Demand, Supply and Elasticities

TYS 2023 Q2

Bad weather and falls in consumer incomes can have different impacts on the prices of agricultural products such as vegetables, rice, and grain.
a) Explain the different impacts on the prices of vegetables due to bad weather and falls in consumer incomes. [10]

Introduction
The prices of vegetables, when left to the free market, is determined by the forces of supply and demand. Demand is defined as the willingness and ability for consumers to pay for a good at a given price, given a period of time, ceteris paribus. Supply on the other hand, represents the willingness and ability for the producer to produce a good at a given price, given a period of time, ceteris paribus.

R1: Bad weather leads to a fall in supply and sharp increase in prices due to PES<1

Bad weather has an adverse impact on crops and harvests, leading to a fall in supply of agricultural products and an increase in prices. Initially, the equilibrium prices and quantity of vegetables is at Q₀, P₀ where D₀ = S₀. When there is bad weather, the supply of vegetables falls from S₀ to S₁. Given that vegetables have a high degree of necessity given that it is a staple food, the demand for vegetables is likely to be inelastic (PED < 1), as illustrated by Dinelastic. This means that a fall in supply from S₀ to S₁ will lead to a sharp increase in prices of vegetables from P₀ to P₁. This is in comparison to the demand for vegetables of elastic (as illustrated by Delastic), in which prices will only see a slight increase from P₀ to P₂.

R2: Falling consumer income leads to a fall in demand and a sharp fall in prices due to PES<1

 With a fall in consumer income, there will be a fall in purchasing power leading to a fall in demand for normal goods. Initially, the equilibrium prices and quantity of vegetables is at Q₀, P₀ where D₀ = S₀. Vegetables are a normal good (YED > 0), more specifically a necessity (YED < 1). Hence a fall in income will lead to a fall in Demand from D₀ to D₁. Given the vegetables take a long time to grow (long length and complexity in production), supply for vegetables is likely to be inelastic (PES < 1), as illustrated by Sinelastic. This means that a fall in demand from D₀ to D₁ will lead to a sharp fall in prices of vegetables from P₀ to P₁. This is in comparison to the supply for vegetables of elastic (as illustrated by Selastic), in which prices will only see a slight decrease from P₀ to P₂.

Conclusion

In conclusion, bad weather leads to higher vegetable prices due to reduced supply, while falling consumer incomes result in lower prices due to decreased demand. Effective measures to stabilize food prices must address both supply disruptions and demand fluctuations to ensure affordability and availability for consumers.