Price equilibrium for tomato using demand and supply

By Bizning Vakil, 26th Jun 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/_1oqakml/

The price of tomatoes is not same over the time. The explanation is not only the relationship between demand for tomatoes and tomato price. There are other factors that affect demand and supply, which, in the end, affect the market price of tomatoes. I am going to describe these factors and explain in what ways they affect the price of tomatoes. I will also find the price elasticity of demand and supply for tomatoes.

Introduction

Food expenditure is always a part of our daily spending that cannot be stopped. The markets where we buy food items are always busy and interesting to study. In this essay, I have chosen tomatoes to do the economic experiment. I will try to explain why the price of tomatoes is not same over the time. The explanation is not only the relationship between demand for tomatoes and tomato price. There are other factors that affect demand and supply, which, in the end, affect the market price tomatoes. I am going to describe these factors and explain in what ways they affect the price of tomatoes. I will also find the price elasticity of demand and supply for tomatoes.

Demand and Quantity Demanded

Demand is the overall demand for tomatoes. If there is a change occurring in demand, it is caused by one or more of the non-price determinants of demand. In graph, the demand curve moves. Depending on whether the change is positive or negative, the demand curve moves right or left (in the graph below a)1 and a)2, respectively.)

Quantity demanded is the quantity of tomatoes at a given price being purchased willingly by the consumers. If there is a change in quantity demanded, it is caused by a change in price. In graph, the demand curve doesn’t move left or right; the change will be along the demand curve itself (in the graph below b) shows this.)

Law of demand

At higher prices, quantity demanded will reduce than at lower prices, other things being equal. Alternatively, at lower prices, quantity demanded will increase, other things being equal. The law of demand happens in all markets because of two main reasons:

Substitution effect: tendency of people to substitute in favor of cheaper commodities. For example, if the tomato price increases, people simply switch to purchasing its substitutes whose prices haven’t changed. Or even if the price of tomato doesn’t change, people tend to purchase more tomatoes’ substitutes if the price of substitutes decreases.

Real-income effect: change in purchasing power that occurs when the price of a good changes. For example, previously one family bought five kilos of tomato for 2,500UZS per week. After a decrease in price, this family can buy ten kilos of tomato for the same 2,500UZS. This family feels richer even though the amount of their money didn’t change. This is called purchasing power.

Determinants of Demand

The major non-price determinants of demand are:

1) Income: When the income of people rises, they can purchase more goods and services. For example, even if the price of tickets of airplane doesn’t change, with more income people make more visits via airplane. But tomato is different case. Its price is not big. So, it doesn’t have to be a rising income to buy more tomatoes. But still there is effect, because with income raised, people can buy many products made from tomatoes such as tomato ketchup, sauce, etc. So, higher income means higher demand and lower income lower demand.

2) Tastes and preferences: Tastes and preferences change along with time. For example, some years ago it was the taste of many young people of Uzbekistan to wear sunhat in white. Demand for those hats was very high. But tastes and preferences changed. Now these youngsters wear sun hats with different colors. It is same with tomatoes, too. For example, according to R. Albert (2007), when non-organic tomato and its products introduced, people liked them and demand for fresh tomato dropped. But now people are demanding more organic fruits and vegetables. So demand for fresh tomatoes is rising again.

3) Price of related goods: People don’t buy just tomatoes or don’t eat just tomatoes. Other commodities go with tomatoes. Certain food or dish that is best with tomato or tomato sauce or ketchup. So, if the price of those related goods goes down, people buy them more and with them buy more tomatoes even though the price of tomato hasn’t changed.

4) Changes in expectations of future relative prices: Actually, this one usually includes the price of tomato, too but no matter if people expect the tomato price to rise or drop, they don’t buy more because tomato can become sour easily. So the effect here is not big.

5) Population and market size: population keeps increasing but market size of tomato markets does not increase at equal speed. More population means high demand for tomatoes. If it was car or a ticket for airplane, it wouldn’t be like this because not everyone can afford it. But, tomato is cheap and needed and desired by every human so more people high demand.

Supply and Quantity Supplied

Supply is the overall supply for tomatoes. If there is a change occurring in supply, it is caused by one or more of the non-price determinants of supply. In graph, the supply curve moves. Depending on whether the change is positive or negative, the supply curve moves right or left (in the graph on the next page a)1 and a)2, respectively.)

Quantity supplied is the quantity of tomatoes at a given price being produced willingly by the farmers/producers. If there is a change in quantity supplied, it is caused by a change in price. In graph, the supply curve doesn’t move left or right; the change will be along the supply curve itself (in graph on the next page b) shows this.

