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a) Market force determines the price of goods and services in a purely competitive market. Firms face competitive demand and supply curve (finance.nine.com.au 2017).
As shown in figure 1, initial price and quantity is $9 and Q1. Initial equilibrium is at point E1. Due to the effect of Debbie storm, production of tomatoes in Australia is greatly affected. Supply of tomato in the market is likely to be less due to devastating storm. Supply curve shifts to the leftward direction to S2. Shortage of tomato is created in the market, as there is no change in demand for storm in the market when Ceteris Paribas condition holds. Therefore, at the price $9, excess demand is created in the market. In order to control the circumstances, price commences to ascend in the competitive market unless the new supply curve meets the new demand curve (finance.nine.com.au 2017). Quantity demanded starts to decrease with the increase in price. New equilibrium is restored at the point E2, where the new supply curve S2 and demand curve cuts each other. New price of tomato in the market is P2 and new quantity supplied in the market at that price would be Q2. New price of tomato is higher than the previous one and quantity supplied is less than initial equilibrium.
b) Shortage in tomato supply in the Australian agricultural market may affect the food markets. There is close substitute for tomato in the form of vegetable. However, food industry such as processed food products, which are prepared from tomato, would be affected. The prices of the products such as tomato ketchup, frozen tomato, canned tomato products are likely to rise (Baumol and Blinder 2015). Processed products are complementary products of tomatoes. Supply of processed products decreases due to fall in tomato production. Diagram is similar to figure 1.
2. a. Price elasticity of demand is the shift in the quantity demanded of a good proportionate to the adjustment in price of that good (Nicholson and Snyder 2014). As stated by Chibwana, Fisher and Shively (2012), the determinants of price elasticity of demand are price of the own products, needs and preferences of the consumers, availability of other complementary or substitutes products in the market. A good is said to be price elastic, when extent of variation in quantity demanded is larger than that in price. On the other hand, for the inelastic demand, reaction of quantity demanded is a smaller amount compared to the adjustment of price.
Price elasticity of demand for tomato is likely to be elastic. Among all vegetables, tomato is not a necessary vegetable and hence, response of quantity demanded of tomato is likely to be greater in the market for a small change in price. If price of tomato changes 1% in the Australian market, effect on quantity demanded of tomato is likely to be greater (Nicholson and Snyder 2014). Consumers, who have low per capital income or low preference for tomato, may reduce quantity demanded when there is sudden price hike for tomato in the market. Hence, farmers are largely affected in natural calamities. As seen in figure 3, change in quantity demanded is greater compared to the change in price.
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