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ECONOMICS

INTERNAL ASSESSMENT

An Investigation OnThe Impact Of The Role

Of

Grace Kennedy In Jamaica

Name: Mark Phillips

Teacher:

School: Kingston College

TABLE OF CONTENTS

 

Page

Introduction

1

Aims and Objectives

2

Methodology Employed

3

MODULE 1

(A)

Scarcity

4

(B)

Demand Analysis

5

(C)

Income

6

(D)

Supply

7-8

(E)

Evaluation and Recommendations

9

MODULE 2

(A)

Market Structure

10

(B)

Price Plus Costing

11

(C)

Evaluation and Recommendations

12

MODULE 3

(A)

Theory of Income Distribution

13

(B)

Demand for Factors

14

(C)

Supply of Factors

15-16

(D)

Evaluation and Recommendations

17

Appendices

18-20

Conclusions

21

INTRODUCTION

Grace Kennedy is one of the Caribbean's largest and most dynamic corporate entities.

The company started in Jamaica in 1922 as a small trading establishment and wharf

founders. It has expanded and diversified over the years, changing from a privately-

owned enterprise to a public company listed on the stock exchanges of Jamaica, Trinidad,

Barbados and the Eastern Caribbean. Today, the Grace Kennedy Group comprises a

varied network of some 60 subsidiaries and associated companies located across the

Caribbean and in North and Central America and the United Kingdom. Its operations

span the food distribution, financial, insurance, remittance, hardware retailing and food-

processing industries.

In 1995, Grace Kennedy developed its 2020 Vision, its objective being to transform the

business from a Jamaican trading company to a global consumer group with the business

roots in Jamaica. After thirteen years on this journey, the company is substantially larger

and stronger, measured by the business growth in revenues, productivity, profits and

market value.

Its mission continues to be, ' To satisfy the unmet needs of Caribbean people wherever

we live in the world ‘.

Although Grace Kennedy is a conglomerate and is involved in “Food Processing,

Financial Services, Information Services and Retail and Trading.” This study focuses on

the Food Processing operation.

AIMS

The major aim of this IA is to investigate the role of Grace Kennedy in Jamaica. This

project will also help me to fulfil the requirements of the CAPE ECONOMICS exam and

give me a better understanding of the topics highlighted in the project.

OBJECTIVES

Module one:

Define Demand

Identify the factors that affect demand and the elasticity of demand

Define Supply

Identify the factors that affect supply and the elasticity of supply

Module Two:

State the type of market Structure which the firm operates

Explain the factors that influence the pricing and output decisions of the firm

Module Three

Theory of Income Distribution

Define the term Demand for Labour

Define the term Supply for Labour

METHOD OF DATA COLLECTION

An interview and a questionnaire were used to access information from Grace Kennedy,

during the year 2010 -2011. The Purchasing Manager and the marketing manager of the

company did the Interviews. Questionnaires where answered by the Chief Executive

Officer, Douglas Orane.

SCARCITY

Grace Kennedy like any other firm uses various types of factors of production

such as land, labour, capital and entrepreneurship. These resources are all economic

resources since they are scarce. The company faces difficulty in this area because some

of there product subsidies like guava have to be imported, so this put a constraint on d

company because they are supporting international market than local. When the various

resources are used to produce goods supplied by Grace, there is an opportunity cost, that

is the alternative goods that such resources could have been used to produce.

DEMAND ANALYSIS

Grace products are demanded both by local consumers as well as international.

Grace Kennedy produces a wide range of goods such as “Tomato Ketchup

There is a

wide demand for these products. Demand for these products are affected by the products

own price, income, price of related goods and other factors. A change in the price results

in the law of demand this means that the lower the price the greater the quality

demanded.

Elasticity of Demand

The concept of elasticity of demand measures how responsive is the quantity of a

product to a change in its price. It is the percentage change in the quantity demanded

divided by the percentage change in price. Demand for Grace products is likely to be

inelastic from the point of view that these products are food items which are considered

as necessity. Never the less these products have very close substitutes and demand would

tend to be elastic. Again Grace products would tend to account for a relatively small

percentage of consumer’s income and are likely to be relatively inelastic.

Cross Elasticity

Since Grace products has a number of close substitutes a rise in the price of Grace

products could affect the demand of other brands and vice versa. Economists refer to this

relationship as cross elasticity of demand.

