Rise in Price of Avocado in Australia - Case Study Example

1. Executive Summary There are various factors that are taken into concept when determining the market price of a product. These factors can be either internal or external and can occur independently or interdependently. Internal factors are those that directly influences the price of a commodity during its production process whereas the external ones are the other factors in the industry. The ability of the producers to set the price of the commodity they are producing depends on the form of control that they possess towards these factors. The paper focuses on understanding the microeconomic and macroeconomic concepts relating to price determination by using a case study about rise in price of Avocado in Australia during January 2016. The impact of the issue on the various stakeholders that include farmers, distributors, retailers and even consumers will be discussed. Analysis of the economic concepts helps in drawing conclusion and giving recommendations for alternative solutions to the issue. 2. Introduction In Australia, there have been a rise in demand for fruits as people become health conscious. One such fruit whose demand has been affected by the changing trend is Avocado. The production of Avocado is faced by several challenges some that are internal whereas others that are external. The availability of the fruit in the market is greatly influenced by seasonal variations and other factors in the market. These factors varies depending with the region where the production is being made due to environmental diversity. The trend, however, allows for the constant supply of the fruits in the Australian Avocado market throughout the year. It also helps in stabilizing the price by avoiding the price fluctuations that can be brought about by variation in the market supply. The various varieties of avocado also contribute to the diversity and continuous supply of avocado to the Australia avocado market. The production peaks from June to November providing enough supply to the market during the Christmas period. The main regions that contribute to the largest supply of avocado in Australia are Queensland and New South Wales contributing to an estimated 60 and 30 percent supply of the market respectively (Han, 2016). Other regions that produce the crop include Victoria, South Australia and Western Australia contributing to the remaining 10 percent of the market share. 3. Description of the main issue One instance that affected the Avocado industry was in January 2016 when the price rose by huge fluctuation in Australia. A tray of avocado weighing at 5.5 kilogram was selling at an average of 45 dollars before Christmas but the rise contributed to the same tray costing at around 80 dollars (Han, 2016). At some outlets, the same tray was costing 120 dollars. That means the price of a single avocado rose to 5 dollars. As people try to get insight into the cause of the rise, there have been speculation that the farmers manipulated the market supply so as to sell the products at a much higher price thus exorbitant profit. Although the prices of avocado are hugely determined by market, Antony Allen who is the former chief executive of Avocados in Australia belief that the fluctuation was engineered by the farmers to generate profit (Han, 2016). The argument was that the prices of the fruit were lowered before Christmas to contribute to an increased ability to purchase the product by the consumer. This was in response to a belief that the demand for the product would be at a minimum once the festive period was over. By them lowering the sale price of the product, they had empowered the retailers to sell the product at a price that is affordable by the consumers. That ability to purchase then result in increased sales before Christmas thus shortage in the market supply in the short run since the product is seasonal. The high demand for the product accompanied by shortage in the supply then resulted in the inflation in the price of the product. The result has also contributed to the rationing of the amount a customer can purchase by some outlets as they aim at making them available to the customers even if they are at a much higher price. The chief executive of Avocado Australia, John Tyas has however defended the farmers stating that the inflating prices was caused by extreme weather condition affecting the supply of Avocados (Han, 2016). The high demand accompanied with the shortage in supply has then contributed to the rise in price of avocados. 4. Impacts on Stakeholders. An understanding of the contributing factors can be done by an assessment of the impact on the various stakeholders who are affected by the shortage in supply and the rise in demand. The parties who are affected by the inflation include farmers, distributors, retailers, and consumers. 4.1. Farmers The farmers are the primary producers of avocado and therefore any change in price of the farm produce greatly affect them. The Avocado Australia, an important body in the avocado industry cited bad weather conditions as the main cause of the shortage. These conditions made it difficult for the farmers to harvest their produce due of the probability that the conditions would contribute to them getting spoilt. 4.2. Distributors The distributors were also affected by the shortage since they lacked produce to deliver. The condition of the produce also made it challenging to purchase the products due to the high probability they would spoil before reaching the targeted consumers. Transports problems were also highly cited as a contributing factor to the shortage, prompting the producers as well as the retailer to source for alternative solution. 4.3. Retailers The retailers are responsible for making the product available to the consumers. The shortage of avocado supply led the retailers to make panic purchases that they bought a very high price. The high price made the product unaffordable to many only limiting it to the few with the ability and willingness to purchase them. Those retailers who had large amount of the product in their stock benefited from the rise as they would generate heavy profit. Several outlets responded by rationing the amount that one buyer could purchase. 4.4. Consumers The shortage in the supply of the product alongside the increased demand for it led to an increase in its price. They therefore had to pay a higher price for the same amount of product. The raised price of avocado made it unaffordable to many consumer, limiting it to very few consumers. The consumer had to switch to alternative to fresh avocado such as processed and frozen products. 5. Economic concepts relevant to the case The analysis of the economic concepts relevant to the case can as well assist in understanding the root cause of the matter. Such factors include supply and demand, scarcity, price elasticity of demand, and opportunity cost. 5.1. Supply and demand In a free competitive market, the price of a commodity is determined by the demand of the product and the supply (Mandal, 2007). The economic model however takes into account other price determinant elements such as external externalities and price control that heavily influences the price. The model explains that the higher the supply of a commodity in the market, the price of the commodity reduces as the suppliers’ aims at selling the product to the flooded market. The low price of the commodity then increase the purchasing power of the consumers contributing to reduced supply of the product in the market. The system result in the establishment of an equilibrium, which is a price at which the amount demanded by the consumer is equal to that supplied by the consumers (Mandal, 2007). The model explains the market price that the consumers and the suppliers regard to be fair for a 5.5 kilogram tray of avocado. 5.2. Scarcity The shortage of resources key in the production of avocado accompanied by an increase in demand for the fruit resulted in scarcity, a fundamental economic issue (Mandal, 2007). The nature of people subject them to having unlimited wants whereas that of environment contribute to it having limited resources. Queensland and New South Wales region supply about 90 percent of the market share in Australian avocado market. 5.3. Price elasticity of demand The economic concept focuses on determining the response of quantity demanded to change in price (Mandal, 2007). The concept is important to the various stakeholders as they can use it to predict the market behavior once the price increases. 5.4. Opportunity cost The economic concept is used in determining the gains or losses incurred when one engages in an action or choses to forego it (Mandal, 2007). The farmers used the concept in analyzing the gains and losses that would be incurred once they opt to harvest during the rainy season. 6. Recommendations 6.1. Government intervention The government can apply the various intervention measures to ensure it controls the price and the supply of avocado. Such measures include the construction of infrastructure that enable easy distribution of the produce of the markets even in bad weather conditions (Mandal, 2007). 6.2. Raising awareness, research and development Various parties can engage in educating the farmers on other alternatives such as the adoption of new breeds that can withstand the bad weather (Mandal, 2007). Further research is also needed in the storage of fresh produce to ensure consumer satisfaction. 7. Conclusion The various stakeholders need to unite in developing a permanent solution to the matter since the inflation is expected to occur all over again when the contributing factors interplays again. References Han, E. (2016). The truth behind the avocado shortage: growers made 'innocent mistake'. [online] The Sydney Morning Herald. Available at: http://www.smh.com.au/business/retail/the-truth-behind-the-avocado-shortage-growers-made-innocent-mistake-20160125-gmdbvw.html [Accessed 11 Sep. 2016]. Mandal, R. K. (2007). Microeconomic theory. New Delhi, Atlantic. Read More