Banana Economics Assignment

Topics: Supply and demand, Microeconomics, Economic surplus Pages: 5 (1635 words) Published: July 3, 2006
The article ¡§Pain at checkout as WA bananas go east¡¨ by Regina Titelius and Jennifer Eliot states that in the wake of cyclone Larry¡¦s unforgiving wrath on Queensland, banana prices have soared throughout the nation over the last month and are expected to rise even more following WA¡¦s wholesaler Mercer Mooney declared that Carnarvon bananas would be shipped east. Following cyclone Larry¡¦s destruction on Queensland, it has wiped out about 80 per cent of Australia¡¦s bananas destroying fruit worth $300 million, thus leaving Australia to possibly face a 3 year shortage as Queensland¡¦s banana industry slowly recovers from the damages. However, to really see the full impact of the cyclone on banana prices and the effect on society¡¦s welfare, the economic aspects of demand and supply, elasticity, consumer and producer surplus, total surplus and the government¡¦s subsidy for banana farmers will be analysed in this report.

The economic aspects of supply and demand the most basic fundamental concepts in economics used by economists to analyse competitive markets. The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. The law of demand claims that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises. The quantity supplied of any good or service is the amount that sellers are willing and able to see. The law of supply states that, ceteris paribus, the quantity supplied of a good rises when the price of the good rises (Gans, King and Mankiw, 2005).

Queensland¡¦s ¡¥region [that] produces over 90 per cent of Australia¡¦s banana crop, has been wiped out for this year¡¦ (Koch, Wahlquist, 2006), and as a result of the decrease in the number of banana suppliers, prices immediately began to soar dramatically throughout the nation. Australian Banana Growers Council chief executive Tony Heidrich had already suggested that banana prices were ¡¥certainly going to go up and go up dramatically¡¦ (Koch, Wahlquist, 2006). As a result, within two days of the cyclone, banana prices at Coles and Woolworths rose to $4.98/kg from $3.98/kg on Monday and are expected to continue to rise. With cyclone Larry destroying the many banana farms in Queensland, the supply curve shifted upwards from S0 to S1. In other words, as a result in the reduction of the determinant of banana sellers in the market due to the cyclone, the amount of bananas that firms are able to produce and sell at any given price decreases. The supply curve shifts to the left because, at every price, the total amount that firms are willing and able to sell is reduced (Gans et al, 2005, p.74). From Figure 1 it can be seen that as the quantity of bananas demanded decreases from Q0 to Q1, the price of bananas rises from P0 to P1 (Gans et al, 2005, figure 4.11). Hence it can be seen that the overall effect of the cyclone causes the number of banana suppliers to decrease which ultimately causes the equilibrium price of bananas to rise and equilibrium quantity to fall.

Figure 1 Shift of supply curve as a result from cyclone (Source: Gans, King and Mankiw, 2005 figure 4.11 pg 75)

However, the amount by which the price of bananas increases and quantity decreases depends on the economic concept of elasticity. Elasticity is a measure of how the responsiveness of quantity demanded or quantity supplied changes in response to another variable (Gans et al, 2005, p.84). If the supply of bananas in the banana industry was relatively inelastic with an elasticity of less than 1, then quantity supplied would move proportionally less than the price and hence supply is said to be inelastic (Gans et al, 2005, p.100). So a decrease in supply would cause the price of bananas to rise more than the quantity of bananas to fall. Figure 2 illustrates the shift of the supply curve when supply is relatively inelastic with P0 „_ P1 increasing more than the decrease from Q0 „_ Q1.

Figure 2 Shift of inelastic supply...
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