is supposed that consumers have well
understood about the affect of vegetables or they know about the worse quality of
vegetables which they choose, they will change their option. They may be willing to pay
high price for clean vegetables and make them having a right position in the market. The
characteristic of unclean vegetables does not affect directly, so consumers shouldn't be
subjective. If consumers use unclean vegetables for a long time, it will lead to serious
diseases.
From those above problems, I think it is necessary to do the research and find out
the characters that affect to clean vegetables market. I hope my thesis will supply the

information to producers, businessmen, organizations and consumers in order to improve
clean vegetables market.

1.2.

Research objectives

Also from those above problems, my main objective of this thesis is to determine the
factors that have significant effects on choosing clean vegetables of consumers and thus
affecting the demand of clean vegetables in the HCM city as well as the whole Vietnam
market. Those specific objectives are:
1. To supply relevant information to the producers, distributors and clean
vegetables program of government.

5


2. To find out which groups of consumers have a trend to choose clean vegetables,
well knowledge or high income people. Base on this result, we may have better
plan in order to improve clean vegetable statement.

1.3.

Research questions and hypothesis

The thesis focuses on answering the main question "What are the key factors

effected to clean vegetables choices of consumers?" Those may include price, income,
brand name, and asymmetric information of clean vegetables. So the thesis will answer
the following questions.

1. How does the knowledge of consumers about clean vegetables affect to choose
clean vegetables of consumers?
2. Does the brand name of companies that produce clean vegetables affect clean
vegetables demand?
3. Does the asymmetric information give the effect to clean vegetables demand?
4. How does the income and price affect to choose the clean vegetables?
5. How does the distribution system affect to choose clean vegetables?
Based on the research questions, I would like to answer all of these questions only
in the scope of my thesis. For some problems such as income of consumers, price of clean
vegetable are improved in many researches, so my hypothesis will concentrate following
problems:
1. If the companies include production and distribution with their brand name,
create believed for consumers then consumers will choose clean vegetables
more.
2. If the consumers have perfect information about vegetables quality and the bad
affected of unclean vegetables, they will choose clean vegetables more.
3. If the companies provide convenient distribution channel then the clean
vegetables demand will be expand.
6


1.4.

Methodology

From the problem statements and my objectives, the methodology used in this thesis
is the descriptive statistics and running an econometric model to test the hypothesis. First,
the descriptive statistic method is used to describe the relevant data base. Next, an
econometric model is estimated to examine the relationship between chosen, dependent
variable, and independent variables such as income, knowledge, price, etc. Software

"Eview" is use to run regression and test hypothesis.
Data for this thesis are mainly from consumers' survey and it is data-cross sectional.
The other sources come from Statistic Offices, the information on website and the reports
of Agriculture and Rural Development Office, Health Department. There are some data
limits such as number and quality of samples. In my survey data is divided into three
groups that are in traditional market, household and clean vegetables shop. In case the
sample survey at market or clean vegetables shop, it is difficult to get the high quality
information.

1.5.

Scope and limitation of research

Place to choose in research is HCM City because it is the biggest city in Vietnam
with crowded residents. The demand of clean vegetables and other goods is so great.
Moreover, output vegetables of HCM City can not supply enough all the demand of
vegetables in HCM. So the big amount must import from other provinces. That means
more difficult in management and the effect would so great when a poising happen. Those
are some reasons why clean vegetables market is complicated on both policies and
operations. However, one of limited of this thesis is HCM City does not represent for
Vietnam because some factors such as seasons, income, education, etc.
The objective to do research is the behavior of consumers. In the research, I am
trying to find out how does the relationship between prices, education and brand name ...
affect demand curve? However, this thesis is not mentioned to supply process so we
cannot show the whole picture of demand and supply of clean vegetables.
7


The thesis also has some other limited when I use the survey data and the supplies
sources of vegetables market are difficult to control. The amount of samples is also the

limited.
The limitation also comes when I do not mention to the other affect of clean vegetables
demand such as price index, inflation, import and export, substitution and complement
goods.

1.6.

