Economic Analysis of Australian Fruit and Vegetable Market
Severe flooding in Queensland in late 2010 and early 2011 “affected an area the size of France and Germany combined” (IBISWorld.com. January 2011. PP. 1), and contributed to massive spikes in fruit and vegetable prices across Australia on the order of 20 to 30% (The Sydney Morning Herald.com. January 11, 2011. PP. 1). Specific examples of these increases include: “broccoli jumping to $10 a kilo from $6” (The Sydney Morning Herald.com. January 11, 2011. PP. 1), “pumpkin tripling from $1.50 to $6 a kilo, and pineapple doubling from $28 to $56 a box” (Dagwell, Todd. January 25, 2011. PP. 1). These price increases provide a platform from which to conduct economic analysis regarding supply and demand issues, elasticity, and government measures to control price inflation.
Background
The Queensland flooding impacted Australian business and consumers, with the state producing 28% of the country’s fruit and vegetable production (IBISWorld.com. January 2011. PP. 1). The loss of “1.6 billion worth of crops” (IBISWorld.com. January 2011. PP. 1) generated a severe supply shortage which manifested itself in higher prices at grocery stores for shoppers, as well as narrowing margins for “small business owners struggling with rising costs” (Dagwell, Todd. January 25, 2011. PP. 1). Certainly, state and national government officials grapple with policies designed to ameliorate the effects of higher food inflation; in this case the policy choices include price controls or lifting the ban on imported fruits and vegetables. These measures will have substantively different results on supply, demand, and prices; but are to be analyzed in the larger context of the flood’s impact on producer quantity and consumer demand.
Use the demand and supply model to show the likely short-term impact of the flood on the price and quantity of fruit and vegetables in Australia.
The flooding in Queensland produced a supply disruption for fruit and vegetable stocks, causing “shortages which would push up the prices of many salad vegetables including tomatoes, capsicum, lettuce, as well as beans, corn, and broccoli” (The Sydney Morning Herald.com. January 11, 2011. PP. 1). To see why, a supply and demand chart is a useful tool. Crop stocks have been reduced, as such there is a decrease in supply, resulting in a shift of the supply curve to the inward-upward and left (quantity supplied at any given price decreases); equilibrium quantity decreases and equilibrium price increases. In practice this occurred as consumers and businesses reduced their purchases or shifted to alternatives. “I’ve had to make a business decision otherwise our margins will be shot” (Dagwell, Todd. January 25, 2011. PP. 1).
If a technological breakthrough ensures imported pumpkins are as good as domestic qualities and are thus allowed to be imported into Australia, use the demand and supply model to explain the short-term impact on the pumpkin market.
In this case the technological breakthrough allows for an increase in supply of imported pumpkins to be brought into the country. Technology advancements shift the supply curve outward-downward to the right (quantity supplied at any given price increases); as a result the equilibrium price decreases while the equilibrium quantity increases.
However, if consumers are uncertain regarding the quality of imported pumpkins, use the demand and supply analysis to explain the impact on the pumpkin soup market in the restaurant industry.
This question first begins with the earlier conclusion that imported pumpkins will increase the supply of pumpkins, increasing the equilibrium quantity and reducing the equilibrium pricing. Because prices are lower for pumpkins, restaurant proprietors have lower input costs for pumpkin soup which shifts the supply curve outward-downward to the right increasing equilibrium quantity and reducing equilibrium price. Yet, the analysis also must incorporate the demand function. Consumers taste preferences indicate negativity toward pumpkin soup made from imports. As such there will be a shift in demand inward-downward to the left reflecting a decrease in quantity demanded at any given price.
These simultaneous shifts result in supply and demand will ensure lower equilibrium prices however, there is some question regarding equilibrium quantity. A larger supply shift and smaller demand shift would result in an increase in the equilibrium quantity. Contrarily, a smaller supply shift and larger demand shift would decrease equilibrium quantity; accordingly there is some ambiguity. In this case however, there is reason to believe that the larger supply shift from imported pumpkins would outweigh the reduction in demand, so equilibrium quantity would increase and equilibrium price would decrease.
