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Australia In The Global Environment Pearson

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Question:

Discuss About The Australia In The Global Environment Pearson?

 

Answer

Introducation

In perfectly competitive market, market forces usually determines price of product and services. In this market structure, the firms face huge competition from other competitors in terms of pricing strategy. The major factors that contributes to rise in tomato price in Australia are – climatic conditions, laws and regulations adopted by the Australian government, consumers and the competitors existing in the market (Bade and Parkin 2016). This is illustrated with the help of diagrams given below:

Figure 1: Price changes

Source: (As created by author)

The above figure reflects that equilibrium occurs at the point E where the demand for and supply of tomatoes becomes equivalent. Corresponding to this equilibrium point E, the equilibrium price and quantity of tomatoes is determined at P and Q respectively (Bade and Parkin 2016). Debbie storm hugely affected the total production of tomatoes in this nation.  As a result, the supply of tomatoes became less in the Australian market owing to this devastating cyclone. This shifts the supply curve to the left that is denoted by S1. This creates shortage of tomato in the market as the demand for it remains constant which reflects ceteris paribus.  However, excess demand arises in the market. For controlling this condition, the sellers increase the price for attaining higher profitability (Bade and Parkin 2016).  This leads to decline in quantity demanded for tomatoes due to increase in price. Thus, increase in price shifts the equilibrium point to E1 where the new supply curve and demand curve intersects each other.  At this price P1, the quantity supplied declines to Q1 from the original equilibrium quantity (Q). Hence, this reflects that Debbie storm adversely affected the purely competitive market of tomatoes in Australia.

 


b) As the suppliers reduce the production of tomatoes, it leads to shortage in supply of tomatoes in the agricultural market of Australia. This is in turn affects the food industry in this nation. In addition, the canned food products made from tomatoes that include tomato ketchup, canned tomatoes etc are adversely affected from this rise in price of tomatoes (Bade and Parkin 2016). As the processed products of tomatoes are considered as complementary goods, supply of these products declines owing to decrease in production of tomatoes in this competitive market. This is illustrated in the diagram given below:

Figure 2: Impact of rise in price of tomatoes in other markets

Source: (As created by author)

It has been noted that, in case of complementary goods, if the demand for a particular product decreases due to macro environmental factors , the price of another product increases. It has been stated by Bade and Parkin (2016), demand for one good inversely affects the price of another good in case of complementary goods.

 

Some of the key factors that helps in determining the price elasticity of demand for a particular commodity are :

Availability of substitute commodity- The demand for the product apt to be elastic if close substitute for the product is available in the market. If the product is not available, then the people intend to purchase that commodity even if price rises. Thus, the demand is considered as elastic. As tomatoes have close substitute of vegetables, its demand tends to become elastic.

Total money spent by the consumers on that particular commodity- The higher the amount of consumer’s income spent on that particular commodity, higher will be price elasticity of demand. As Australian households spent huge proportion of income in purchasing tomatoes, the commodity tends to become elastic.

Complementarities between the commodities- complementary goods also influence price elasticity of demand. In this case, the demand becomes inelastic, as households are less sensitive to the variation in commodity prices. However, as the processed products of tomatoes are complementary, the demand is said to be inelastic.

Time horizon- The price elasticity of demand tends to become elastic if the total time involved in producing the commodity is long.

Preferences of consumers- The price elasticity of demand also depends on the preferences and wants of consumers. As tomatoes are highly preferred by the Australians, the demand for this product becomes highly elastic.

Price elasticity of demand refers to the variation in quantity demanded with respect to fluctuation in commodity price. It has been opined by Bade and Parkin (2016), a commodity is termed as price elastic, if the variation in quantity demanded becomes higher than its price. On the contrary, in case of inelastic demand, change in demand for quantity is low in comparison with the price adjustment.

