Microeconomics For Taxation And Economic Efficiency In The Banana Industry In Australia

Demand and Supply of Bananas

Discuss about the case study Microeconomics for Taxation and Economic Efficiency.

The banana industry in Australia is one of the key economic pillars that support more than a thousand families. A 46 percent drop in the cost of the bananas led to the fall in the overall prices of the fruits. This is mainly due to the increasing supplies that resulted from the cyclone that took place in Queensland in the year 2015. However, in the past, Queensland had witnessed an increase in the prices of the fruits by 24 percent. As a result, the CPI that is the consumer price index was even as compared to a rise of 0.6 percent in the September quarter.  As a result, the Federal Government is advising the shoppers to purchase the Australian-grown food on Australia Day (Cook et al. 2015).

The Cyclone Yasi almost damaged the majority of the banana plantation in the northern Queensland. However, the prices of the bananas are set to become standard after seven months of the Cyclone Yasi. After the cyclone, the prices of the bananas increased to $15 per kilogram during the scarcity. The prices mainly increased during the short-run. The increase in the prices of the bananas is primarily due to the decrease in the supply.

Figure: The Demand and Supply

(Source: Created by the Author)

The demand and supply are the two most important factors that act as the backbone of the market economy. The demand refers to the amount of the products that are demanded by the customers. The supply, on the other hand, refers to the amount of the products that the market can offer. The above diagram shows that the point of equilibrium is E0. It intersects with both the points D0 and S0. Due to the cyclone Yasi, the supply of the banana plants have been destroyed tremendously. As a result, the supply curve shifted from S0 to S1. This, in turn, has decreased the quantity of the bananas that declined from Q0 to Q1. As a result, the new equilibrium takes place at point E1, where the prices also increase from P0 to P1 (Lyssenko and Education 2015).

The price of the bananas will increase if the bananas are imported from other parts of the world. The market structure of a banana is perfectly competitive as it is sold everywhere in the world. As per the law of supply, the supply has a positive relationship between the price and the quantity supplied. Hence, the increase in the price leads to the increase in the quantity supplied and the decrease in the prices leads to the fall in the quantity supplied (Baumol and Blinder 2015).

Oversupply of Bananas

However, the prices of the bananas are expected to fall in the coming weeks mainly due to the oversupply of bananas. The prices are thus pushed to a relatively lower level due to the perfect growing condition. The above graph showed that the cyclone has led to the increase in the prices of bananas. However, the lack of cyclone has resulted in the oversupply of bananas by reducing the price (ABC Rural 2016).

Figure: The Oversupply

(Source: Created by the Author)

The oversupply of the bananas in Australia will set the price too high at P1. As a result, the quantity supplied will be Qs and the quantity demanded will be Qd. The oversupply of the bananas will, in turn, lead to the reduction in the prices of the fruits. The oversupply will take place, as the quantity supplied is less than the quantity demanded. As a result, the consumers are requested more bananas in order to overcome the current surplus. The consumers are requested as they have the ability to alter the quantity that they demand. If the consumers increase the demand for bananas, it will help eliminate the oversupply (Frank 2014).

In the case of oversupply, the profit-maximizing firm will decrease the price due to the availability of too much inventory. In order to eliminate the oversupply, the banana industry in Australia needs to lower the quantity supplied from Qs to Q.

Figure: The Indifference Curve

(Source: Created by the Author)

The above diagram shows the indifference curve is a locus of a combination of both banana and the other fruits. The oversupply and the increase in the price of bananas are affecting the price of other fruits. As a result, the farmers are getting affected due to the drop in the price of fruits to as low as $1 per kilogram. The consumers are indifferent between both the fruits. As a result, the consumers are not getting the same level of satisfaction from the bundle. As a result, if the consumer starts the consumption of bananas they need to give up certain units of the other fruits. This will help them to maintain the same level of satisfaction (Bailey et al. 2013).

The banana industry in Australia faces an elastic demand. This is mainly because a small change in the price of the bananas will lead to a substantial change in the quantity demanded. If the price of bananas increases, in that case, the consumers will start purchasing the other fruits (Friesz and Meimand 2014).

Elastic Demand of Bananas

Figure: The Price Elasticity

(Source: Created by the Author)

According to the above diagram, the consumers will stop demanding above the price Pe. At the price Pe, the demand of the market will equal the quantity provided. The farmers selling bananas in the competitive marketplace can best illustrate the perfectly elastic demand. As a result, the sellers will not be able to sell the bananas more than the ongoing price.

