Question

Lemon shortage and high demand for fresh fruit sends prices skyrocketing

Summertime means seafood and cocktails with fresh lemon for many across Australia, but prices for the fruit have skyrocketed. A shortage of Australian-grown lemons has caused supplies to fall and prices to spike. The normal retail price is about $3.99 to $4.99 per kilo but as most lemons currently have to be imported, the fruit is selling for as much as $8.99 per kilo on supermarket shelves. Citrus Australia chairman Ben Cant said the market was known to tighten during summer but the weak Australian dollar was also contributing to soaring prices. "In the Christmas period we run predominately on imports," Mr Cant said. "A large degree of the fruit this year has been brought in from the United States and it's a higher procurement cost for the importers. "In the past, they brought in a higher degree of Spanish and Egyptian lemons, which has been cheaper, but they've had some quality issues, with mouldy fruit in the boxes. "So I think that from my discussions, the safe bet is to buy the US fruits, spend a bit more money and get a good product."

Extreme heat reduces Australia's production volumes Sunlands citrus grower Mark Doecke in South Australia's Riverland said the lemon shortage was simply a problem of supply and last year's extreme heat affecting the fruit. "Lemon sales have grown a little bit, there is a bit of extra demand, but supply is the problem," Mr Doecke said. "We are in a minor picking time, and last year in February-March, when the fruit should have set, what we would be picking now, they didn't set well." He said the extreme heat last February was one of the major causes for the fruit not to set, resulting in less fruit produced.

"Consequently, we have a very short supply of lemons at the moment and that's why the prices are high in the supermarket," Mr Doecke said. He said most lemons in South Australia were picked in July and August but they picked up to five times a year, including at minor picking times. Mr Cant said lemon consumption was increasing and traditionally, Christmas was a high-demand period. "Unfortunately this is just the time of the year, due to mother nature, where we can't produce enough lemons," he said. "Lemon trees yield most of their crop in winter, so high availability is through March to October." Prices expected to fall, more trees being planted Marketing and business development manager for SA Produce Market Nadia Boscaini said they were currently selling lemons from the Adelaide Hills but were expecting to see prices fall when ample supplies from Queensland came onto the market. Mr Cant said Queensland lemon growers would start picking in February and once the fruit came onto the market, prices were expected to drop immediately. And with lemon consumption increasing, so is production across Australia. Mr Doecke said across the southern growing region in the past three years farmers had seen about a 30 per cent increase in the area planted with lemon trees. "There are a lot of lemons that have gone in so as they come into production, supply will meet demand in the future," he said.

Question

1. Based on the determinants of price elasticity of demand, is demand for lemons price elastic or inelastic, for a bakery that makes lemon tarts? [Included well-drawn diagram]

2. Based on your discussion of elasticity, Illustrate and analyse the effect on total revenue of the farmers in the lemon market when more trees are being planted.（Included well-drawn diagram）

Answer 1

Summary of the case: Australia is facing an issue where demand for lemons has gone up in summer season and its supply has gone down. Supply has gone down due to low productivity in summer. Prices are going up because demand is increasing (due to summer ) and imports are getting expensive due to weaker Australian currency. It is expected in future that increased production and productivity will meet demand in future.

1. Based on the determinants of price elasticity of demand, is demand for lemons price elastic or inelastic, for a bakery that makes lemon tarts? [Included well-drawn diagram]

Price elasticity is a responsiveness to a change in price. It is given by a formula: Ped = % change in quantity/ Change in price.

Elasticity more than 1 is elastic demand and less than 1 is inelastic demand, value of 1 shows elastic demand.

In this case a higher % change in price is not showing more % change in quantity and hence value is less than 1, which shows inelastic demand for lemons.

The factors making lemon inelastic in this case are : 1. Substitutes- There are no easy substitutes to lemon

2. Tastes and preferences : People are liking more lemon based drinks.3. Number of users: More demand

4. Time period: The time available for changing demand is less.

As shown in the fig. below. price increase of P 1 to P2 is reducing consumption very small from Q1 to Q2 which shows inelastic demand.Refer fig. a

2. Based on your discussion of elasticity, Illustrate and analyse the effect on total revenue of the farmers in the lemon market when more trees are being planted.（Included well-drawn diagram）

Total revenue (Price *Quantity) for lemon producers will go up as P1*Q1 is smaller than P2 *Q2 in this case, as price is increasing but demand is not decreasing much, on the contrary it is increasing. Refer Fig. b.

Now, when more trees are planted, more demand will keep prices higher and revenue will increase.