According to the case study, there has been a massive increase in the flowering of the mango trees across the country. The major mango producing areas are Darwin, Burdekin, Mareeba, Katherine, and Bowen and Townsville. The mango producers predict that the harvest would be great if the weather remains favorable. They also predict that the timing of harvest would determine the price of the mangoes in this particular year. If the producers can manage the harvesting schedule just one after the other, then the market price would remain stable (Baumol & Blinder, 2015).
The demand and supply theories states that the quantity demanded and supplied of a good depend on the price and some other factors of that good. The law of demand says that if the price of a good increases, the its demand falls and vice versa, other things remaining the same. Thus, the price and demand of a commodity is inversely related. On the other hand, law of supply says that, if the price of a good rises, then its supply rises too, and vice versa, ceteris paribus. Hence, the price and supply are positively related (Moulin, 2014).
However, the case study refers to the weather and timing of harvesting as the determining factors for price of the mangoes. It is also predicted from the flowering boom, that supply would be massive. Hence, there will be a shift in the supply curve for mangoes. As the price is determined by the other factors, hence, there will not be a movement along the supply curve; rather the curve would change its position, if the demand remains constant (Rader, 2014).
Figure 1 depicts the market demand, supply and equilibrium for mangoes. The demand curve for the mangoes is D and the initial supply curve is S1. Due to good weather and proper harvesting time, the supply of the mangoes increases. The supply curve for the mangoes shifts to the right to S2 from S1. The equilibrium point also shifts down to E2 from E1. At E2, there will be excess supply of mangoes in the market, leading to a fall in the price from the initial market equilibrium. Thus, as the supply increases to Q2 from Q1, the price falls to P2.
According to the fellow student, the fall in price would lead to a rise in the demand for the mangoes, as per the law of demand. Hence, the magnitude of increase in demand determines the position of the price, that is, if the fall in price would be too much or slight. The changes in the price of mangoes depend on the price elasticity of demand for mangoes. The price falls due to increase in supply, but, if the demand for mangoes is price inelastic, then a fall in price would not affect the quantity demanded much. Again, if the mangoes are price elastic, then if the quantity demanded is greater then, the price would not fall much (Thimmapuram & Kim, 2013).
According to the local farmer Ian Groves, in the case study, the bountiful production of mangoes would not be good in terms of revenue for the farmers. This depends on the elasticity of demand for the product. It is seen that as supply increases in the market, the price falls. At the same time, with a fall in price, demand would increase in the market. This would prevent the price from falling too much. The resultant change in price depends on the price elasticity of demand for the mangoes. If the demand curve is less elastic, then the revenue would be less. On the other hand, an elastic demand curve would generate more revenues (Tomek & Kaiser, 2014). This is illustrated in figure 2.
Figure 2 depicts the price elasticity of mangoes and resultant effect on the price. If the demand curve is relatively inelastic, shown by the demand curve D, with the increase in quantity of mangoes, price falls to P2 from P1. However, if the demand curve is elastic, shown by D1, then a rise in quantity for mangoes would lead to the rise in demand, hence, equilibrium moves to E3 from E1. Price falls to P3, which is higher than P2 but less than P1. At P3, equilibrium quantity is Q3.
In terms of revenue, it is calculated by multiplying price with quantity. Hence, in the diagram, it can be seen that, when the demand curve is relatively inelastic, i.e. D, the initial revenue is shown by the rectangle OP1E1Q1. When the quantity increases to Q2 and price falls to P2, then the revenue is OP2E2Q2. The amount of revenue is greater than the earlier one. When the demand curve is relatively elastic, i.e. D1, then, at the new equilibrium E3, the revenue is shown by the rectangle OP3E3Q3. Thus, it can be seen that with an elastic demand, the revenue is greater when the supply rises, as the quantity increases to Q3 and the level of price fall is little. Hence, the bountiful production would lead to an increase in the revenue for the mango producers (Varian, 2014).
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Moulin, H. (2014). Cooperative microeconomics: a game-theoretic introduction. Princeton University Press.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Thimmapuram, P. R., & Kim, J. (2013). Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), 390-397.
Tomek, W. G., & Kaiser, H. M. (2014). Agricultural product prices. Cornell University Press.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.