The demand elasticity of tomato apt to be elastic as it has close substitute in the market. Tomato is not considered as necessity vegetable and thus response in demand for total quantities of tomato tends to be higher with respect to smaller proportion in its price. This means that if the change in price of tomato is by 1% in this market, then the impact on quantity demanded for this product apt to be higher (Bade and Parkin 2016). The Australians who have lower per income or preference for tomatoes, it might lead to decrease in quantity demanded owing to rise in price for this commodity in purely commodity market of Australians. However, the producers or the farmers are adversely influenced by cyclone. In other words, elastic demand curve of tomato is flatter than the original demand curve.

Figure 3: change in total revenue

Source: (As created by author)

b) The main aim of the sellers is to attain higher revenue than total production cost for gaining higher profitability. The total revenue of the firm is estimated by multiplying product with its total quantity supplied (Bade and Parkin 2016). The total revenue of the firm selling tomatoes in Australian market is shown by the area P0E0Q0O.  As the price elasticity of demand for tomato is elastic, total revenue in the market declines , which is highlighted in the above figure. At market equilibrium, the revenue obtained is PEQO. As the total production of tomatoes reduces, the sellers tries to increase the price of the commodity as no change in demand for its quantity has been observed. Therefore, it has been noted that, hike in price of tomato is greater than reduction in sales volume of tomatoes, the total revenue decreases in wholesale market of Australia. This in turn discourages the sellers in further selling tomatoes in the Australian market (Bade and Parkin 2016).

If huge number of farmers stops producing tomatoes and leave the market, it adversely affects the wholesale market of Australia. This leads to drastic fall in supply of tomato and hence this causes immediate increases in product price.  Increase in price of tomato and this causes decrease in total revenue obtained by the farmers (Bade and Parkin 2016). The farmers manufactures large amount of tomato in order to keep huge sale in winter season and invest huge amount in harvesting it. In essence, farmers incur huge loss as the cost of investment by the farmers is high and revenue obtained is lower than this cost (Bade and Parkin 2016). The main motive of the farmers is to invest a portion of obtained profit in the production of tomatoes for the upcoming year. However, if the farmers incur loss from the sale of tomatoes, then they face huge difficulty in producing it in the next period owing to absence of proper fund. As a result, the famers leave the market as the operations of the production of tomatoes in Australia in long term becomes no more profitable to them.

In addition, the government of Australia plays a huge role for bringing long term sustainability in Australian market and hence subsidy is provided to the farmers for covering the production cost. It helps the farmers in covering huge loss that is incurred to them and supports them financially in manufacturing tomatoes for the next year. The diagram below signifies the positive impact of subsidy to the farmers in the Australian market.

Figure 4: Impact of subsidy on the farmers

Source: (As created by author)

Provision of subsidy provided  to the farmers for each unit of production declines burden on farmers and this increases supply of tomatoes. This shifts the supply curve to the right from S to S1 and this leads to fall in price of tomatoes. The Australian government bears the production cost partially by imposing subsidy to the farmers. Hence, the supply curve shifts with respect to each unit of subsidy. Furthermore, imposition of subsidy facilitates the farmers in gaining profits in much easier way, which they uses in manufacturing tomatoes by implementing new technology.  As stated by Bade and Parkin (2016), the government adopts another strategy in undertaking warehousing investment.  Therefore, proper warehousing helps in improving storing process of tomatoes for increasing inventory, which in turn raises inventory for smoothening supply of tomatoes in the Australian market when cyclone hits the nation.

Advantages of subsidy

Subsidy provides benefit to the farmers and the advantages relating to this subsidy are:

  • Stabilizing infrastructure of agriculture- As subsidy provides financial support to the farmers that in turn aids in purchasing equipment of farming and implementing new technology in manufacturing more tomatoes (Bade and Parkin 2016).
  • Managing supply of tomatoes- subsidy enhances harvest of tomatoes and this increases food supply. Thus, the exports of tomatoes improve and this enhances national income of the country.
  • Stability in income of the farmers- Implementation of subsidies assures steady income and helps in recovering losses incurred from sale of tomatoes.
  • Compensating farmers- the subsidies provided by the government helps in compensating the farmers if they suffer from huge loss on particular commodity than expected. In addition, this encourages the framers in expanding their business and also aids in improving efficiency as well as competiveness in the agricultural market.
 