Referring to the determinants of price elasticity of demand as they apply to pineapples analyze the likely impact on the market if the government imposes a retail price ceiling of $40 a box on pineapples. Specify any assumptions you have made.
When discussing price elasticity of demand, the question is “how much the quantity demanded changes when the price of the good changes” (NetMBA.com. N.D. PP. 1). Elasticity is measured as a coefficient with the calculation as Q2-Q1 / (Q1+Q2)/2 divided by P2-P1 / (P1+P2)/2. Demand for a good is considered elastic >1, inelastic <1, or unit elastic = 1 (NetMBA.com. N.D. PP. 1). Elasticity for pineapples is unknown however, an assumption can be made. In 2006, Cyclone Larry caused a spike in banana prices…and in that case consumers just stopped buying bananas” (The Sydney Morning Herald.com. January 11, 2011. PP. 1). This would indicate that bananas were inelastic; a price increase saw a greater proportional decrease in quantity demanded. The same would likely be true for pineapple.
Regarding the price control imposed of $40.00/box for pineapple by the government. From the article, the market price for pineapple jumped from $28 to $56 a box (Dagwell, Todd. January 25, 2011. PP. 1). So the price control of $40.00/box would be significantly below the market price. The market price indicates the point where supply and demand are in equilibrium, yet with the imposition of the price ceiling, consumers / businesses will demand more pineapple at $40.00/box than suppliers will provide; the result is a pineapple shortage. The price ceiling will only worsen the pineapple supply issue, as producers will be unwilling to sell at the reduced price. Further, the ceiling distorts the price elasticity as consumers demand more; a movement from elastic to perhaps unit elastic.
Conclusion
The Queensland floods produced a deleterious impact on the economy of Australia with higher prices for consumers and business. The initial query was: what if any action government could take to quell price increases? The only way to forestall a supply shock (inward and upward shift of curve) is to attempt to mitigate its effects with adding more supply. In this case lifting import bans on fruits and vegetables would bring in much needed supply, which leads to lower equilibrium price and quantity. Also as indicated, price controls (ceilings in this case) only exacerbate a supply issue not solve it. Ultimately in absence of more supply, business and consumers would have difficulty with the higher prices, because “this is a very broad range of fruit and veggies that will be affected, the grocery bill will inevitably rise as the substitution ability is less” (The Sydney Morning Herald.com. January 11, 2011. PP. 1).
References
Dagwell, Todd. (January 25, 2011). Fruit, Vegetable costs Surge. NewCastle Herald.com.
PP. 1. Retrieved March 22, 2012 from http://www.theherald.com.au/news/local/news/general/fruit-veg-costs-surge/2056289.aspx#
IBISWorld.com. (January 2011). Queensland Floods: The Economic Impact.
IBISWorld.com. PP. 1-9. Retrieved March 22, 2012 from http://www.ibisworld.com.au/common/pdf/QLD%20floods%20special%20report.pdf
Mankiw, G.N. (2008). Brief Principles of Macroeconomics Economics (5th ed.).
Cengage Learning: South-Western.
NetMBA.com. (N.D.). Price Elasticity of Demand. NetMBA. PP. 1. Retrieved March 22,
2012 from http://www.netmba.com/econ/micro/demand/elasticity/price/
The Sydney Morning Herald.com. (January 11, 2011). Food Prices Set to Spike in Wake
of Floods. The Sydney Morning Herald.com. PP. 1. Retrieved March 22, 2012 from http://www.smh.com.au/business/food-prices-set-to-spike-in-wake-of-floods-20110111-19may.html
http://www.theaustralian.com.au/national-affairs/australia-opens-door-to-nz-apples-following-kiwi-fruit-trade-victory/story-fn59niix-1226116892830