Law of Supply

Law of supply is similar to law of demand. At higher prices, a larger quantity will be supplied than at lower prices, all other things being equal. Alternatively, at lower prices, a smaller quantity will be supplied, other things being equal. There are some reasons why the law of supply happens:

Higher prices increase incentives for increasing production: Although the process of tomato production is not fully dependable on the wants of producers (time for the tomato plants to produce tomatoes and time for tomatoes to turn ready by becoming red cannot be fully controlled by the farmers.), still, if the price of tomatoes is high, farmers increase their supply at the nearest future time possible with a hope to make higher profit.

Lower prices decrease incentives for increasing production: This is the reserve of the above, simply vice versa. If the price of, for example, fresh tomatoes is low, farmers don’t pick up the tomato from its plants until the price increases.

The law of increasing costs: This one is related to the above two reasons. If the cost is high, example, the farmer spent a lot of money to bring water (assuming water is problem), the farmer tries to charge high price but if the market does not permit high price, then the farmer supplies a small amount. And the reserve happens if the cost is low.

Determinants of Supply

The major non-price determinants of supply are:

1) Input costs: Input costs are very strong factors, which affect the supply. There must be profit or otherwise, there is no purpose in doing a business. To be profit there, the price must be higher than the cost. Tomato production requires land, workers, machines (if it is a large farm of land), tools, seeds, chemical nutrition and water for tomato plants, and knowledge. If hiring workers is a lot of cost, input cost is high. Or if seeds or chemical nutrition is a lot of cost, input costs are high. Whenever the input cost is high, it means either the price will be high or supply will be low or both. Actually, this is the supply’s determinant, so it affects supply first. And followedly, low supply makes the price high.

2) Technology: Technology has revolutionized the production of many goods and services in the last century. Using technology wisely, farmers can make the land ready in very small time and at small cost. Or using technology, farmers can bring water if water is problem or maintain full control of water throughout the growing season. All of these make it possible for the farmers to supply more.

3) Taxes and subsidies: For producers, for any businessman, taxes mean higher costs and subsidies mean lower costs. Taxes are everywhere and it can be avoided. So it should be looked at a normal part of costs. But taxes differ depending on where the farmers are located. As for subsidies, usually farmers are granted government money so they can producer more to satisfy community or to produce healthier fruits and vegetables.

4) Expectations of future relative prices: Expectation works for every: for consumers, for producers, even for governments. But with different levels. Tomato producers try to watch and forecast the prices. The simple one is the price of tomatoes. If the price of tomatoes is expected to rise, farmers withhold their products until the price goes up.

5) Number of firms in the industry: never one firm can satisfy all the demand. Even if it is government. So there are other firms, companies, or farmers, all working in their respective industries to satisfy their share of the demand. Tomato producers are countless from large farmers’ unions to small individual farmers. Together, they make up all the supply. And more of them, the higher the supply.
Unpredictable events: Unpredictable events are crucial for farmers. What if the weather comes bad this year? What if there is some strange illness in the vegetable plants? What if there is water shortage due to little rain and little or no snow? All of them can cause the supply of tomatoes or all the farmer products to be affected negatively.

Price Elasticity

The price elasticity of demand is a measure of the price responsiveness to the quantity demanded and is equal to the percentage change in quantity demanded divided by the percentage change in price. The price elasticity of supply is a measure of the price responsiveness to the quantity supplied and is equal to the percentage change in quantity supplied divided by the percentage change in price.

* * * * * * * * * * * * *

Price elasticity of demand for 2006 and 2007 is:
= / = 0.68

Price elasticity of supply for 2006 and 2007 is:
= / = 0.84

Conclusion

In this paper, I made study on tomato, its price, and the factors that affect this price. Namely, the non-price determinants of demand and non-price determinants of supply. Also, I made calculations on the price elasticity of demand and price elasticity of supply for the case of tomatoes. It is turned out that the price elasticity of demand is 0.68 and price elasticity of supply is 0.84. They both are smaller than 1, which means they are inelastic.

Bibliography

Albert R, November 2007, U.S. Tomato Statistics, USDA: Economics, Statistics and Market Information System, available from: <http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1210>

Begg D., Fischer S., Dornbusch R. (2000), Economics

New World Encyclopedia. Tomato. New World Encyclopedia. Available from: <http://www.newworldencyclopedia.org/entry/Tomato>

Sloman J. (2003) , Economics

Sloman J. (2007), Essentials of Economics

Meet the author

Bizning Vakil
An economist by definition, a teacher by practice, a journalist by nature, I find it hard to find any one permanent place to settle down...