Saturday, 20 August 2016

When avocado demand outstrips supply

'Demand outstripping supply' is one of those emotive and overly used phrases in the media. Sometimes it makes sense, but often not. Take for example this article from last week's New Zealand Herald, on the market for avocados, and in particular this bit:
A smaller crop size and high demand last season saw avocado prices reach a record high of up to $5 each, sparking a thriving blackmarket [sic] for the fruit.
A number of thefts from orchards across New Zealand were also reported as demand outstripped supply, with several being hit multiple times.
I have a couple of points to make on this. First, if demand is 'outstripping' supply, then to me that implies excess demand (a shortage) - that is, there aren't enough avocados to satisfy everyone who wants to buy them. In that case then prices should rise (which they did - as noted above to a record high of $5 each). However, as the price rises the quantity of avocados demanded will reduce (fewer consumers are willing and able to buy avocados at higher prices). If given long enough to adjust the price of avocados will reach a new equilibrium, where quantity demanded is equal to quantity supplied. That is, there is no longer any 'demand outstripping supply' if the price has fully adjusted.

You might suggest that perhaps the price has not fully adjusted. But in that case, then what are the retailers doing? They're just giving away profits. They could have sold those avocados for an even higher price. Their shareholders/owners should be on the warpath. We should expect that 'demand outstripping supply' will always be a very short-lived phenomenon. Particularly if there was a black market (where low priced fruit purchased from a retailer are re-sold at a price much closer to, if not at, the equilibrium price).

Second, the last sentence also shows the role of incentives. This relates back to an post of mine from last year (on rational onion thefts; just substitute 'onion' for 'avocado' in this explanation):
...when the price of onions increases, we might expect to see more onion thefts. Why? The benefits of onion theft have increased, while the costs (in terms of the risk of punishment) probably haven't much changed. We can describe two mechanisms for why this would increase onion thefts. First, career vegetable burglars (or maybe just the generally criminally-inclined) recognise that there are larger profits to be had by stealing onions for resale. So, they steal more onions (or maybe they start stealing onions). Second, ordinary people now face higher costs of purchasing onions. So, perhaps stealing onions becomes a lower cost alternative for them, so they steal rather than purchase.
Note that the first explanation has little to do with 'demand outstripping supply', and is purely a result of higher avocado prices. 'Demand outstripping supply' would only be a direct cause for avocado thefts if it was avocado consumers committing the thefts, which seems unlikely.


  1. Hi Michael. I really enjoy your posts for the somewhat random look at life.

    My immediate thought with this post was that avocados are perishable. That is, if the price was to rise too high, then the consumers still willing to buy would be too few to find the avocados before they perished. Hence, the price always remained low enough to sell all avocados before they perished beyond purchasable quality (Pp if you like) Therefore, there is a much more long term shortage of avocados at Pp, instead of the market clearing at Pe, or the equilibrium price, which would be higher.

    Producers are maximising their profits and yet still not satisfying market demand. Is there a name for this type of market? It is obviously similar to a price ceiling market, but without the regulation in place.

    On a side note, I went shopping for bananas yesterday at a reputable supermarket and the banana shelf was empty. I am a very precise banana shopper, not wanting to waste even one of the fast-perishing bananas in the bunch, taking into account a range of factors. I have always marvelled at how consistently cheap bananas are despite where they come from and their perishable quality. Perhaps, the Pp (perishable price) is at work in the banana market also to maximise profits for the banana retailer.

    Mark Orchard
    Economics Teacher
    Tauranga Boys' College

  2. Interesting thoughts Mark. I wrote a long response, but then it got lost when I hit the 'publish' button. I'll see if I can remember all the points.

    I'm not necessarily convinced on consumers being unable to find the avocados. We could factor the search costs into our model (e.g. as lower demand), but it wouldn't stop the market from clearing (although it would clear at a lower price and quantity).

    Perishability is clearly important, and we should expect to see retailers concerned about this to offer lower prices to clear stock. However, I would expect to see this as high initial prices, with lower price for older stock that has not already sold. This is a form of temporal price discrimination. Consumers who prefer the freshest avocados are willing to pay more for them, while 'standard' consumers are willing to pay less (but would be willing to buy the slightly older produce at the lower price).

    I'd argue this is what we tend to see. As a related example, think about those new-ish discount stores that sell short-dated products at low prices.