Venezuela Food Shortage

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Consumer surplus is the difference between what a consumer is willing to pay and what is actually paid. Producer surplus is the excess of the amount received from the sale of a product or service over the cost of producing it.

If the quantity demanded is higher than the quantity supplied, this will cause shortage in the market. The price of a product increases, the quantity demanded by consumers decrease due to the law of demand and the quantity supplied by producers increases due to the law of supply until it achieves market equilibrium. If the quantity supplied is higher than the quantity demanded, this will cause surplus in the market. Since surplus occurs, producers will lower the price to compete with each other. As the price of product decreases, the quantity demanded by consumers increases and the quantity supplied by the producers decreases until it achieves market equilibrium. The invisible hand which is same meaning with price mechanism in the market will eliminate shortage and surplus and until it achieves market equilibrium.

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When there is maximum price or price ceiling, it is shown as the diagram 2 above at the point P1, which is below the equilibrium price. Since the price decrease from P0 to P1, quantity demanded will increase from Q0 to Q2 while quantity supplied decrease from Q0 to Q1. It shows that the quantity demanded is higher than the quantity supplied. When price changes from P0 to P1 in diagram 2, area for consumer surplus will increase from PQRST to PQSWUT. When the price decrease from P0 to P1, area for producer surplus will decreases from RSTUV to UVW. Shortage occurs in the market. The shortage will only appears when quantity demanded is higher than quantity supplied.

Maximum price is known as price ceiling. Price ceiling means government imposed regulations by setting a price that below market equilibrium price to prevent prices from increasing above a maximum level. This can lead to shortage. Government will impose a price ceiling when the prices of necessary products such as rice, sugar, cooking oil, toilet paper are likely to increase. Government imposes price ceiling is to benefit consumers. Consumers can purchase products at lower prices.

In Venezuela, President Hugo Chavez had imposed precise price controls on foods and necessary goods to make it more affordable for the poor. The gap between rich and poor was extreme, so Mr. Hugo Chavez tried to fix it. Prices set by government are too low, companies and producers make no profit at this price. Farmers reduce crops, manufacturers diminish production and retailers keep less stock. This had led to shortage. Shortage occurs because the quantity demanded is greater than the quantity supplied.

Due to shortage, consumers are willing to pay a higher price to get what they need. Price ceiling causes reduction in quantity supplied. Producers will provide goods unless consumers pay them higher. Therefore, black market occurs.

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Venezuela government provides subsidy on basic goods such as sugar, cooking oil and others. Subsidy is a financial aid provided by government to producers as public welfare. Subsidies provided will be either the form of money or equipment. Therefore, the cost of production will decrease, selling price will lower and supply will increase. As conclusion, there will be an increase in producer surplus and consumer surplus. In diagram 1 below, it had shown that the equilibrium price is P0, equilibrium quantity is Q0 and equilibrium level is at E1. Region X is consumer surplus and region Y is producer surplus.

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By providing subsidies to producer, it will shift supply curve to right and if other factors remain unchanged. This will decrease the price paid by consumers, new equilibrium will created. Equilibrium level will change from E1 to E2. Quantity demanded (DD) will intersect with the new quantity supplied (SS2).

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When the price falls from P0 to P1 that shown in diagram 2 above, supply curve will directly shift to right, which means supply curve (SS1) will shift to supply curve (SS2). While the supply curve shifts to right, quantity supply will also increase from Q0 to Q1. Based on this situation, both consumer surplus and producer surplus will increase. In diagram 2 above, region X is represented the extra benefit of producer surplus that can be enjoyed by producers after subsidies are provided. As the same, region Y is shown as the extra benefit of consumer surplus that received by consumers when price decreases. Quantity demanded increase as consumer surplus increase because consumers can purchase products at a lower price. Product supplies increase due to decrease in cost of production so that producers can earn higher profit.

2)

Food shortage is a serious economic problem in Venezuela. Food shortage had affected both rich and poor. Although Venezuela is one of the top oil producers in the world, they still facing food shortage. Venezuelan blame price controls on necessary products such as sugar, rice, cooking oil, and even toilet papers. Prices are needed to keep in check in Venezuela where there is a highest rate of inflation which is 27.6 percent increase from last year. Food shortage occurs is because suppliers stalled off products to push up prices. In the month, government lowers the price on toothpaste, disposable diapers, fruit juice and other products.

A serious wave of food scarcity happened in 2008. Many shop owners hold off products as a mechanism to resist government on price controls. In short run, President of Venezuela Hugo Chavez imposed price controls on foods and necessary products for helping the poor by making it more affordable. Price control which is price ceiling that is sets below market equilibrium level. Price ceiling in Venezuela was established in 2003 to protect consumers. In another way, companies and producers make no profit due to price ceiling. Therefore, producers decrease production and quantity supplied is following to decrease. Shortage occurs is because quantity supplied is lower than quantity demanded.

In long run, black market appeared which is caused by price ceiling. Products that cannot be found in grocery stores were selling in black market at higher prices. Producers need to earn profit, they sell shortage products at higher prices. Consumers are willing to pay for it in order to get what they really needed. Hence, producers will provide goods to those can tamper them.

Although price controls policy is inefficient, it