Discuss the impact of the events mentioned on the expenditure on non-organic and organic fruits.

The cost of organic fruit-specific fertilisers has increased and huge campaigns encouraging people to eat more healthily have convinced more consumers to opt for organic fruits in place of non-organic fruits. 

Discuss the impact of the events mentioned on the expenditure on non-organic and organic fruits.[25]

Introduction

Demand refers to the degree to which a consumer is willing and able to purchase a specific good or service, ceteris paribus. Supply refers to the ability and willingness of a producer to sell goods and services at various price levels, ceteris paribus.

Expenditure here refers to price times quantity (P x Q).

Supply Factors                                                                                 

Figure 2a: Market for Organic Fruits

OF2A.png

Rise in price of natural fertilisers for organic fruits                

Price Elasticity of Demand: Measure of responsiveness in the quantity demanded for a commodity because of a change in the price of the same commodity, ceteris paribus.

Natural fertilisers are factor inputs in the production of organic fruits.  Higher price of natural fertilisers àhigher cost of production of organic fruits àless profitable to produce organic fruits at every price level  fall in supply. With reference to figure 2a, which shows the market for organic fruits, 

·       Demand is likely to be price elastic since the price constitutes a small proportion of consumer’s income, and this is represented by the relatively more price elastic demand curve DDe

·       Supply curve shifts from SS0 to SS1

·       Price increases from P0 to P1

·       Quantity falls from Q0 to Q1

·     Since Demand is price elastic àan increase in price would result in a more than proportionate fall in quantity demanded  fall in consumer expenditure from P0E0Q00 to P1E1Q10.

 

1.      Non-organic fruits: close substitute (Use of XED concept)

·       Higher Price of organic fruits (price of related goods)èHigher Demand non-organic fruits

·       Increase in demand for non-organic fruits

·       èHigher total expenditure for non-organic fruits

 

Demand Factors

Increase in Demand for organic fruits & fall in Demand for non-organic fruits

Healthy living campaigns change tastes and preferences of consumers àconsumers now prefer organic fruits to non-organic fruits àDemand for organic fruit increases, while demand for non-organic fruit decreases. With reference to figure 2b, which shows the market for organic fruits, 

  • Demand curve shifts from DD0 to DD1 

  • Price increases from P0 to P1

  • Quantity increases from Q0 and Q1 

  • Both price and quantity increase àconsumer expenditure increases from 0P0E0Q0to 0P1E1Q1

 

With reference to figure 2c, which shows the market for non-organic fruits 

  • Demand curve shifts from DD0 to DD1 

  • Price decreases from P0 to P1 

  • Quantity decreases from Q0 and Q1 

  • Both price and quantity decrease àconsumer expenditure decreases from 0P0E0Q0to 0P1E1Q1

Figure 2b: Market for Organic Fruits                             

OF2B.png

Figure 2c: Market for Inorganic Fruits

OF3C.png

                 

 

 

 

Total Expenditure

Possible synthesized outcomes

Organic fruits:

Scenario A: Extent of an Increase in Demand (impact of healthy living campaign) > Extent of a Decrease in Supply (impact of fertiliser cost increases) èHigher total expenditure

Scenario B: Extent of a Decrease in Supply (impact of fertiliser cost increases) > Extent of an Increase in Demand (impact of healthy living campaign  èLower total expenditure

Non-organic fruits:

Scenario A: Overall Higher Demand (Impact of more expensive organic fruits due to fertiliser cost increase > impact of healthy living campaigns)

Scenario B: Overall Lower Demand (Impact of more expensive organic fruits due to fertiliser cost increase < impact of healthy living campaigns)

 

Conclusion

We argue that the overall expenditure of on organic fruits would still increase, because a change in tastes and preferences spurred by the government campaigns would cause consumers to be in demand for organic fruits even as the supply falls. Due to non-organic fruits being a close substitute, the total expenditure on this good would be falling.

(RWA) Our theoretical discussion on the impacts on organic fruits would match what we would intuitively expect on the real world changes in expenditure on organic fruits, considering that organic fruits are increasingly being carried by major supermarkets.

 

Comments

For questions like this, it is important to note the question requirements, whether the focus is on prices, output, expenditure, revenue or market. 

DDSS & Elasticities, MicroeconomicsEUGENE TOH