The price of a commodity is derived through interaction between its demand and supply. Equilibrium price is the amount at which consumers and sellers agree to exchange goods and services. This price is at times referred to as the market-clearing price. At this instance, the demand and supply of a commodity are said to be at a balance, or equilibrium. Whenever the quantity supplied is lesser than the quantity demanded; the consumers get anxious to buy the product. However, the producers, speculating rise in prices, refuses to supply; a scenario that causes commodity shortages (Dwivedi 2002, 15). So as to ration this shortage, consumers are forced to pay higher prices for the commodity. This is because the producers demand a high price in order to supply the product. This results into a rise in price to a new balance/equilibrium which is agreeable to both parties. In most cases, if the price of a commodity rises beyond equilibrium, the situation leads to a surplus in supply, and this forces the suppliers to lower prices in an attempt to clear the excess supplies. On their part, consumers are induced to lower prices so as to purchase more. The antagonism continues until a new equilibrium is reached. In Australia, shortage in supply resulted from the destruction caused by the floods.
Excessive flooding in Australia caused a decline in the agricultural output and massive destruction of the infrastructure, which consequently caused supply shortages. Insufficient supply, logistical problems, and shortage of staff impacted negatively on the retail sector. This resulted into, among other thing, panic buying. Panic buying caused a drastic rise in prices of food items, especially those of perishables such as fruits and vegetables. The panic buying heightened the shortage that had already been caused loss of un-harvested crops (Martina, 2011). This was so because several large scale buyers who had cooling facilities opted to withhold commodities in attempts to cushion themselves from further price hikes. The figure below demonstrates the short-term impact on the quantities and prices of perishables in Australia shortly following the floods.
Decreasing supply of fruits and vegetables caused a shift of the supply curve leftwards from S to S2. This shifting led to an increase in the equilibrium price as a result of decrease in the equilibrium quantity. This was observable because whenever the supply decreases as demand remains constant, the prices of commodities raises prices due to insufficient quantity (Ray 2010, 53). As the problem appeared to persist, consumers sought for alternative commodities due to unabated rise in prices as the quality slumped. To alleviate the problem, the government started considering either lifting the import ban or imposing a price ceiling. Imposing a price ceiling couldn’t have been effective without addressing logistical problems. Consequently, lifting of the import ban on commodities that were scientifically proven to meet the local standard was the preferable option. Among these commodities were pumpkins which had been in short supply.
With all other factors held constant, an increase in supply was hoped to lead to a lower equilibrium price. This is because the market prices of the commodities are determined, among other factors, by their demand as well as supply (William & Michael 2010, 388). Imported pumpkins, being of the same standards as the domestically grown ones, drew the same level of attention from the consumers. The figure below demonstrates the short-term impact of the increase in pumpkins supply.
Imports led to an increase in supply which is depicted on the figure by a shift from S to S2. Increase in supply induced decrease in demand, a scenario which persisted until a new equilibrium price, P2, agreeable to both consumers and suppliers, was reached. At this price, the consumers were leveraged as they could buy more for a smaller amount.
Nevertheless, after the agony of commodity shortage eased, consumers’ confidence of the imports dropped. The pessimism resulted in their reluctance to make substantial purchases, a situation which created an artificial surplus in the market. The sale of pumpkin soup in the restaurant industry kept declining. In the end, prices fell to unsustainable levels causing most importers to quit. Their quitting reintroduced shortages which revitalized the market determination forces (Martina, 2011). This time, these forces resolved the situation based on a combination of factors other than pure demand and supply.
The main determinants of price elasticity of demand are the ability and willingness of consumers to postpone their immediate consumption needs of a commodity in search of its substitutes. In a scenario where the government imposes, say, a retail price ceiling of $40 per a box of pineapples, there are several factors that may affect its demand. These factors include the necessity of pineapples, brand royalty, percentage of income, the availability of substitutes, and the duration of the cost (Joe, 2011). Whenever an increase is on essential goods, consumers tend to continue purchasing the same quantities despite the prices. Besides the necessity, the attachment that consumers feel towards the commodity affects the stability of purchases. This means that, despite being an unessential commodity, the consumers’ loyalty to pineapples may make its demand become inelastic. Income percentages mean the proportion in price of the commodity in relation to consumer income (Saul, 2011). Consumers’ awareness of price changes is prevalent when commodities are expensive and luxurious. Before the flood, the average price of a box of pineapple in Australia was about $28. Since the price had risen to over $56 as a result of flooding, a price ceiling of $40 dollars may influence consumers to make extra purchases, taking advantage of the decrease in price. However, if the imports of other fruits lead to a sharp decline in prices, the consumers opt to give up pineapple in favor of the cheaper fruits. This would especially happen if a significant difference in price persists for an extended duration of time.