Saturday, 22 September 2018

Safety concerns and strawberry markets

The economic model of demand and supply is remarkably robust in terms of explaining changes in prices, and as I show in my ECONS101 class, it even works (qualitatively) when the market is not perfectly competitive. Given that my ECONS101 class has a test coming up in a week and a half, I thought it might be timely to look at an example. Let's take the recent safety scares in Australia, as reported by the New Zealand Herald:
Fruit growers across Australia are reeling from 20 reports of needles found in punnets of berries, with isolated cases of banana and apple sabotage...
Mass harvests of fruit have been dumped as prices plunge, consumer demand evaporates and products are ripped from shelves.
A police operation involving 100 officers across multiple states is now under way to hunt down those responsible...
Up to 120 growers in Queensland alone — where the scare originated — have been hit by a slump in demand and a wholesale price collapse of more than 50 per cent.
Consider the market for strawberries, as shown in the diagram below. Before the sabotage, the market was operating in equilibrium with price P0, and Q0 strawberries were being traded. Following reports of needles in strawberries, consumers have product safety concerns (who wants to buy strawberries when there's a chance of a needle strike?), so demand decreases from D0 to D1. The equilibrium price falls from P0 to P1 (a "price collapse of more than 50 per cent"), and the quantity of strawberries traded falls from Q0 to Q1.

So far, so bad. But, if you're strawberry growers, what do you do with all those strawberries that aren't being demanded by consumers? You could dump them (and some have), so maybe you find someone else willing to take them. Consider the market for strawberry jam, as shown in the second diagram below. The market was initially operating in equilibrium with price PA, and QA units of strawberry jam were being traded. Then, sabotage hits the strawberry market. The price falls. Strawberries are now much cheaper to buy (not just for consumers, but for strawberry jam producers as well). The supply curve for strawberry jam shifts down and to the right (an increase in supply), from SA to SB. The equilibrium price of strawberry jam falls from PA to PB, and the quantity of strawberry jam traded increases from QA to QB.

That last implication is testable. Check the supermarket shelves in coming months, and expect to see cheaper strawberry jam.

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