Read the following excerpts from the article “Bumper Crop means cheap
mangoes” by Nathan Dyer published on November 1 st 2011 and answer all the questions.
NATHAN DYER, The West Australian November 1, 2011
Perth consumers are set for a mango boom with a bumper Ord Valley crop driving down prices for the tropical fruit.
Kununurra packing shed operator Quentin Parker said a favourable growing season meant Kimberley mango farms were flush with fruit.
"I've got one customer who did 4000 trays last year and he'll do 27,000 this year," he said.
Mr Parker said his packing shed was sending about two semi- trailers of mangoes to Perth each day and had packed 80,000 trays with about
40,000 more to go.
He estimated the Ord Valley would produce more than 200,000 trays this year.
Tony Tonich, fruit sales manager for Perth market agent AllStates, said the bumper Ord crop and strong supplies from the Northern Territory were good news for consumers.
"At the moment there's a huge volume of mangoes on the market," Mr
Tonich said.
"So the consumer in the shop should be getting a reasonable price.
They're advertising this week at around two for $5, which is a very good price."
Mr Tonich said mangoes were trading between $18 a tray for secondgrade fruit and up to $35 a tray for top quality fruit.
But he said prices were unlikely to go much lower because farmers would stop making money.
"If they're not getting $18 a tray and over, they'll just stop picking."
He said people should enjoy the fruit while the price was low.
Ord Valley picking finishes in about three weeks. The harvest in Carnarvon begins next month.

Please answer the following questions using appropriate diagrams. Be sure to
explain your answers thoroughly:
1.
Assuming that mangoes operate in a perfectly competitive market, use a well-labeled demand and supply model to explain how market equilibrium price and output of mangoes is being determined. Then using the same model, explain and illustrate what factor(s) has caused the price of mangoes to fall in price.
[7 marks]
The demand curve depicts the amount or quantity of a particular good that buyers are willing and able to purchase at each price during a specified period.
Similarly the supply curve shows the amount or quantity that sellers are willing to offer for sale at each price during that same period. Hence by plotting the two curves together, we can find a price at which the quantity buyers are willing and able to purchase equals the quantity sellers will offer for sale.
Further in a perfectly competitive market the marginal revenue and marginal cost of the firm should be equal which in turn should be equal to the price of the product. This is shown in the second graph below.

Now because of the surplus production of mangoes, the supply of mangoes increase, so the supply curve shifts to the right. And this shift would bring down the equilibrium price of the mangoes.
Due to the increase in the production of mangoes this season, the producers now have a large quantity of mangoes produced and hence there is quite an increase in the supply of mangoes. Since it is a perfectly competitive market, the prices are determined by the market equilibrium and all the supplied quantity is sold.
So this surplus increase in production increases the supply and results in the rightward shift of the supply curve. Now the equilibrium price where the supply and demand curves meet goes lower and hence resulting in the lowering of the equilibrium price of the mangoes.

2a. Do you think the demand for mangoes is price elastic or price inelastic?
Explain your answer based on the determinants of price elasticity of demand.
[4 marks]
In a perfectly competitive market the demand that an individual firm faces is perfectly elastic, while the market demand is not. We can see that the for the individual farmers the demand curve is flat and he is a price-taker, he sells mangoes at the price determined by the market. Hence his demand is elastic.
Whereas the market demand of mangoes is price elastic as the change in the supply of mangoes is decreasing the price.
Availability of Substitute Goods- There is no close substitutes available for mango, hence the substitution effect would be small and demand inelastic.
Food in general has a very low elasticity of demand as no substitutes exist
Percentage of Income: Since mangoes are not expensive and take up a very less amount of the budget, income effect is insignificant and hence demand is inelastic.
Duration: Since the price of mangoes are not expected to be the same for a longer duration, the consumers will not look for substitute and the elasticity will be less.
2b. Based on the elasticity established in your answer above, discuss the likely impact of a price fall on mangoes producers’ total revenue.
[4 marks]
Since demand is price inelastic the decrease in price of mangoes would result in an increase in demand of mangoes.
Total revenue of the producers depends upon the quantity sold and the price. Although the price of mangoes is reducing, the demand of mangoes is increasing which would increase the amount of mangoes sold by the producers. So the total revenue generated by the producers will not be effected by price fall as increase in amount of mangoes sold would
compensate for the decline in price.
3. Assume the government is concerned about prices falling too low for farmers and decides to introduce a price support scheme. With the aid of

appropriate diagram show the effect of a price support scheme on demand and output in the mango market. In your answer discuss the potential problems associated with such a scheme.
[7 marks]
As seen from the graph above, introduction of Support Scheme by the government would put a ceiling price on the price of mangoes.
This would reduce the demand to Q1 and increase the supply to Q2. The difference in the amount would be compensated by the government as it will buy the surplus produced. For the individual producers it would result in the increase in output at a higher price.
Now the consumers will have to pay more than the price of the competitive market forces when the supply is more.
The problems associated with this scheme are:
1.
Dead Weight Loss: It is the economic insufficiency which is faced by applying a price-support system by the government.
2.
Food Surpluses: Higher prices attracted higher supply and which in turn would result in production of surplus food.
3.
High Prices: To safeguard the profits of the producers, consumers would now have to pay more. This is insufficient and results in people paying more percentage of their incomes.
4.
Insufficiency: This is an insufficient method as it penalizes the consumers with higher prices to help the producers. It also results in

higher profits for bigger producers as they would benefit the most out of this.
Presentation and referencing = 3 marks
References
1) Principles of Microeconomics, v. 1.0 by Libby Rittenberg and Timothy
Tregarthen
2) Managerial Economics 9 th Edition by Christopher R Thomas and S.
Charles Maurice
Total = 25 marks
Provide adequate referencing. Failure to cite properly is evidence of academic misconduct and will result in marks being deducted.
Provide atleast 1 reference.