Supply and Demand

During the course of this report I will be exploring the major issues of an article taken from The Australian on February 3 2011 entitled 'Australian banana price crisis looms again as Cyclone Yasi wipes out crop', written by Ben Packham. I will be using economic principals to discuss analyze these issues. In particular I will be using supply and demand models to show impacts of Cyclone Yasi on the price of bananas in Australia. I will then look at the short and long term impacts on the market if bananas were allowed to be imported into Australia, and finally I will analyze the impact on the market if the government were to impose a retail price ceiling.

According to Jackson, McIver and Bajada (2009, p.43) the laws of demand and supply state that ceteris paribus, "as price falls the corresponding quantity demanded rises, alternatively, as price increases the corresponding quantity demanded falls", this means that a negative and inverse relationship exists between price and quantity demanded. Accordingly, Jackson, McIver and Bajada (2009, p.43) say that the law of supply is when "As price rises the corresponding quantity supplied rises and as price falls the quantity supplied also falls. " ceteris paribus.

Due to the decrease of the banana crops as a result of Cyclone Yasi, the likely impact on the price of bananas is that it will increase dramatically due to the original decrease in the quantity of bananas able to be supplied. This is shown in the graph below. As there is a decrease in the supply of the bananas the supply cure moves inwards. This will create a new equilibrium price, were the decrease in supply has caused the price to rise from Pe to Pe'. This change has come due to the price determinants, forcing the supply to decrease, also the cost of production has now increased as new crops must be planted and extra work must be hired in order to do so. This increase in price will cause a decrease in quantity demanded from Qe to Qe' . There will also be a change in demand as the price of other fruits or substitute goods, not affected by the cyclone, will remain constant and will be a cheaper and just as healthy alternative.