Economics

Observing the Influences that Impact Market Equilibrium

Purchasing fresh produce in a farmers market offers an opportunity to buy direct from a supplier. The process of buying fruit and salad items direct from the suppliers, rather than though an intermediary such as a supermarket, increases the exposure of the purchaser to price fluctuations. Visiting the market, which is held every weekend, over a number of weeks it was possible to see how different influences would impact on the supply and demand for the products, and how this impacted on the prices. The prices of the little gem lettuces appears to be one of the more sensitive products; this may have been due to their short shelf life. These lettuces, unlike other produce, are not suitable to be held for any period in cold storage, so there is not the ability to hold a supply ready for the peak demand.

In the first week, which will be used as the base week, there was a busy market, the weather was dry and the price of the lettuces was at the mid point of prices seen over the entire period, at $0.59

each. There were two market stalls selling the produce, both appeared to have plentiful stock. Presenting the supply and demand on a graph where point P. will be $0.59 per unit, as seen in figure 1;

Figure 1; Supply and demand for the lettuces

The market was busy, but as the day wore on the level of the crowds started to decrease. An hour before the market closed both of the suppliers had stock left. It is likely that they realized the stock would not last to the following week. With the decreased level of people available to buy the lettuces the farmers had to reduce their prices in order to attract the sellers. The impact of a decrease in the demand is shown in the graph below, which shows the new pricing point of P1. The decrease in demand moves the demand line to the left. Now the new cross over or equilibrium point is at a lower price level. Where the demand decreases and the supply level remains the same prices decrease (Nellis and Parker, 2006).

Figure 2; Decrease in demand

The new price is at point P1.

In the following week there was a lovely sunny day, there were many more people at the market that there week before. It was the weather for salads, so all items that were used to make salads appeared to be selling well. The lettuces were being sold by the same two suppliers as the week before, with the same level of stock, so the supply remained the same. With an increase in the demand the suppliers knew that at the same price as the week before they would sell out quickly, so they increased their price. An increase in demand without a similar increase in supply will increase the prices (Baye, 2007). The impact of an increase in the demand is shown in figure 3.

Figure 3; Increase in demand

The supply line stays in the same place, but the demand line moves to the right to reflect the increase in the demand. This creates a new point of equilibrium shows the ability to charge a higher price.

The following week, with the goods sales at the market, a new supplier was attracted, so the supply increased; there were now three suppliers. However, the weather returned to normal and demand was at the normal level. The farmers ended up reducing the prices of the lettuce, as a result of the increase in supply. The impact is seen in the figure 4.

Figure 4; Increase in supply

This time the demand line remains in the same place, but the supply line moves. As there is an increase it moves to the right. Now the point at which it crosses the demand line is at a lower price.

This shows the way different factors all impacted on the price of a single product. However, an interesting point was the price of lettuce in the local supermarket that most of the customers passed before going to the farmers market; the organic little gem lettuces were only $0.29 a unit here, every week. This may be argued as a case of inefficiency in the market place, the customers to the farmers market did not have perfect knowledge and did not known there was an alternate and lower price supplier that was easy to access. However, it is also possible it was more than simply an inefficient market, the buyers may have chosen to buy from the farmers because of other influences, such as the perception of freshness which, reduced increased the desirability of the farmers’ lettuces.

References

Baye Michael, (2007), Managerial Economics and Business Strategy, McGraw-Hill/Irwin

Nellis JG, Parker D, (2006), Principles of the Business Economics, London, Prentice Hall

The paper is written generically, so this may be changed for other produce items with a short shelf life.

The price may be changed as needed