University of South Australia - Principle of Economic Applied Writing

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 5 (1698 words) Published: May 25, 2013
UNIVERSITY OF SOUTH AUSTRALIAPrinciple of economic – assignment 2

Prepared by Donald Mak

The price of fruit and vegetables keep rising recently. According to Todd (2011), popular salad and fresh juice have removed from the menus due to the rise of fruit and vegetable price after the Queensland flood. The research showed that price of pumpkin has tripled from $1.5 to $6 and price of pineapple have increased from $28 a box to $56 a box. (Todd 2011) Regarding to this issue, the Australian government can either lift the import ban or impose a price ceiling to keep the fruit and vegetable prices in a socially acceptable level.

An increase of the price and decrease of the quantity demanded of food and vegetable were caused by the flood in Australia. Due to the flood in Queensland, many food and vegetables were destroyed. It is no doubt that the supply of food and vegetables will decrease.

From diagram (1), in short-term, we will find that supply curve has shifted leftward from S1 to S2 as there is a decrease in supply. With the decrease of supply, equilibrium price will goes up from Pe to P2 and the equilibrium quantity will decline from Qe to Q2. At this stage, a shortage will appear in Q3Qe. Shortage usually occurs when the quantity demanded exceeds the quantity supplied at the current price. There will be competition amongst buyers and they will eventually bids up the price and results in a new equilibrium. When there is a shortage in the market, black market may exist and rationing problem might occur.

When there is a technological breakthrough which can ensure the imported pumpkins are as good as domestic qualities and are allowed to be imported into Australia, it will definitely increase the supply and improve the shortage problem in short term.

From diagram (2ai), with the improvement of the technology as well as the lifting of import ban, the supply has increased and the supply curve has shift to the right. A new supply curve S1 has been formed. With the new supply curve, it is obvious that equilibrium point will change from e to e’. The equilibrium price will decline from Pe to P2 and the equilibrium quantity will expand from Q1 to Q3. Furthermore, the problem of shortage in pumpkin market will be improved. As there was an increase in supply, the new shortage will be Q3Q2 as shown in the diagram (2ai). It was a big improvement when comparing with the original one which is Q1Q2. So, with the improvement of the technology, it is effectively reduce the part of the original shortage which is P1Q1Q3.

Regarding to the improvement of the technology, it will actually also affect the domestic pumpkin market. Import pumpkins are considered as domestic pumpkin’s substitute goods. When the new technology breakthrough ensures the import pumpkin can have a good quality, consumer’s demand for import pumpkin might increase. The increase in demand for import pumpkin will definitely affect the demand of its substitute which is domestic pumpkin.

Refer to diagram (2aii), consumer’s demand for domestic pumpkin will decrease when import pumpkin can have the same quality as domestic pumpkin. The demand curve will shift leftward to D1. Equilibrium price will fall from P1 to P2 and the equilibrium quantity will decline from Q1 to Q2. Finally, the domestic pumpkin farmer may suffer loss in total revenue which is P1Q1-P2Q2 as the equilibrium point has been moved from e to e’.

In the other way, when consumers are uncertain regarding the quality of imported pumpkins, it will definitely affect consumer’s demand for pumpkin soup. Pumpkin is the most important ingredient as well as raw materials in making the pumpkin soup. When consumer is not quite confident with import pumpkin, they may also won’t confident to those pumpkin soups which were made by import pumpkin. So, the demand for pumpkin soup may decrease.

As shown in diagram (2b), the demand for pumpkin soup was decrease and the demand curve has shift...
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