Tomatoes are through the roof

Samantha Townsend, The Daily Telegraph, May 24 2012

Tomatoes set to hit $8 - $10/kg in coming months Due to floods and frost destroying key crops Farmers receive half the price on supermarket shelf

TOMATOES could be off the menu for at least two months with prices skyrocketing to $10/kg after flooding and frost crippled supply. Crops in four key areas up Australia's east coast have been destroyed, with those surviving in limited supply due to delayed plantings. Industry experts predict the high prices of between $8/kg and $10/kg will ease in the coming months when supply levels return to normal following the combined problems of floods and frost put a huge dent in crops. Tomato grower Peter Comensoli, from NSW Farmers, said consumers were paying under a $1/kg for field tomatoes just two months ago. But a lack of supply had pushed up prices dramatically in recent weeks. He said consumers should usually pay between $3.99 and $4.99/kg in good times. Mr Comensoli said flooding in Queensland had heavily delayed seed planting for growers who would not start producing tomatoes until late June while some Sydney suppliers had been affected by frost. He said those growers in southwest NSW and northern Victoria were hit with a double whammy, when their crops that survived floods were affected by a frost. Mr Comensoli said the current supply was coming from glasshouses or those farmers who had avoided frosts. While these prices hurt the pocket of consumers, he said farmers were not complaining as they usually received about half of the price on the supermarket shelf. Another grower hoped the high prices would not turn people off tomatoes. "When the price goes down, and it will go down, it will take a while for consumers to realise and start buying again," the grower said. Port Macquarie mother of two Linvana Hanlan said her children loved tomatoes but she would look at alternative sandwich options such as grated carrots and lettuce until prices fell. With winter approaching, Mrs Hanlan said instead of using fresh tomatoes for casseroles she would

used canned tomatoes.

Please answer the following questions using appropriate diagrams. Be sure to explain your answers thoroughly: 1. Use demand and supply model to explain and illustrate why the price of tomatoes in Australia is expected to rise. Make sure to clearly explain the movement to the new equilibrium position, and any underlying assumptions in your analysis. (7 marks) The price of tomatoes is expected to rise due to the fall in supply. The combined problems of floods and frost have caused tomato crops to be destroyed, thus tomato farmers are unable to supply as many tomatoes to the market as before. This thus leads to a severe fall in market supply of tomatoes, shown as a leftward shift of the supply curve from SS1 to SS2 in the

Price SS2

SS1 P2

P1

DD Q2 Q3 Q1

Quantity

diagram below.

Originally, the market is at equilibrium at price P1 and quantity Q1.When supply falls from SS1 to SS2 via a leftward shift, at original price P1, the quantity demanded for tomatoes is Q1 while the quantity supplied of tomatoes is Q2. This causes a shortage of tomatoes of (Q1-Q2) as the

quantity supplied cannot meet the quantity demanded. In view of the shortage, producers of tomatoes will increase the price of tomatoes as rational decision-makers to increase total revenue. Consumers, in view of the shortage of tomatoes, will also offer higher prices to buy the tomatoes. This is also known as the market adjustment process. As consumers unwilling to pay higher prices leave the market and suppliers produce more tomatoes due to the increased price, the quantity demanded and quantity supplied of tomatoes moves towards quantity Q3 and price P2, where the market finally clears and the shortage is resolved. At this new equilibrium position where quantity is lower than original and price is higher than original, the market is now allocatively efficient. The underlying assumption in this process is the ceteris paribus assumption that all other factors are held constant. It assumes that there is no change in demand although in actual fact, the demand may have increased or decreased, which would affect the equilibrium position in the market for tomatoes.