INCOME

As income increases both at home and abroad, larger quantities of these products

are generally consumed especially these consumers who view the companies product as a

normal good. However, some people may view tin mackerel, sausages, sardines and

corned beef as inferior goods. The demand for these goods would decrease as income

increases. The extent to which these goods will be perceived as normal or inferior goods

will depend on the level of income.

Price of Related Goods

The goods produced by Grace Kennedy have a wide range of close substitutes

since there are other firms selling similar products. A rise in the price of other products

would result in a significant increase in the demand for Grace products and vice versa.

This means that the company will watch carefully the pricing policies of its competitors.

Even though there are other firms selling similar products persons might be willing to pay

higher price for Grace products due to the greater utility associated with the consumption

of these products as oppose to other brands.

SUPPLY

Supply refers to the amount of goods that Grace Kennedy is willing to produce

and offer for sale. Like demand, supply is affected by a number of factors such as the

products own price, the cost of production, technology, price of related products and so

forth. The company’s operation is largely dependent on obtaining reasonably priced

products on a sustainable basis. To this end the company has bypassed local farmers and

other local producers and outsource goods from overseas. E.g. coconut water is obtained

from Thailand, mango concentrate is obtained from Columbia, guava from Brazil and

bottles from Trinidad. The reason given is the difficulty encountered in obtaining

reasonably priced goods on the local market on a sustainable basis. The company is

manufacturing fewer items and is outsourcing them from more efficient producers who

can supply these items at a lower price than it would cost Grace to produce. The

company’s objective is to move closer to the final consumer, develop better customer

service, extend its international business and achieve operation efficiency.

Elasticity of Supply

This is defined as a measurement of the responsiveness of the quantity supplied to

a change in price. Grace Kennedy products can be produced in a relatively short period of

time and would be quite responsive to an increase in price. Since most of the products

have a relatively long shelf life, finished goods can be stored as inventory. When price

rises due to an increase in demand the company can sell goods by reducing its inventory.

Inventory would tend to make supply more elastic. However, holding inventory increases

a firms production cost, it also involves financial resources tied up until the goods are

sold. Like all other Jamaican firms the company is affected by higher cost of utilities such

as electricity, water, telephone service as well as security cost. The company operates in

the heart of downtown Kingston where crime is a major concern and this necessitates the

need for a large fleet of security personnel.

EVALUATION AND RECOMMENDATIONS

Grace Kennedy responds quite favourably in satisfying the ever increasing

demand for food items within the country. The company uses various methods to increase

supply not only by means of its own production but through outsourcing. It imports a

large amount of fruit concentrates and pastes from other countries, many of which can be

obtained locally. It asserts that Jamaican suppliers are unreliable and the prices are

sometimes too high.

The company ought to mobilize local farmers to produce the fruits and other raw

materials for its processing plants. To the extent that it generates income for local farmers

they will be able to earn the income to purchase the company’s products. With the

present arrangement a significant part of Grace earnings is used to pay for imports.

MARKET STRUCTURE

Grace Kennedy operates in an oligopolistic market structure. This structure states

that where a few usually large firms characterise the market, each possessing a substantial

market share. Its major competitors are Eve, Nupak and Lasco. Since there are other

firms selling similar products firms are reluctant to engage in price competition. If Grace

lowers price, other firms are likely to cut their prices which may precipitate into a price

war. If Grace raises prices it is likely to lose sales to other firms. In reality there is a

cluster of prices, that is, the price of other brands are very close to that of Grace,

sometimes differing only by a few cents. This explains the typical price rigidity of the

oligopolistic model. Grace of course uses none price competition in terms of advertising

an introduction of new products Grace is arguably the market leader and there could be

some elements of price leadership or tasic collusion where Grace as the dominant firm

sets its price and the other firms follow.

In the absence of price competition oligopolists resort to research and

development to develop new products or add new features to existing products. This will

serve to extend the products life in the market. Over the past two to three years Grace has

developed a wide range of new products such as “Grace Porridge, Grace Juices, Grace

Soup …” This is in keeping with the health conscious consumers who prefer non-sugar

natural juices as oppose to artificially flavoured drinks. Today Grace is a popular brand

name and there is tremendous brand loyalty. Brand loyalty will make demand more

inelastic and will give the firm some discretion in raising price within certain limits. This

will somewhat overcome the difficulties that oligopolists face in changing prices.