Structure of the study

Following chapter I, the thesis will be continue with 4 following chapters:
Chapter

2: Theoretical frameworks: On the second chapter, I will talk about

theoretical frameworks that are relevant to the demand curve of goods in general and in
clean vegetables. I also mention to the factors that affect to supply and demand. The
preference of consumers is discuss in this chapter, the economist explain consumer's
behaviour and some other factors that affect to the choice of consumers. The clean
vegetables contain asymmetric information and distribution problems. Its difficulty to
distinguish and estimate the quality of vegetables, so clean vegetables market has close
relationship with asymmetric information, brand name and distribution. In this chapter, I
also mention and inherit the result of previous empirical studies.
Chapter 3: An overview of clean vegetables in HCM City: This chapter is used to·

describe the overview and of clean vegetables in HCM City. With HCM city' own
characteristic such as crowded citizens, great demand, the outstanding of demand, etc,
HCM City must face to many difficulties. So in this chapter, I will give out policies of
HCM committee and the existing of management on clean vegetables. I also analyse the
relevant statistic number and relevant information of clean vegetables in HCM.
Chapter 4: Empirical analysis: In this chapter provides a methodology of the

research. At first, in the model specification selection, I will select a model. After that I
give out analytical framework and show the reasons that I choice model. Then in data
descriptive, I show out how data is collected and I show out the limited of data. The next
sections, descriptive statistic, I will analyse data and find out the relationship of data. And

8


the last section, estimate model, I will base on collected data and run the regression to test
the hypothesis statistics and result of estimation. The chapter remark is the last section.
Chapter 5: Conclusion and recommendations: Base on the result of thesis, I give

out the conclusion, recommendations and suggestion for further studies.

9


CHAPTER II

THEORETICAL FRAMEWORKS
This chapter is used to mention to the basic theories to build up this thesis. The
thesis's objective is to find out the significant factors that have effect on the choice of
clean vegetable of consumers. At first, I will mention the theory of supply and demand
curve in section 2.1. The theory of supply and demand will show the demand of
consumers about clean vegetable and explain how demand is affected by supply process.
Then as we know, all the selections of consumers are not only explained in supply and
demand theory but also in the other theories. We know that the own consumer preference
is different to another one. For example, I'd like food meanwhile the other would like
clothes or services. The different is similar in financial, it isn't true when the consumers

want something then they can purchase those goods because they have the limitation of
budget line. Most of consumers have to face to the lack of finance so in their fmancial
condition, how do they decide to choose goods that they need? Those problems will be
mentioned in section 2.2, theory of consumer's choice. Section 2.3 is the problems that
have relevant to asymmetric information. Most of the commercial transactions are
affected by the balance of information between buyers and sellers. They hardly have the
same infqrmation about one business so they will have differeut evaluation in the value of
goods. The asymmetric information may lead to the adverse selection and step by step it
drives the high quality good out of market. The next one, section 2.4 will be distribution
channels:. There have been some researches that prove the market is affected by
distribution. Especially in foods, the distribution channel gives the convenient and
incentive to consumers much more. After that, I will mention empirical studies in section
2.5 that I have already to read and inherited the results of previous researches. After that, I
combine both theory and empirical study in order to give out the suggested model in
section 2.6. The chapter remark is used in order to summarize on the last section 2.7.

10


2.1.

Supply and demand curve

Supply and demand concepts are not only mentioned in business but also in many
other fields. Economists use those concepts to explain and forecast about economic
situation in the world. By analysing supply and demand curve, we may partly understand
the mechanic of market. In this section, I will build the supply and demand curve and then
give out some concepts such as equilibrium point of market, surplus, shortage problem,
etc .... The factors shift the demand and supply curve to the left or the right and how we
can predict new price, new quantity when the supply and demand shift? Beside that, I also

mention to the elasticity of supply and demand.
2.1.1

Supply and demand concepts

The supply curve shows that how much quantity the producers will sell each price
level. At lower price, the producers will supply less and on the contrary, at the higher
price, the producers want to supply more. So the supply curve will be upward sloping.
The demand curve shows that how much the quantity that the buyers want to
purchase corresponding to the price level. The buyers will buy more at the lower price
and on the contrary, at the higher price, the buyers will buy less. So the demand curve will
be downward sloping.

.

.

Suppose other factors are unchanged, the law of demand curve will be: "when price
increases, the quantity will decrease and when price decreases, the quantity will increase."
Demand - supply curve will intersect to each other at the balance point between price and
quantity. It is the market equilibrium where supply and demand are equal.
In free market, the price will keep on change until reach to the equilibrium point. At
the lower price, the goods will be shortage status because the buyers want to buy more
meanwhile the sellers are not be willing to supply at that price level. On the contrary, at
the higher price, the goods will surplus. Figure 2.1 describes those problems.

