jMBA 51022 - Business Economics
Assignment No.01
Case Analysis
Maximum retail price for coconuts in Sri Lanka
With a culture that entwines with the coconut tree and a climate that ensures an around the year
harvesting, Sri Lanka is the fourth-largest exporters of coconut products to the world. Among the
most popular Sri Lankan coconut exports to the global market are desiccated coconut, virgin
coconut oil and coconut water, while the country’s bristle fiber products manufactured through
indigenous ‘Drum’ extraction method and activated carbon made with coconut shells are also in
high demand.
Coconut accounts for approximately 12% of all agricultural produce in Sri Lanka with the total
land area under cultivation covering 409, 244 hectares (2017) and about 2,500 -3000 million
nuts produced per year (by 2017). New measures have been introduced to enhance the annual
coconut crop to 3600 million nuts per year.
The coconuts became a commercially important plantation crop in Sri Lanka during the Dutch
and British colonial times and grew to be undeniably an important crop in the country’s
economy. The coconut sector has contributed 1.8 % of the GDP in Sri Lanka during the year
2000, in terms of employments, income generations, and foreign exchange earnings etc
(Central Bank of Sri Lanka, 2000). The total annual coconut production in the island ranges from
2000 to 3000 million nuts, depending on the lagged effect of weather, cultural and management
practices. The uses of coconuts are diverse in Sri Lanka. It provides a base for the emergence
of various industrial uses than any other agricultural crop grown in the country. However, the
domestic coconut consumption is a priority, and utilizes around 70 percent of the total annual
nut production. The rest 30 to 35 percent of the production is used in many other Coconut
based agro industries for the production of range of coconut-based value added products such
as desiccated coconut, copra, coconut oil, cream and milk powder etc. both for domestic and
export market.
The average annual per capita consumption of coconuts in Sri Lanka is about 110 nuts and it is
considerably a higher number of nuts than any other coconut producing country in the world.
The fresh coconuts have become a daily necessity for the people in the country for over
thousands of years. The most important use of coconuts is to extract coconut milk in fresh form
and utilize as a basic ingredient in domestic culinary preparations. The coconut oil, which is
extracted from the dried kernels, is also an important constituent in various traditional Sri
Lankan dishes. The other forms of coconut consumption comprise coconut based household
products like confectionaries, detergents, cosmetics etc. Coconut is the principle source of
dietary fat for average Sri Lankan people. The contribution of coconuts to calories in diet is
second only to rice; the staple diet in Sri Lanka. Coconuts and coconut oil add 17.4 percent of
calories, 7 percent of protein and 79.4 percent of the fats in average daily diet of a Sri Lankan
(Perera, 1990). The highest per capita consumption of coconuts as fresh nuts is observed in the
rural sector of the country, consuming around 100 fresh coconuts per head per year (Central
Bank of Sri Lanka, 1996). Hence, the coconuts are one of the cheap sources of food nutrition
especially for the poor people in the country.
The Sri Lankan consumers spend 9 percent of their total food budget on fresh coconuts and
coconut oil (Central Bank of Sri Lanka, 1997). Accordingly, coconuts and coconut oil have
become the third most important food item in the consumer’s food budget followed by rice and
fish expenditures. The price for coconuts is largely determined based on the domestic market
forces depending on the production and consumption levels. The total coconut demand shows a
slow steady upward trend over the years with the increasing population. However, the annual
coconut supply tends to be fluctuating widely based on the lagged weather pattern and other
supply influencing factors.
During the last two decades the food consumption patterns observed in Sri Lanka have been
changing gradually. Forces responsible for shaping the demand for food are varied. They
include not only the economic and demographic factors but also changes in lifestyles, which
influence consumers’ tastes and preferences. Despite, the coconut is considered as an
essential food commodity in Sri Lanka and subsequently makes a strong domestic demand
After the lift up of lock down period during the Covid- 19 outbreak from March to June the prices
of fresh coconut have increased to the range of Rs 70- 80 for Large size nut and Rs. 60-65 for
small size nut. As this prices were not affordable for the consumers, specially due to the loss of
income during and post Covid period, government has decided to intervene the market where a
Gazette notification was issued by the Government announcing a maximum retail price for
coconut with effect from 25th September 2020.