PRICE PLUS COSTING

The company is likely to use the price plus costing method where the firm

determines its unit or average cost and adds a percentage mark up or profit margin. Such

profit margins are based on the rate of return that a similar sized firm of equal risk would

obtain. Since average cost tends to increase with prices, this unit cost must be calculated

based on some level or percentage of capacity utilization.

Grace is arguably a conglomerate since it produces a wide range of differentiated

products. The company benefits not only from economies of scale but economies of

scope. Economies of scope is defined as a reduction in average cost arising from the

firm’s diversified business. Such benefits assist the firm to occupy a good position in the

market and to be better able to enjoy cost and price advantage over other firms. The

company also outsources certain products whenever it finds other firms that can produce

that product or part of a product at a lower price. Equipped with such strengths Grace is

able to ward off the onslaughts of competitors and reduce the level of the uncertainty

characteristic of the oligopolistic market.

EVALUATION AND RECOMMENDATIONS

Grace operates in an oligopolistic market where there is a great degree of

interdependence. Since there are other firms selling similar brands the company face

limited options in raising prices, it is therefore forced to use non-price competition such

as product improvement, development of new products and better customer service. The

company continues to increase efficiency by outsourcing products when it can be

produced cheaper by other firms. The company should always try to identify local

sources of products where possible. The company can expand its range of products and

benefit from economies of scope as well as risk bearing economies of scale.

THEORY OF INCOME DISTRIBUTION

Like all firms, Grace Kennedy uses various types of factors of production such as

land, labour, capital and entrepreneurship. Land is used to site the various companies’

plants. Labour refers to the various categories of employees and capital refers to the

buildings, machinery and equipment used by the company. Finally entrepreneurs refer to

the shareholders. Since these are economic resources, they have to be paid at least what

they could have earned in their next best alternative use. Such opportunity cost of a factor

of production is known as the transfer earnings. This is the minimum income required to

attract or retain a factor in its current use. Any income earned that is above the transfer

earnings is known as economic rent.

DEMAND FOR FACTORS

Demand for any factor of production refers to the amount of units of that factor

that a firm is willing to employ at different prices for that factor over a period of time.

Demand for any factor is a derived demand, since it depends on the demand of the goods

that such factors are needed to produce. In other words Grace demands labour and other

factors of production because there’s a high demand for the wide range of food products

that the company produce. Like any demand curve the demand curve for these factors

would be downward sloping to the right, indicating that there is an inverse relationship

between factor prices and the amount of factors employed. In the short run the demand

curve for factors like labour is downward sloping due to diminishing marginal product. In

the long run the downward sloping nature is due to the substitution of one factor for the

other when there is a change in factor price. The demand for factor curve or any other

factor is the marginal revenue product curve. This is the marginal product of labour times

the marginal revenue of the product sold.

SUPPLY OF FACTORS

The supply of labour or any other factor is the amount of that factor that

households are willing to sell or hire at various factor prices over a period of time. Like

any supply curve the supply of labour slopes upwards to the right indicating that the

higher the price of the factor, the more of that factor will be made available to firms.

Grace Kennedy sells its products in an oligopolistic market but obtains factors of

production in a competitive market since it has to compete with other firms for additional

workers. This means that to employ an additional unit of labour the company will have to

pay higher wages to attract workers from their previous job. This means the marginal cost

or the marginal resource cost of labour is upward sloping. However, this would refer to

only professional, skilled or technical workers who are in short supply. The company

could obtain lower categories of workers at a reasonable wage rate since the supply of

these categories of employees would be much more elastic. Grace will continue to

employ additional units of labour and other factors until the marginal revenue product of

labour is equal to the marginal resource cost. If the marginal revenue product exceeds the

marginal resource cost it will be more profitable to employ an additional unit of labour. If

marginal revenue product exceeds marginal resource cost, employing an additional

worker would add more to the firm’s total revenue than to its total cost. If the marginal

resource cost exceeds the marginal revenue the firm should employ at least one less unit

of labour since employing an additional worker is adding more to the firm’s cost than its

adding to its revenue.

The company is a major player in the labour market and could have some degree

of market power in determining wages nevertheless workers are unionized and trade

unions would act as a monopoly on labour and neutralize the market power of Grace,

forcing it to act in a more competitive manner.

