Saturday, 26 March 2016

Cauliflower prices

It's nice when the things we talk about in ECON100 or ECON110 classes are illustrated by real-world examples. Last week, cauliflower prices hit $10 at some stores. The New Zealand Herald reports:
Kiwi classic cauliflower cheese is becoming an expensive luxury - with cauliflowers selling for around $10 each at several grocers.
St Heliers Bay Fruit Market owner Kamal Duggal said he was forced to put prices up, as cauliflowers were becoming hard to come by.
"There's a big shortage at the moment. It's cost me $8.50 plus GST each to buy them in the past couple of weeks..."
When there is a shortage of a good, we expect prices to rise. Why is there a shortage? The Herald explains:
The price was affected by a market shortage of cauliflower due to recent adverse weather conditions, the [Foodstuffs] spokeswoman said.
So, there has been a decrease in supply of cauliflower in the market. We can illustrate what is going on with a simple diagram, as below (ignoring the effect of GST, for simplicity). Supply of cauliflower has decreased from S0 to S1. At the previous equilibrium price of P0, there is now a shortage of cauliflower (the difference between the quantity of cauliflower demanded at that price, Q0, and the quantity of cauliflower supplied at that price, Q2). The price will start to rise, until it reaches the new equilibrium price of P1 (with Q1 cauliflower traded).

The transition in the equilibrium price from P0 to P1 can be explained through the combination of the actions of buyers and sellers. Some buyers, who are willing to pay more than the old market price, would miss out on the good because of the shortage at that price. To avoid missing out, some of them will find sellers and offer those sellers slightly higher prices, bidding the price up. Sellers might not even have to wait for buyers to find them and bid prices up - recognising the shortage, they can raise prices in anticipation of the bidding up of prices by buyers.

Finally, with the higher price, fewer cauliflowers are sold (Q1 rather than Q0 in the diagram above). And indeed this is what is observed:
"Not many people are buying them. I bought five or six on Monday and have only sold two or three."
"They've been very hard to sell. Restaurants still buy them because they need them, but regular customers haven't been."
So, even with cauliflowers at $10 per head, the quantity sold doesn't fall to zero (because at least some people are willing to pay the higher price), but fewer people do buy (those people whose willingness-to-pay for cauliflower is less than $10).

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