As far as economic efficiency is concerned, the focus is given on the allocative, productive and the technical efficiency (Auerbach and James 2015).

Figure: The Production efficiency curve

(Source: Created by the Author)

As far as productive efficiency is concerned, the economy needs to sacrifice the production of banana in order to increase the supply of other fruits. The point on the graph shows the productive efficiency. The productive efficiency can be increased by making the use of the managerial procedure. It is very important to understand the current position of the banana industry that will help to improve the economic efficiency. The farmers in Australia, as well as the supply chain partners, are continuously seeking to improve the productive efficiency. This will help to improve the performance of the business (Fare et al. 2013).

Figure: The Average Total Cost

(Source: Created by the Author)

The ways by which the economic efficiency can be achieved in the banana industry is by improving the productivity across the value chain. Since the banana industry is a competitive market, in the long run, the productive efficiency will occur at the base of the average total cost curve. This will help to increase the cost of production of bananas as the farmers can sell the bananas at a price that will be more than the cost of production.

The asymmetric information can be referred to as the failure of the information in the economy. It is mainly the specialization as well as a division of knowledge in the society as applied to the economic trade. In this case, the consumers should not have the information about the effect on the banana production. The sellers can provide the consumers with many alternatives that will help to increase the demand for the bananas and eliminate the oversupply. The sellers could offer Filipino bananas with that of the Aussie bananas at a cost that will be comparatively lower than the fact if the Filipino bananas were sold individually.

Productive Efficiency in the Banana Industry

The microeconomics is also linked to psychologies that explain the behavior of the individuals. According to the behavioral economics, the demand curve is negatively sloped. In other words, an inevitable increase in the price of a product will lead to the decrease of the demand for the product. The Behavioral economics refers to the psychological behaviors of the individuals. The behavioral economics of the consumers will help them to decide whether to demand more or less of bananas. Since banana is a private good, in that case, an increase in the price will decrease the demand. As a result, the consumers will prefer to purchase more of the other fruits (O’Donoghue 2015).

However, if the seller starts providing bananas at a lower price, in that case, the consumers will start buying more bananas and less of other fruits. The market decision is mainly based on the behavior of the consumers. As per the reports, the suppliers will be able to meet the demand of the consumers as soon as the peak season is achieved in the month of November.

Conclusion

The banana industry in Australia faces an elastic demand. This is mainly because a small change in the price of the bananas will lead to a substantial change in the quantity demanded. the increase in the price leads to the increase in the quantity supplied and the decrease in the prices leads to the fall in the quantity supplied.

References

“Banana Glut Hits Growers’ Hip Pocket”. 2016. ABC Rural. https://www.abc.net.au/news/2016-05-31/banana-prices-slump-amid-glut/7461480.

Auerbach, Alan J., and R. James. “Hines Jr.(2002).“Taxation and Economic Efficiency”.” Handbook of Public Economics 3 (2015).

Bailey, David H., Marcos López de Prado, and Eva Del Pozo. “The strategy approval decision: A Sharpe ratio indifference curve approach.” Algorithmic Finance 2, no. 1 (2013): 99-109.

Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Cengage Learning, 2015.

Cook, David C., Andrew S. Taylor, Rachel A. Meldrum, and André Drenth. “Potential economic impact of Panama disease (tropical race 4) on the Australian banana industry.” Journal of Plant Diseases and Protection 122, no. 5-6 (2015): 229-237.

Färe, Rolf, Shawna Grosskopf, and CA Knox Lovell. The measurement of efficiency of production. Vol. 6. Springer Science & Business Media, 2013.

Frank, Robert. Microeconomics and behavior. McGraw-Hill Higher Education, 201

Friesz, Terry L., and Amir Meimand. “A differential variational inequality formulation of dynamic network user equilibrium with elastic demand.”Transportmetrica A: Transport Science 10, no. 7 (2014): 661-668.

Lindsay, S. “Farm practices to manage the impact of severe tropical cyclone damage on banana production-a case study from tropical Australia.” In XXIX International Horticultural Congress on Horticulture: Sustaining Lives, Livelihoods and Landscapes (IHC2014): IX 1114, pp. 275-284. 2014.

Lyssenko, Nikita, and Distance Education. “Excess Demand and Supply.” (2015).

O’Donoghue, Ted. “Teaching a Behavioral Economics Elective: Highlighting the Science of Economics.” American Economic Review 105, no. 5 (2015): 391-95.