The company employs various categories of workers such as engineers,

technicians, mechanics and professional categories, many with qualifications in chartered

accounting and masters in business administration. It has other categories of workers

such as clerks, factory workers and so forth, workers are paid higher wages based on

qualifications, experience and so forth. Within the company therefore there are

substantial wage differentials. The company not only compensates its employees but also

its shareholders who are the entrepreneurs. The company educates its work force through

training programs, both externally and on-the-job. Measures are also taken to improve

working conditions and to improve the level of safety and the reduction of accidents.

EVALUATION AND RECOMMENDATIONS

Grace is a profitable company and can afford to pay the wages that will attract

labour and other resources. The company’s employees seem to be comfortable since there

has been no evidence of industrial action. However, to remain competitive the company

may have to mechanise more of its operations in order to increase efficiency. This could

lead to the laying off of workers. The company should introduce employees share

ownership programs. This method will make all employees share holders of the company.

This step could harmonize the objectives of the employees with those of the company and

reduce conflicts. The company should continue training its staff to measure productivity.

Care has to be taken to ensure that such training is specific or peculiar to the company

and reduce the chance of trained workers leaving and working for other companies.

Fig 1 Diagram showing a graph of a typical demand curve

Fig 1 Diagram showing a graph of a typical demand curve This typical demand curve shows
Fig 1 Diagram showing a graph of a typical demand curve This typical demand curve shows
Fig 1 Diagram showing a graph of a typical demand curve This typical demand curve shows
Fig 1 Diagram showing a graph of a typical demand curve This typical demand curve shows
Fig 1 Diagram showing a graph of a typical demand curve This typical demand curve shows

This typical demand curve shows that as the higher the price of the commodity, the

smaller the quantity demanded. When the price was at $15 the quantity demanded was at

Q1. However, when the price increased to $20 the quantity demanded went to Q0. it also

shows an inverse relation between price and quantity demanded because as one goes up

the other goes down.

Fig 2 Diagram showing a graph of a typical supply curve This graph shows a
Fig 2 Diagram showing a graph of a typical supply curve This graph shows a
Fig 2 Diagram showing a graph of a typical supply curve This graph shows a
Fig 2 Diagram showing a graph of a typical supply curve This graph shows a
Fig 2 Diagram showing a graph of a typical supply curve This graph shows a
Fig 2 Diagram showing a graph of a typical supply curve This graph shows a

Fig 2 Diagram showing a graph of a typical supply curve

This graph shows a positive relationship where as price goes up there is an increase in

quantity supplied. This can be further explained as it is shown on the graph where price

was at $25 and the quantity supplied was at 100. Whist as the price increase to $30 the

quantity supplied went to 200.

Fig 4 Graph showing Economic Rent (B) & Transfer Earnings (A)

showing Economic Rent (B) & Transfer Earnings (A) This graph illustrates transfer earnings and economic rent.

This graph illustrates transfer earnings and economic rent. Transfer earnings are indicated

by area under the labour supply curve. The economic rent is shown above the transfer

earnings. The wage rate is at equilibrium with the supply and the demand curve.

Although the equilibrium wage is W, at wage rate below this are these are transfer

earnings and above the wage rate those are economic rent. So persons that are willing to

work below the wage rate are transfer earnings and person who works for wages above

the wage rate are economic rent.

Fig 5 Graph Showing the Demand of Labour This graph simply illustrates that as the

Fig 5 Graph Showing the Demand of Labour

This graph simply illustrates that as the wage rate of Wo the firm will demand L0

workers. As the wage rate falls the firm is in disequilibrium where the wage rate is less

than the MRP of the last unit of labour. However as the wage rate falls at W1, the firm

will employ more workers which means that the firm is able to pay the wage rate of the

labour demanded.

Quantity supplied

Quantity supplied Fig6 Graph Showing the Supply of Labour This graph illustrates that as the wage

Fig6 Graph Showing the Supply of Labour

This graph illustrates that as the wage increases the quantity supplied of labour also

increases. This clearly means that as when wages is at W the quantity supplied of labour

is LQ0. However when wages moves to W1 the quantity supplied of labour increases to

LQ1.