The Gazette notification was issued by the Consumer Affairs Authority (CAA) Chairman Major
General Shantha Dissanayake (Retd.) under the CAA Act of No 9 of 2003. Accordingly, the
maximum retail price for a coconut with circumference 13 inches (Large Size) was announced
as Rs.70 per nut.
A coconut with a circumference 12 to 13 inches (Large Size) to be sold at Rs.65 per nut while a
coconut with a circumference below 12 inches (small Size) to be sold at a price of Rs.50 per
nut. Meanwhile, the CAA ordered that no producer, distributor or trader would allow to sell,
expose or offer for sale or display coconuts above the maximum retail price mentioned in the
Gazette notification.
However, although the annual Coconut Yield in Sri Lanka is around 3000 million coconuts, this
year there is a shortage of 250 million. coconut demand in Sri Lanka is found to be significantly
influenced by the retail coconut prices and the consumer’s per capita income, and the changes
in the tastes and preferences of the consumers. Domestic demand for coconuts is said to be
inelastic over a wide range of retail prices because coconut consumers are less responsive to
retail price changes, as it is an essential food commodity for household consumption without a
closer substitute.
References
● Central Bank of Sri Lanka, (2000). Annual Report. Colombo. Sri Lanka.
● Central Bank of Sri Lanka, (1997). Report of the Consumer Finance and Socio Economic
Survey 1996/1997. Colombo. Sri Lanka.
●
Maximum retail price for coconuts, Retrieved from
http://www.dailymirror.lk/breaking_news/Maximum-retail-price-for-coconuts/108-196718 on 26
September 2020
●
●
Perera, U.V.H., (1990). Coconut Industry in Sri Lanka. Occasional Publication series.
No.10. Asian & pacific Coconut Community. Jakarta. Indonesia.
Samarajeewa, S.R., An Econometric Analysis of Consumer Demand for Coconuts in Sri
Lanka, Agricultural Economist, Coconut Research Institute, Bandirippuwa Estate,
Lunuwila 61150, Sri Lanka
Required:
You are required to submit a maximum of five (05) pages document providing answers for
below questions;
a) Explain how government control the prices using price ceiling and price floor.
b) Briefly explain short term and long term effects of imposing price ceiling/maximum price on
Essential Goods.
c) Discuss the challenges faced by Sri Lankan government when implementing price controls.
d) Explain the consequences of imposing a price ceiling for coconut using a diagram where
necessary. (You are required to take the prices prior to price ceiling as Rs. 80 and Rs. 65 for
large size and small size nuts respectively.)
*State the assumptions where necessary and mention the references at the end of your report.
a) Explain how government control the prices using price ceiling and price floor.
In the market buyers of any good always want a lower price while sellers want a higher price,
the interests of the two groups conflict where government intervene and impose price controls.
There are two main types of controls such as Price ceiling and the Price floor. A legal maximum
price on which a good could be sold referred to as Price ceiling where the legal minimum price
on which a good could be sold referred to as price floor.
When the government identifies that the existing equilibrium price of a good which has been
decided by the market supply and demand is not fair and affordable by the consumers a legal
maximum price would be imposed on which a particular good could be sold referred to as the
Price ceiling. Intention of imposing a price ceiling is provide a relief to the consumer.
When the government identifies that the existing equilibrium price of a good which has been
decided by the market supply and demand is not fair to the suppliers a legal minimum price
would be imposed on which a particular good could be sold referred to as the Price floor.
Usually this price is above the equilibrium market price. This could be commonly seen in relation
to factors of production and labour wages.
