Falling Egg Prices, the Rationale for Destroying Stock, and Consumer Expenditure on Bakery Products

Answer

Part (a) — The fall in egg prices and the rationale for destroying eggs [10]

The fall in price. The price of eggs is set in a competitive market. Diversifying import sources to Poland and Australia raises the supply of eggs, shifting the supply curve right. At the original price a surplus emerges, putting downward pressure on price; quantity demanded rises and quantity supplied falls along the curves until a lower equilibrium price is reached.

The rationale for destroying eggs. Distributors are profit-maximisers weighing the costs and benefits of destroying stock. The benefit turns on price elasticity of demand: demand for eggs is inelastic ($PED < 1$) because they are a near-necessity with no close substitutes. Destroying eggs reduces supply, raising price; with $PED < 1$, quantity falls less than proportionately, so total revenue rises — the revenue gained from the higher price exceeds the revenue lost on the smaller quantity. The costs of destruction — manpower and disposal — are minimal by comparison. Since benefits exceed costs, destroying the eggs is the rational, profit-raising choice.

Part (b) — Effect on consumer expenditure on regular bakery products [15]

Consumer expenditure is price times quantity. Three events bear on the market for regular (egg-containing) bakery products, working through demand and supply, with PED determining the direction of the expenditure change.

Demand effect — the vegan movement. Growing veganism shifts taste and preference away from regular bakery products toward eggless alternatives, lowering demand. As demand falls, both price and quantity fall, so consumer expenditure on regular bakery products decreases.

Supply effects — eggs are an input. Eggs are a key input, so the price of eggs shifts the supply of regular bakery products. Two opposing forces act on the egg market: diversification raises egg supply (lowering egg prices), while destruction lowers it.

• If, on balance, the supply of bakery products rises (cheaper eggs dominate): with inelastic demand for bakery products, the fall in price outweighs the rise in quantity, so consumer expenditure decreases — reinforcing the demand effect.

• If the supply of bakery products falls (destruction dominates): with inelastic demand, the rise in price outweighs the fall in quantity, so consumer expenditure increases — offsetting the demand effect.

Weighing the events. The net effect depends on the relative size of the demand fall and the supply change. Veganism remains a small share of bakery consumers, so the demand fall is modest; and destroying eggs is more likely to mitigate the price fall than to reverse it, so the supply of bakery products most plausibly rises. On these grounds the demand fall and a supply rise both push consumer expenditure down, so expenditure on regular bakery products is likely to decrease.

Judgement. The most defensible conclusion is that consumer expenditure on regular bakery products falls, because the unfavourable taste shift and a net rise in bakery-product supply (cheaper eggs) reinforce each other, and the destruction of eggs is unlikely to be large enough to raise bakery prices outright. Two qualifications temper this. First, the conclusion rests on the assumption that demand for regular bakery products is inelastic; second, over time this may fail — as bakers develop eggless products that closely satisfy the same taste, regular bakery demand becomes more price-elastic, so a fall in egg-driven prices could then raise rather than lower expenditure. The verdict is therefore: a likely fall in the short run, conditional on inelastic demand, with the direction increasingly uncertain as substitutes mature.