Economics Report: Analyzing Tomato Price Elasticity and Strategies

This economics report examines the factors influencing tomato prices in the Australian market, including the impact of natural disasters on supply and the resulting price increases. It explores the concept of demand elasticity, illustrating how changes in price affect demand and total revenue. The report analyzes the effects of a price rise on total revenue, demonstrating that, in the given scenario, the revenue decreases due to elastic demand. Furthermore, it outlines different strategies for sustaining the tomato industry in the long run, such as government subsidies, listening to farmers' grievances, and providing insurance facilities. The report uses diagrams to explain the shift in supply curves and the impact of various strategies on the market equilibrium, concluding with a summary of key findings and referencing relevant sources.

Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK ..............................................................................................................................................1
A. Factors affecting the prices in competitive market............................................................1
B. Demand elasticity concept.................................................................................................2
C. Effect of price rise on total revenue...................................................................................3
D. Different strategies to sustain in long run..........................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Economics is the study which can be used in all business as with the help of this needs
and wants can be satisfied in most appropriate manner (Schumacher, 2011). Also, resources
which are available will be utilised in judicious manner so that problem of scarcity can be dealt
with, in a proper way. In this report, the various aspects in relation to them will be discussed.
TASK
A. Factors affecting the prices in competitive market.
In competitive market, there are various factors which will be affecting prices of tomatoes in
Australia , some of them are discussed below:
 Reduction in the productive capacity: The produce of tomatoes has been destroyed as a
result of a natural disaster and the capacity with which it will be produced by farmers will
lead to a decline of supply to consumers. So, in order to sustain in market and deal with
insufficient supply prices will be increased in Australia.
 Increase in the procurement prices: It can be determined that as the production has
destroyed due to the storm, tomatoes will have to be procured from the other locations in
order to meet demand of the market. The price at which it will be obtained will be higher
in comparison to production. Therefore, to cover the purchase price tomatoes will be
supplied to customers at higher price and this is the reason why prices have increased.
 Price floor: This is price which is set by the government and it is the lowest price below
which it cannot be decline further. This shall be decided at such level which will be
higher than equilibrium level. So, to set this equilibrium position will have to be
determined in new situation.
 Increase in demand: This is another factor by which price will be increasing as
customers are demanding more thereby giving rise to price.
 Decrease in overall supply: The supply of tomatoes in market has reduced due to storm
as crop has been destroyed and due to this price will be increasing so that insufficiency
can be dealt with in appropriate manner.
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A change can be seen in demand and supply curve due to all this and there will be a left shift in it
in order to reach the new equilibrium price and quantity. It can be understood in better way by
the diagram provided below.
Change in curves to acquire equilibrium position
Illustration 1: Shift in supply curve and equilibrium
(Source: Shift in supply curve and Equilibrium position, 2017)
From above figure it can be identified that supply curve has shifted to left side and new
supply 1 has been achieved. Due to this equilibrium position has also changes. As earlier it was
at A with Qe as quantity and Pe as price of tomatoes. But after storm the price increased to P1
and quantity reduced to Q1. This gave rise to new equilibrium which is at B.
In addition these there are certain other factors also by which supply of any product will
be affected and they are as follows:
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 Technology:If the company will be using advanced technology then it is possible that
production is improved and by that supply will also be enhanced. In the given case also in
order to achieve the old supply, advanced technology will have to be used.
 Policies of government: There are various policies which are issued and will be affecting
supply as if more tax will be levied then its impact can be seen on supply which is
decreased.
 Natural calamities: They are very important in present case as by the adverse climatic
conditions, supply is also affected in negative manner. In given case by storm the crop is
destroyed and overall supply has been reduced.
B. Demand elasticity concept.
Elasticity of demand is the concept in which demand of product will be fluctuating with
the change in prices. It response of the demand with respect to consequent change in the price
(Robison, 2015). When a huge change in demand can be observed due to small change in price
then it will be said to be highly elastic otherwise it will be considered to be less elastic or
inelastic demand.
