MA503 Economics and macro economic Analysis of a Country

a. Identify and explain the key ideas that define economic way of thinking and the maximisation of scarce resources.
b. Analyse how prices are determined in a market.
c. Compare and contrastthe key characteristics of various market structures and market strategies adopted by firms in different market environments

Answers:

The aim of the essay is to analysis the article on ‘Tomato potato psyllid: Insect found outside Perth quarantine zone on three commercial properties’.  As stated by Prendergast (2017), outbreak of tomato potato psyllid is affecting production of crops such as tomato, potato, capsicum, chilli and other crops. This essay examines the impact of eruption of pesticide on the crop production of Australia. Immediate effect of this pest spread is likely to be on the supply of the crops and their price on the Australian market. The essay examines demand supply factors along with price elasticity of demand and externality analysis.

The crop market in Australia is competitive and agriculture holds 12% share of GDP of Australia. Price of crop in this is determined by the supply and demand for crop in the Australian market. Sudden outbreak of crop pest in Western Australia hampers the crop production and hence the supply in the market (Roberts & Schlenkera, 2013). As an effect crop, supply in the market reduces in the short run. The effect can be shown with the figure:

Figure 1: Impact of pest on supply

(Source: created by author)

Initially the equilibrium is achieved at the point E1, where demand curve D and supply curve S1 go across each other. At this point total demand for crop in the market equates with the marker supply. In the other words, demand price of the consumers are just equal with supplier price of the crops. As pest affects the crop production, it creates direct impact on the crop production and in turn on the supply. Supply decreases and the supply curve shifts to the left. As damage in crop has no immediate effect on the demand and there is no change in the demand-influencing factor such as income, or preferences, there would be no shift in the demand curve (Costinot, Donaldson & Smith, 2016). When supply is cut. At price P1, quantity demanded for the food crop is greater than supply in the market. Therefore, it is not possible for the farmers or the suppliers to meet the demand supply gap at P1. Hence, price hike of the pest-affected crop is inevitable. There is no information about the storage or warehousing of foods crop like potato, tomato and capsicum. Therefore, it can be assumed that excess demand exists in the market. In order to absorb the excess demand in the market at the short term, producers increase the price of the crop (Baumol & Blinder, 2015). Therefore, the price of pest-affected crops is likely to rise in Australian market. Decrease in supply creates upward pressure on the crop. New equilibrium is reached at the point E2, where the new supply curve S2 intersects with the demand curve.

Price hike in the Australian crop market depends on the price elasticity of demand. Effect of price hike is greater on consumers when demand curve is less elastic. On the other hand, suppliers bear the burden of price hike if demand curve is price elastic. Moreover, elasticity of demand depends on the availability of substitute goods in the market. Crops such as potato, tomato, capsicum are necessary crop and have no such substitutes (Hall & Lieberman, 2012).

Figure 2: Effect on revenue

(Source: created by author)

Effect of revenue is not much when demand is price inelastic. If crop demand in Australia is price inelastic, demand curve is steeper and shift in supply curve have little effect on quantity demanded. Increase in price definitely excludes some customers from market. However, remaining customers are willing to pay higher price to avail the crops. Preference of the customers is a significant factor. If a customer has strong preference, price hike would have no effect on that consumer (Tomek & Kaiser, 2014). Therefore, in order to meet domestic demand, government has to import that crop from abroad. In case of price inelastic demand, revenue decrease in revenue is small compared to elastic demand. When people have options, they can shift to substitute food in case of price hike. Hence, revenue of the farmer may fall significantly. In figure, 0P₁E₁Q₁ is the initial revenue and 0P₂E₂Q₂ is the revenue after price change.

Outbreak of tomato potato psyllid has negative externality on the Australian economy as it has negative impact on the horticulture industry of Australia. This pest can cause zebra chip diseases to reduce production by 20 to 50% (Prendergast, 2017). This virus can remain dormant in soil and is transmitted through contaminated machinery, equipment and infected seed stock. Eventually it attacks fruits such as banana, cucumber, chestnut. Pollination and horticulture industry is also likely to be affected. This disease also has health hazard possibility for human being. All these negative impact result in loss of revenue of government and decreasing revenue of agricultural sector, which may result in lower per capital income of the farmers. Therefore, prompt initiatives are required to undertake.  Plant Bio security CRC reported that once established, psyllid is much costly to eradicate (abc.net.au, 2017). Hence, some preventive measures can be undertaken. Firstly, the farmers can avoid the psyllid in the spuds by growing Maori potatoes. Farmers need to eliminate the solanacae family from the land and surrounding areas to prevent pests. Infected leaves can be removed and burnt (Irvine, 2014). Farmers can take help of consultants regarding this issue. However, all the preventive measures are too costly to implement. A farmer cannot put effort to remove pests. Government needs to take initiatives to provide funds to farmers for pest prevention. Regular monitoring and necessary helps are required to be provided by the Government.

The essay concludes that tomato potato psyllid is a pest that only affects the crops but also affects the horticulture sector of Australia. This pest mainly affects the production of tomato, potato, capsicum, chilli, tamarillo. As production is hampered, this creates direct effect on the supply of crops in the domestic market. This effect is naturally caused and hence has no immediate control on supply. This pest reduces production by 20% to 50%.  As demand remains unchanged, change in supply is the main cause of change in price. As output in the market reduces, this create upward pressure on the price. Therefore, crop price is likely to rise. However, hike in price depends on the price elasticity of demand. Revenue falls significantly if demand is price elastic or else, less impact is on the revenue of farmers. Tomato potato psyllid has negative externality in terms of decreasing production of horticulture industry. The diseases spread over the land and contaminates machine, equipments. Once the disease is established it hard to eradicate. Therefore, preventive measures can help to tackle the disease. However, as this process is costly, government assistance is required for the farmers to prevent the outbreak of the disease.

References

abc.net.au (2017). Biosecurity outbreaks in Australia: A short histor retrieved on 27 April, 2017 from https://www.abc.net.au/news/rural/2017-02-20/biosecurity-outbreaks-in-australia-a-short-history/8280634

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Costinot, A., Donaldson, D., & Smith, C. (2016). Evolving comparative advantage and the impact of climate change in agricultural markets: Evidence from 1.7 million fields around the world. Journal of Political Economy, 124(1), 205-248.

Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.

Irvine, K., (2014).  My Summer of the Tomato Potato Psyllid. Retrived on 27 April, 2017 from https://www.ediblebackyard.co.nz/my-summer-of-the-tomato-potato-psyllid/

Prendergast,J.,  (2017).Tomato potato psyllid: Insect found outside Perth quarantine zone on three commercial properties’ retrieved on 27 April, 2017 from https://www.abc.net.au/news/2017-03-06/psyllid-found-outside-metro-area/8327732

Roberts, M. J., & Schlenkera, W. (2013). Identifying supply and demand elasticities of agricultural commodities: Implications for the US ethanol mandate. The American Economic Review, 103(6), 2265-2295.

Tomek, W. G., & Kaiser, H. M. (2014). Agricultural product prices. Cornell University Press.