Commented [1]: Just check whether the points are
fine. If anything to amend or add feel free to do so.
b) Briefly explain short term and long term effects of imposing price ceiling/maximum price on
Essential Goods.
Short Term Effects
1.
2.
3.
4.
Shortage of goods
Long ques will be created to buy goods due to shortage in the market
Increased demand for essential goods
Emerging a black market
1.5.
Benefits to consumer (Transfer some producer surplus to consumers)
Long Term
A market failure, such as discourage the new entrants
waste limited resources (Expiry, Hidden supply)
Long Term Effects
1. Low quality products in the market
Formatted: Outline numbered + Level: 1 + Numbering
Style: 1, 2, 3, … + Start at: 1 + Alignment: Left + Aligned
at: 0.25" + Indent at: 0.5"
c) Discuss the challenges faced by Sri Lankan government when implementing price
controls.
●
Price Ceiling
- Reimbursement
- Long term inflationary effects (Increasing prices in imported goods)
- Emergence of black market leading to unfair activities in the market where
government has to focus on getting rid of them
- Demotivate local industry & supplier grievances
- Emergence of long queues for essential goods & consumer grievances
- Possibility in crating bribing in market while regulating policies (Rationing and
welfare)
- Lack competitiveness discourages innovations
●
Price Floor
- Gvt. has to purchase excess production in the market (Additional cost & addition
effort in distribution has to be afford)
- Gvt has to formulate new economic policies to mobilize excess production
among the substitute industries
- Emerging unemployment in the society (wages market)
- Over Investment situation in society
nMarkets are not limited to the supply and demand of goods and services so they have a
mechanism to reach an optimal price and quality. It’s more than that. It is important that
market sentiments are kept consistent so as to ensure the key wheels of the economy –
investors, buyers, and sellers – keep turning as efficiently as possible. If this takes place,
consumers, that is you and I, get the best products and services at the best price,
without being prey to black-market racketeers.
price controls are impractical and how they lead to the creation of black markets and
shortages of food for people.
It has had the most impact on the poor and vulnerable community in society who do not
have a voice.
Price controls, more so than regulation and lack of competitiveness, are sure ways of
stagnating any market or industry.
Institutes like the Consumer Affairs Authority’s mandate need to be revisited and they
should lead the promotion of competition instead of becoming the neighbourhood cop
for price controls.
https://www.advocata.org/commentary-archives/tag/Price+Controls
When the price is too high, there is an excessive amount of the product for sale
compared to what people want.
However, the higher prices discourage consumers from buying farm products, causing
an excess of supply (e.g. a “butter mountain”). Government then exacerbates this
situation by continuing to purchase the excess crop at the set price.
Serious problems also result when government sets prices below the equilibrium level.
This causes consumers to want more of the p aroduct than producers have available.
The wasted chance to create both producer and consumer surplus from those sales is
known as ‘deadweight loss’ because it is income that is lost forever. In addition to
creating deadweight loss, an artificially high price transfers profits from consumersS to
producers;
One of the reasons that governments invoke price controls is to ensure that goods and
services are sold at a ‘fair’ price.
Maximum price - Challenges to government
● Emergence of black market leading to unfair activities in the market where government
has to focus on getting rid of them
● Long lines of customers could be seen in front of shops making the general public
uncomfortable
● Low quality products in the market
● Government has to intervene in placing a proper procedure in distributing goods among
the public
Price floor - Challenges to government
● In reference to imposing minimum labour wages, labour demand decreases and
unemployment rate in the country decreases
● When private companies are not willing to buy goods under the minimum price imposed,
government has to intervene in buying the product surplus in the market
Providing subsidies to suppliers - Just check on this point whether could be included
Commented [2]: Just check whether these too could
be incorporated.
d) Explain the consequences of imposing a price ceiling for coconut using a diagram where
necessary. (You are required to take the prices prior to price ceiling as Rs. 80 and Rs. 65 for
large size and small size nuts respectively.)
Assumptions