EVALUATION AND RECOMMENDATIONS

Grace Kennedy responds quite favourably in satisfying the ever increasing

demand for food items within the country. The company uses various methods to increase

supply not only by means of its own production but through outsourcing. It imports a

large amount of fruit concentrates and pastes from other countries, many of which can be

obtained locally. It asserts that Jamaican suppliers are unreliable and the prices are

sometimes too high. However the supply of these products during the hurricane season

will decrease since the amount of fertilisers will also decrease which would be beyond

the farmer’s control. On the other hand, it can be recommended that these farmers

produced as much fertilisers to supply the company so that a hurricane would not much

of drastic effects.

The company ought to mobilize local farmers to produce the fruits and other raw

materials for its processing plants. To the extent that it generates income for local farmers

they will be able to earn the income to purchase the company’s products. With the

present arrangement a significant part of Grace earnings is used to pay for imports

Grace operates in an oligopolistic market where there is a great degree of

interdependence. Since there are other firms selling similar brands the company face

limited options in raising prices, it is therefore forced to use non-price competition such a

better customer service. The company continues to increase efficiency by outsourcing

products when it can be produced cheaper by other firms. The company should always

try to identify local sources of products where possible. The company can expand its

range of products and benefit from economies of scope as well as risk bearing economies

of scale.

Grace is a profitable company and can afford to pay the wages that will attract

labour and other resources. The company’s employees seem to be comfortable since there

has been no evidence of industrial action. However, to remain competitive the company

may have to mechanise more of its operations in order to increase efficiency. This could

lead to the laying off of workers. The company should introduce employees share

ownership programs. This method will make all employees share holders of the company.

This step could harmonize the objectives of the employees with those of the company and

reduce conflicts. The company should continue training its staff to measure productivity.

Care has to be taken to ensure that such training is specific or peculiar to the company

and reduce the chance of trained workers leaving and working for other companies.

Additionally, since Grace Kennedy is an oligopolistic market they face competitions from

other companys such as Lasco, Nupack, and Eve, they can dominate these firms with

advertisements and promotions. Grace Kennedy can advertise their products extensively

to persuade consumers in purchasing it so that they can have a substantial share of the

market. They can also use promotions by involving the consumers to make them have a

sense of loyalty towards the company. This will enable the company to be more involved

with the consumers and once these consumers realises the benefits they provide it will be

at an advantage to Grace to dominate more of the market share.

Grace Kennedy faces problems with the goods they produced which are slightly

differentiated from those of their competitors. With this problem faced they can introduce

a product innovation. This means that they can do their outmost best in trying to

differentiate their products from their competitors. This can be done by changing the

sizes or shapes for some of their produced products. For example both Grace and Lasco

produce tinned mackerels. These products are slightly differentiated however; Grace

Kennedy could use the advantage by producing their tinned mackerels by putting on a

can opener so it would be easier for the consumers to open it instead of using a knife or

something sharp which could cause damages.

Moreover, Grace Kennedy also faces problems in terms of brand proliferation. This

means that the company is not producing enough brands to saturate the market. It can be

recommended that the company produces a lot of brands that will saturate the market so

that no gaps will be left for their rivals.

Market segmentation could also be a problem faced by Grace Kennedy as an oligopolistic

market. This is so because they may not decide that there are sub markets where

consumers have different characteristics and needs. This problem could be solved by

getting different views from their consumers in acquiring information as to what goods

are more effective to them and those that are not.

Many house holds in Jamaica cannot afford goods produced by Grace Kennedy because

of the prices at which they range. The company can use this as a means of implementing

a process innovation. This simply means that they can find a way of reducing their

average cost, by cutting back on their prices to take these consumers in consideration

without sacrificing their profits made.

Internet

www.Wikipedia.com

Book

REFERENCE

Comprehensive Economics for Caribbean Students- Edward Bahaw

Economics for Cape Colin Bamford and Narissa Mohammed

CONCLUSIONS

Grace Kennedy imports a lot of raw materials which could be produced in

Jamaica. For Example, in the production of tropical rhythms, the guava is imported from

Brazil; the mango imported from Columbia and the bottles from Trinidad. There is little

value added. The company should mobilize farmers to grow crops. Since more revenue

will go to Jamaicans to purchase their products.

There is stiff competition for other products, which tend to reduce their market

share. Grace Kennedy should develop new products which will take competing firms a

while to catch up with them.

The company has a system where employees and managers work together to achieve

desired objectives. For example, if a trailer is to be unloaded quickly, all members of the

company from the workers as well as managers participate in manual work. The company

should encourage employees to become shareholders. This is likely to reduce industrial

unrest in the organization.