11


Price

Supply (S)
Surplus
~

Po

----------------

---------

Equilibrium point (E)

-----~------

'----Y-----'

Demand (D)

Shottage
I
I
I

Qo

Quantity

Figure 2.1: Supply and demand

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :23)

The market clears at price P0 and quantity Q0 . At the higher price P1, a surplus
develops, so price falls. At the lower price P2, there is a shortage, so price is bid up.
We know that the world economy is affected by many different factors. According to
Pindyck and Rubinfeld (200 1), there are many factors that affect to supply and demand
curve, for example, the quantity that the producers want to sell not only depends on price
but also depends on the input cost such as salary, interest rate, and the price of input
material. Similarly, beside price factor, the demand curve depends on income, price of
other goods, tax and many other

fac~ors.

When those factors give the effect to the

economic then demand and supply will change and then price, quantity change afterward.
This leads to the equilibrium change in order to touch new equilibrium point.
In most market both demand and supply shift time to time. Beside those factors that
I have already mentioned above, there are many other reasons such as seasons, taste and
government's policy. Economist uses supply and demand curve to trace the effect of those
changes. In case the affection of those factors shifts supply and demand curve to the right
then price and output may usually increase. On the contrary, the supply and demand shifts
to the left, price and output may decrease. The special case happens when both supply and
demand shift at one ratio, the output will change but price will not or there are some
special cases when one change and the other do not or one curve shifts left and the other
shifts right so on. In general, the changing of price and output depend both on how much
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the supply and demand curve shift and the shapes or the slope of those curves. To predict
the sizes and directions of such changes, according to Pindyck and Rubinfeld (2001 ), we
must be able to characterize quantitatively the dependence of supply and demand on price

and other variables.
Summary, the rules of moving supply and demand as figure 2.2 describes: when
input cost such as materials, salary, etc decrease then supply curve will shift to the right
and on contrary, supply curve will shift to the left. For demand curve, in case of
consumer's increases, some consumers will spend more; the demand will be expanded
and shifted to the right.
Price

s

,- S'

Quantity
Figure 2.2: New Equilibrium following shifts in Supply and Demand

(Source: Robert S.Pindyck and Daniel L.Rubinfeld, 2001 :26)
Supply and demand curves shift over time as market conditions change. In this
example, rightward shifts to the supply and demand curves lead to a slightly higher
price and much larger quality. In general, change in price and quality depend on the
amount by which each curve shifts and the shape of each curve.

2.1.2

Elasticity of supply and demand

As I mentioned above, the demand and supply for a good depends not only on its
price, but also on consumer income, on the price of other goods, on the inputs cost, etc.
However, one question that most the economists want to know is the quantity supply or
demand will rise or fall when they are affected by other factors? And how sensitive is the
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demand when its price increases or decreases? Those problems are explained by elasticity
concept. According to Pindyck and Rubinfeld (2001), "elasticity is percentage change in
one variable resulting from a 1 percent increase in another''. "Elasticity measures the
sensitivity of one variable to another. Specifically, it is a number that tells us the
percentage change that will occur in one variable in response to a !-percent increase in
another variable". For price elasticity of demand is example, percentage change in
quantity demanded of a good resulting from a !-percent increase in its price is described
like that:
Ep = (%6Q)/ (%6P)
Where %6Q means "percentage in Q" and %6P means "percentage in P". The
percentage change in the variable is just the absolute change in the variable divided by the
original level of price. Thus we the price elasticity of demand can write as follow.
Ep =

!1Q/Q - p !1Q

M/P

--Q M

When price of one good increase, the demand quantity will decrease so elasticity of
demand is usually a negative number. According to Pindyck and Rubinfeld (2001), "when
the price elasticity is greater than 1 in magnitude, we say that demand is elastic because
the percentage decline in quality demand is greater than the percentage increase in price.
If the price elasticity is less than 1 in magnitude, demand is said to be price inelastic".
However in market, there are only some special cases that can not be explained by
the price elasticity of demand such as infinitely elastic demand, completely inelastic
demand and income elasticity of demand, so on. It happens in case the market is affected

by some factors such as monopoly or the market with the intervention of government.
We can not explain all the market mechanism by supply and demand theories. In
fact, when consumers choose this or that, it is not only depending on price but depending
on others factors such as consumer's preference and the limitation about budget line. In
the next part, I will mention to those problems.

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