ECON 1008 Principles of Economics Assignment - University of South Australia, Australia

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Article - Lemon shortage and high demand for fresh fruit sends prices skyrocketing By Jessica Schremmer.

Introduction - With the given case study, we would be evaluating the shortage of lemon supply that would also cause a high increase in demand and it would lead to the importing of lemons from another country USA (Cavaliere, 2015). through this case, we would be briefly evaluating steps to also understand how there can be a growing repercussion effect with respect to the supply and demand curve in the given market of the lemons. It would cause fluctuating prices along with the issues of the quantity.

Q1. Based on the determinants of price elasticity of demand, is demand for lemons price elastic or inelastic, for a bakery that makes lemon tarts?

Answer -

With the shortage supply of the lemons, it is important to relate and also understand the factors due to the weather problems-:

Due to the soaring summer, it would cause a high demand for the lemon.

Subsequently, the cuisine's that includes the seafood also require a high demand for the lemons.

Due to the low production and supply of the lemons, it would cause a shortage of supply.

Shown from the given graph

(Source: Kauffman, 2018)

With the high soaring prices, it would also cause a shortage of the supply due to the lemon issues, which can show how the equilibrium price along with the quantity supplied can be determined as below-:

Due to the shortages caused by the supply, this would even lead o the fluctuation in the demand and the supply that would shift it leftwards and as a result of the shortage of supply, would lead to high demand and would equate it to the high equilibrium price which would move from the P0 to P1. As a result, it would cause the lemons to be imported and would be supplied leading to the increase in the supply of lemons and eventually would make the Australian Lemon market to move to E1 to E0 which are right now at a Q3 point with the PO price.

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Therefore the demand of the lemon is elastic, as the people change their preferences with the price change of the lemon.

For the bakery which makes lemon tarts, the demand would stay inelastic in the short run while in the long run it would be elastic, due to the high substitutes available such as the exported lemons from USA, substitutes to use the lemon essence and even more plants are planted to add on the lemon supply. This would help the bakery to find suitable substitute to the lemon.

In the short run it would be 1.5 from 1.0 and the quantity 2 would reduce to quanity 1 with the shortage of the lemon and the supply curve would decrease from curve 1 to curve 2, creating shortage and high price. With the exported lemons, substitute such as lemon essence and also planting of more plants it would again move back to the supply curve 2, leading to normal pricing.

Q2. Based on your discussion of elasticity, Illustrate and analyse the effect on total revenue of the farmers in the lemon market when more trees are being planted.

Answer -

It would cause an increase in the price of lemon which is considered to be the substitute good as the lemon is caused by the soaring price due to the substitute good. With the soaring high demand caused by providing alternatives to the lemons, it would also cause a soar in the price with the high demand.

Such as the substrates available to substitute the Lemons that can be used alongside the seafood ingredient would be Tomato or causing the other type of citrus fruit. Due to this price of the lemon would eventually, increase and cause the substitutes of lemons to also soar in the price rise.

As shown from the given below graph, there is a high demand for the substitute good leading to the increase in the price with the given lemon. It would cause the DD to change to the D1D1 and resulting high quantity demanded of the substitute good that would move from one point of Q to Q1.

The impact of the total income would be low, as spending on the lemon constitutes a less amount and the total income would not be as such affected as lemon is also one of the necessary items and has close substitutes available. But for the farmers, as the government took action of planting more trees, the total revenue would increase in the short run due to the shortage but in the long run it would return to same level.

Conclusion -

Hence in the perfect competition, every time there is a shortage of any one product, it would cause the demand and the supply curves to equate it. It would also push the pricing of the substitutes to surge high along with the surging demand and supply (Tham, 2015).

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