Bb106 Economic Principles And Market Assessment Answers

This individual assignment requires students to answer the following four questions based on the above article.

a.Assuming tomatoes are sold in a purely competitive market, discuss other major factors contributing to increase price of tomatoes in Australia. In your answer, include appropriately labelled demand and supply curves to explain the process of moving to the new equilibrium output and price.

b.Explain the concept of the demand elasticity. Using appropriately labelled demand and supply curves, discuss the price elasticity of demand for tomatoes.

c.Based on your answer in part b, illustrate hypothetically, what should be the effect of the rising price of tomatoes on the total revenue of the tomatoes wholesale market.

d.Considering the fact that many tomato farmers could abandon the industry, explain, the different strategies that government should adopt to sustain the long-term supply of tomatoes. Use graphs to support your answer. Discuss the advantages and disadvantages of the strategies you have mentioned.

Alteration in preference of consumers

One likely reason for increase in price of tomato could be the increase in demand for tomato which may be caused due to change in consumer preference. Two reasons which may be fuelling the increase in consumption are the availability of higher tomato variety and also the perceived health benefits associated with the consumption of tomato. There is evidence that in the last decade, the demand for the smaller tomatoes (sweet variety) has grown in Australia (FreshPlaza, nd). As a result, of this, the demand curve tends to shift rise causing an increase in the price of tomato in the short term which over a period of time may be catered to by increased supply. However, in the short term, this would lead to higher price as indicated in the graph below (Nicholson & Snyder, 2011).

It is apparent that owing to shift in the demand curve, the price has increased to P2 which is leading to higher profits for the producers.

Limited availability of arable land

Another reason for increase price is the inability of the supply to cope up with the increased demand of tomato in Australia as the availability of land for tomato is rather limited and concentrated in certain parts of Australia. The net impact of this is that the grasslands are being converted into agricultural land but the same has not been able to keep pace with the rising demand. Also, with climate change the productivity of tomato has been adversely impacted although soil less cultivation is now beginning to add to the production (Bryce, 2017). The graphical representation of the ideal scenario where increasing demand is matched by the proportionate increasing supply is represented below (Mankiw, 2014).

In case of tomatoes, the supply has not caught up with demand as should happen and hence there is an increase in the price.

The demand elasticity of a good tends to depend on a host of factors including income levels, availability of cheaper substitutes, contribution to the budget and nature of the good. The demand elasticity of tomato is likely to be inelastic considering that it is a part of the staple food in Australia. Additionally, considering the health benefit and flavour of tomato, there are not many cheaper alternatives that exist. However, it may so happen that in case price increases, people may shift to cheaper variants of tomato rather than shifting to other vegetables. This is especially true for the food and the restaurant industry. Also, considering that the contribution of tomato to the monthly budget would be quite small, hence the consumers would not be too affected by increases in price. Thus, considering the above parameters, it may be concluded that tomato demand is inelastic with a demand elasticity lower than 1.

Original price of tomato = $ 4 per kg

New price of tomato = $ 6 per kg

Hence percentage change in price of tomato = [(6-4)/4]*100 = 50%

Demand elasticity = % change in quantity demanded/% change in price

Substituting the available values, we get

-0.6*50% = % change in quantity demanded

Hence, change in quantity demanded of tomato = -30%

Let us assume that the original demand of tomatoes = 100 million kg

New demand of tomatoes at the increased price = 100*(1-0.30) = 70 million kg

Original Revenue from Tomato = Original Price * Original Quantity Demanded = 4*100 = $ 400 million

Revised Revenue from Tomato = Revised Price * Revised Quantity Demanded = 6*70 = $ 420 million

Based on the above computation, it is apparent that since the demand elasticity for tomato is inelastic, hence revenue would increase on account of higher prices.

It is apparent that this would lead to increased supply and lower prices in the long term.

It is apparent that this would lead to increased supply and lower prices in the long term.

References

Bryce, E. (2017, February 14), These farms use sun and seawater to grow crops in the arid Australian desert, Wired UK Website, Retrieved on August 23, 2017 from https://www.wired.co.uk/article/sundrop-farms-australian-desert

FreshPlaza (n.d.), AU: Australian tomato consumption soars, Fresh Plaza Website, Retrieved on August 23, 2017 from https://www.freshplaza.com/article/102721/AU-Australian-tomato-consumption-soars

Mankiw, G. (2014), Microeconomics (6^th ed.), London: Worth Publishers

Nicholson, W. & Snyder, C. (2011), Fundamentals of Microeconomics (11th ed.), New York: Cengage Learning