Question

A storm in North Coast of New South Wales destroyed thousands of hectares of pineapple crops. Pineapple farmers whose crops were destroyed by the storm were much worse off, but those whose crops were not destroyed benefited from the floods. Assume that the demand curve for pineapples is inelastic. Have pineapple farmers as a group been hurt or helped by the floods? Explain using supply and demand diagrams. Word count 100.

Answer 1

The first important point to note is that as a general rule -

1. Price and revenue move in opposite directions when demand is elastic

2. Price and revenue move in the same direction when demand in inelastic

The chart below gives the supply and demand followed by an explanation.

The initial supply and demand curve for pineapples is given by "S" and 'D" respectively.

When there is a storm that destroys the crops, the supply of pineapples declines and the supply curve shifts to the left from S to S1. This translates into an increase in price of pineapples from P to P1.

However, pineapples have inelastic demand. In other words, demand is not very sensitive to change in price. This is clear from the chart above with price increasing significantly from P to P1. However, quantity demanded declines relatively marginally from Q to Q1.

The result is that the overall revenue for the Pineapple farmers increases as decline in supply is more than offset by surge in prices without meaningful change in quantity demanded. As a whole, the pineapple farmers therefore benefit from the storm.