Question

With a number of new orchards coming into production, Australia is expecting a bumper crop, with volumes up 9% from last year’s, says Avocados Australia CEO John Tyas. Based on the industry’s latest quarterly forecasting, the nation is set to produce 95,000 metric tons (MT) for the April 2019 – March 2020 period. Australia’s avocado supply for January, February and March of 2019 increased by 20%, compared to the same three-month period last year.

Source : Australia expects bumper avocado crop, plans export growth

(a) Explain any two possible (2) factors/scenarios which could possibly result in an increase in demand (NOT quantity demanded) for avocados.

(b) Besides a bumper crop, explain any two possible (2) factors/scenarios which affect the supply of avocados.

(c) Describe how a market equilibrium “clears” the market of avocados.

(d) Describe how a government intervention such as price controls (price ceilings or price floors) may not always lead to a desirable market outcome.

Answer 1

a) Two factors which could increase demand for avocados are -

1. The research and news regarding the health benefit of avocado has made people more affine to avocados. Recent research about how avocados can help reduce chances of cancer has increased the positivity towards consuming avocados. This leads to increase in demand.
2. There has been economic growth in the economy for past few quarters. This has raised incomes of people. With rise in income, people demand more of the healthy avocados at the given price. This causes demand to increase.

b) Two factors which could increase supply for avocados are -

1. Favourable weather conditions has made it possible to grow more avocados which led to increase in supply.
2. Modern farming techniques along with newer technologies to farm with has increased the productivity of land, labor and capital. This allows producers to produce more at the given price. This increases supply.

c) A market equilibrium clears the market through price mechansim which leads to demand and supply being equal at a point. At this point the quantity demanded is fully supplied by the producers or in other words what is being supplied is being brought by the buyers. There is no shortage or surplus and price has become stable at a determined equilibrium point. In our context, there is bumper growth. Supply will be high, which will decrease price and increase quantity. As price decreases, demand increases and there is a moved along the demand curve and a equilibrium is reached and the market clears.

d) Government internvention may be required in the market when there is some sort of market failure occuring in the market. Government can put price ceilings (maximum chargable price) or price floors (minimum chargable price) for the sellers. This will not be problamatic if the interventions are not binding on the equilibrium. However if they they are binding they create surplus or shortage. Let government impose a price ceiling which is above equilibrium price. This iwll not be binding because market mechanism would bring the price back to equilibrium. However if ceiling is below equilibrium then the situation is binding. The price now cannot adjust up to the equilibrium due to the ceiling. At this point more is demanded while less is supplied. This creates a shortage. Again say if a price floor is imposed, it will not be binding if it is below the equilibrium price, however if floor is above equilibrium, price wont be able to adjust down to the equilibrium level. Hence at the price floor less will be demanded and more will be supplied. This will create a surplus. Hence a government intervention that is binding on the market leads to undesirable results of shortage and surplus.