In a correctly competitive market, there is no government intervention in the market. The price is usually set up when the equilibrium price and volume is achieved (Jackson, J &Mclver. R 2007). Equilibrium means that individuals are eager to buy at this price and producers are prepared to supply. By discussing the graph Body 1, we can easily see the equilibrium reaches the intersection point between demand curve and offer curve. Pe means the purchase price equilibrium and Qe means volume equilibrium. In an equilibrium condition, problems like scarcity and surplus won't happen in the market because the quantity demand and quantity supply are in balance. Scarcity will usually happen when the purchase price is below the purchase price equilibrium, we can see that when price drops from Pe to P0, the number supply will decrease because suppliers are willing to supply at this price where they have got low revenue while amount demand will increase because consumers find bananas is actually cheap plus they should buy it. Demand surpasses supply. Surplus may happen when the price is above the purchase price equilibrium. From graph, when price increase from Pe to P1, the quantity demand drops because consumers think it is very expensive and the bananas doesn't worthy of that price while variety supply increase because the suppliers are willing to supply approximately they could as the high price of bananas would help them to generate more earnings. Demand exceeds source.
The natural devastation, cyclone has triggered the resources of bananas to decrease tremendously. The purchase price elasticity of demand in bananas market is said to be inelastic whenever we look into the determinants. First of all, Bananas are Australia's No. 1 reselling fruit, it means there's a huge demand for bananas in Australia. (ABGC n. d) Bananas industry appears to be one of the major fruit growing business in Australia and also an important contributor to the economies. Bananas are among Australia's top 10 supermarket lines. First determinant could be the availability of alternative goods as well as for bananas, there exists insufficient substitutes for it. Obviously the demand would be inelastic when there is absolutely no substitutes. Second determinant is proportion of income. Bananas price has shot up from around $3 per kg to $15 per kg (ABCG n. d). Consumption of bananas would be still a tiny small percentage of income although the purchase price has increased. Therefore, individuals are not very sensitive towards the purchase price changing. Third is Luxury versus necessity. Bananas can be viewed as as essential in Australia because people still take in bananas although the purchase price has increased. Based on the Australia Banana Growers' Council, they predicted that 28 million of bananas are used each week, this means a person ingest 60-70 bananas and is around 13kg averagely (ABCG n. d). Fourth determinant would be time. The time would be in a short run because consumers are difficult to change income and preference immediately right after the cyclone. People would still think that the purchase price is acceptable and they'll still buy it in short run. It might be an elastic source for bananas market because there remain 800 banana growers in Australia (mainly from Queensland and New South Wales) that are projected to produce about 23 million 13 kilogram cartons of bananas (ABCG n. d). When there are a whole lot of products, its price elasticity of source would be stretchy and long haul. However, the resource has reduced as the cyclone has brought on a critical harm on banana farms. The price has raised since there is a lack in bananas market. Banana consumers will have a tendency to compete and bet up the marketplace price for bananas. As the source curve shifted to still left, it shows that the price has gone up from P0 to P1 and amount demanded has decreased from Q0 to Q1. (refer to figure 2) It then steps to the new price equilibrium from e0 to e1 and it implies that a large change in cost has resulted a little proportionate change in quantity. Quantity demanded falls means many customers can't afford the new equilibrium price. Total expenditure on bananas is equal to total income gained by retailers. From your graph, the R1 shaded area means earnings gained, R2 shaded area means earnings loss. Because the demand is inelastic, the revenue gained could be more than revenue damage when the price increases. Therefore, the total revenue of sellers increased.
In economy, whenever the supplies is available limited and couldn't gratify all the demands in market, suppliers would have a tendency to raise the price of up to possible to increase their profit. It would be a benefit to suppliers but a drawback for the consumers. In such situation, government intervention is needed to set up a price ceiling in the market of bananas. Price ceiling means a maximum legal price level that suppliers can established for the goods they are selling Jackson, J &Mclver. R 2007). Price ceiling for this case would be a security for the consumers as they don't really have to cover unreasonable high price arranged by suppliers. However, adding a roof price in the market doesn't settle the issues. It may result in a bigger shortage. The lack would cause difficulty in rationing the limited supply of bananas. From graph Physique 3, we can see that quantity supply is slipping further from Qe to Qs and Variety demand has increased from Qe to Qd. Apparently, the quantity source contributed more to shortage compare to consumers. Besides that, dark market price will increase further. Preparing a ceiling price is really encouraging dark market. All these repercussions such as dark market and shortage will cause the marketplace efficiency to become inefficient. Supplier will not be happy to source because they may have low income reselling bananas at roof price. The government will obtain less sales tax from banana industry as well.
In final result, there are benefits and drawbacks if government intervenes the marketplace by applying price roof. However, the price ceiling would have only short-term results because the resource could recover in within 6months to twelve months period.
Reference Lists
Australian Banana Growers Council Inc. (ABCG) n. d, Advertising Set up, available through www. australianbananas. com. au/public/media/downloads/media_kit. pdf, seen at 2 Sept 2010.
Jackson, J &Mclver. R 2007, Microeconomics, 8th edn, McGraw-Hill, Australia.