In the below presented diagram the concept of price elasticity of demand has been
explained:
Price elasticity of demand
Illustration 2: price elasticity of demand
(Source: Price elasticity of demand, 2017)
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It can be seen that If the price of tomato increses by 10% and demand declines by 20%
hence demand is elastic and if the change in demand is less or negligible in response to change in
price then it will be inelastic.
C. Effect of price rise on total revenue.
In the given case, demand will be elastic as with the small change in price also demand
will be affected to a great level. In this case as this will be elastic and the supply will also be
fluctuating because the crops have been destroyed so the revenue will be declining. It means as
the demand will be reducing to great extent so even though price is increasing revenue will be
affected (Mason, 2011). There will be less quantity that will be available and due to this the total
sales will be declined thereby affecting revenue which will be slashed extremely. An example of
this has been elaborated below:
Price per kilo Quantity Total revenue
Current position $7 100 million 700 million
Changed position $9.1 60 million 546 million
It can be seen that the price has been increased by 30 % and due to that demand has
reduced by 40 percent and as such total revenue has declined from 700 to 546 million. So, it can
be said that overall revenue will be affected adversely.
D. Different strategies to sustain in long run.
In the tomato industry, due to the loss which farmers are facing, they will not be willing to
consider further production of it and in order to maintain the supply government will be
following various strategies which are explained below:
 Providing subsidies and loan facilities: In this the government will be providing
subsidies to farmers by which they will be motivated to produce tomatoes and so that
supply could be maintained. The main advantage of this will be that more farmers will be
now be willing to produce as they will be getting financial support but the demerit of it
will be that there will be many producers which will misuse the policy and use funds for
other purposes.
 Listening to grievances of farmers: Under this a team could be established which will
be hearing problems of farmers and will be taking corrective actions in order to solve
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their grievances. The merit of it will be that, issues will be resolved speedily but at the
same time it will not be possible to listen to issues of all the farmers .
 Insurance facility: Since the farmers are not having any insurance in current case so this
can be introduced by the government so that security can be ensured. Advantage of it will
be that, farmers can be secured against any losses so they will be ready to take the risk
and will be maintaining production but major drawback is that loss will have to be borne
by government and also farmers will have to pay premium which all the small farmers
cannot afford.
The sustainability will be ensured by these policies and this can be understood by the following
graph:
Before strategy implementationAfter strategy implementation
0
50
100
150
200
250
100
200
SUPPLY
Linear (SUPPLY)
Illustration 3: change in supply due to strategies
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(Source: Change in Supply due to strategies, 2017)
It can be seen that with the implementation of strategies supply can be increased and so
strategies shall be introduced by the government to achieve the regular supply of tomatoes.
CONCLUSION
From the above-mentioned report, it can be concluded that there are various aspects
which will have to be considered in order to maintain supply and demand and they have been
explained above with the help of suitable graph. Also, the effect of storm on the revenue and the
policies to be taken by government in this respect have been provided in report.
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REFERENCES
. Books and Journals
Layton, A., Robinson, T., & Tucker, I. (2015). Economics for today (5th edition. ed.). South
Melbourne, Vic: Cengage Learning.
Online
Khan Academy. (2017). Supply, demand, and market equilibrium | Microeconomics |Khan
Academy. [online] Available at: https://www.khanacademy.org/economics-finance-
domain/microeconomics/supply-demand-equilibrium [Accessed 22 Aug. 2017].
dummies. (2017). How to Determine the Price Elasticity of Demand - dummies. [online]
Available at: http://www.dummies.com/education/economics/how-to-determine-the-
price-elasticity-of-demand/ [Accessed 13 Aug. 2017].
Investopedia. (2017). Law of Supply and Demand: Basic Economics. [online] Available at:
http://www.investopedia.com/university/economics/economics3.asp [Accessed 23 Aug.
2017].
ThoughtCo. (2017). How to Calculate Economic Equilibrium. [online] Available at:
https://www.thoughtco.com/calculating-economic-equilibrium-1147698 [Accessed 24
Aug. 2017].
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