Disadvantages of subsidy

Some of the disadvantages of agricultural subsidy provided by the government include:

  • Necessity of government intervention- Subsidy directly influences price as well as supplies of tomatoes that help the farmers in attaining higher profitability in the purely competitive market. Moreover, it raises burden on spending of government that causes budget deficit that in turn occurs future tax burden on customers.
  • Lack of diversity of tomatoes- Subsidies creates diversity in the production of tomatoes and this benefits both the consumers and producers.
  • Discriminating between the farmers- this subsidies discriminate among the farmers that specialize on tomatoes that does not require subsidy. Therefore, this helps the farmers in taking agriculture decisions regarding funding on eligible tomatoes crops for manufacturing good harvest
  • Drives small farmers out of the business- it has been estimated by economist that the subsidies inflate the farmland value by 30% and this prevents the small farmers in farming as beginning the business becomes expensive as it includes purchasing machines in order to increase productivity (Bade and Parkin 2016). On the other hand, large farms uses these subsidies in implementing new technologies and hence producers huge quantities of commodities at low price.
  • Barriers in import and damaging environment- The farmers those who are manufacturing in better soil region and in good climate uses less fertilizers as well as pesticides. On the other hand, the farmers who are producing commodities in poor locations choose to use more fertilizers on their crops. This excessive usage of  chemicals causes environmental pollution and damage.  In addition, vast water that the government runs begins to sell it to the farmers at low price.

Advantages and disadvantages of agricultural warehousing

Warehousing includes advantages as well as disadvantages to the agricultural market in Australia. The benefits of warehousing include

  • Preservation of tomatoes- it aids the producers for storing tomatoes during offseason when the requirement of sale becomes less (Bade and Parkin 2016). Thus it provides stocks protection and prevents it from the wastage.
  • Smooth flow of tomatoes- as tomatoes are consumed in every season, proper warehousing ensures the farmers in regular supply of seasonal products during the year.
  • Convenient location- convenient location of warehousing decreases the transportation cost of tomatoes in the market.
  • Creating job opportunities for the farmers- warehousing provides job opportunities for skilled as well as unskilled farmers in this nation. However, it acts a vital source of income for the people for improving their standard of living (Bade and Parkin 2016).
  • Aids in sale of tomatoes- warehousing improves the procedure of selling tomatoes in the market. The steps for distribution of tomatoes include, inspection, branding and packaging that warehouses carries on during the process.
  • Increases availability in finance- Warehousing increases the availability of finance by raising loans from banks and financial institution for maintaining security of the warehouse (Bade and Parkin 2016).
  • Decreases risk of acquiring huge loss- warehousing benefits the farmers in reducing their risk of incurring huge loss from the sale of tomatoes.

In this situation, as cyclone affects Australian agricultural market, improvement in warehousing protects the product quality for long period , which in turn increases the period of consumption. Therefore, smooth flow in tomatoes production reduces the risk of facing loss as it stabilizes both the price level and its quality for long period of time.

The disadvantages that warehousing involves include-

  • Less flexibility in investment
  • Requirement of capital for producing tomatoes
  • Rise in initial cost of tomatoes
  • Availability of space as well as services.
 

Conclusion

From the above report, it can be concluded that the producers mainly focuses on elasticity of demand before setting price of tomatoes. In case of elastic demand, the effect of quantity dominates the effect of price and thus decline in price rises total revenue. Moreover, the prices of goods are also set by them depending on customers, rivalries and market structure. These helps the producers in attaining higher profit that is applied in this case of tomatoes production. Imposition of government subsidy also plays a vital role in improving the farmers standard of living  by supporting them financially. Additionally, the warehouse operations also adds up in integrated operations of supply chain and hence positively contributes in development of the economy. However, appropriate warehousing operations enhance customer’s satisfaction and add the value of profit to the farmers. Moreover, inappropriate agricultural warehousing creates difficulties for the farmers in selling the commodity which in turn affects their profitability level.

 

References

Robyn, Bade and Michael, Parkin., 2016. Microeconomics: Australia in the global environment. Pearson

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