Bb106 Economic Principles And Market Assessment Answers

Questions:

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.

Answers:

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

Let us consider that the price elasticity of tomatoes is -0.6. Now let us try to increase the price of tomato in order to understand the impact on the revenue.

Original price of tomato = $ 4 per kg

-0.6*50% = % change in quantity demanded

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

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.

In wake of the increasing damage caused due to climate change, there is possibility that the farmers may migrate to other crops that are less risky and offer sustained rewards. The various strategies that the government could deploy in order to ensure long term supply of tomato are highlighted below.

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