An Economic Analysis of an Essay Economics

Question: Discuss about theAn Economic Analysis of an Essayfor Economics. Answer: The essay focuses to analyse the article on effect of tomato potato psyllid pest on the agricultural sector and the Australian economy. This pest not only affects the crop production but also creates negative impact on the horticulture industry of Australia. Main affected crops are potato, tomato, capsicum, chilli, tomarillo, sweet potato and other crops (Prendergast, 2017). This pest affects crops in terms of loss of plant vigour and its production. The problem is that farmers have not still aware about the effective remedial measures to restrict the outbreak. Hence, preventive measures are more effective than remedy. This essay analyses the effect of the outbreak of the diseases on the market demand and supply and the crop prices. Figure 1: Effect on market demand and supply (Source: created by author) Initial demand curve is D and initial supply curve is S1 to supply Q1 amount of crop in the market in total. Equilibrium is realized at the intersection point of the demand and supply curve. E1 is the initial equilibrium point. Sudden spread of the tomato potato psyllid in the major areas of Australia causes a decrease in production of crop in short run. As supply decreases due to uncontrolled reason, in short term the direct effect is envisaged on the price of the affected crop (Canto, Joines Laffer, 2014). In short run there is no change in the demand for crop as income, preference are unchanged in short run. As there is no information about the substitute products of the affected crops, it can be assumed that there is no change in the price of those products. Therefore, market only experiences change in supply. Decrease in supply shifts the initial supply curve leftward. As supply decreases, excess demand is created in the market. In order to absorb the excess demand, crop produc ers raise the price due to shortage of crops in the market (Bruneel et al., 2012). Price eventually increases to restore new equilibrium at the point E2, where new supply curve meets the demand curve. Accordingly new equilibrium price is P2 and quantity Q2. New price is greater than initial price and new supply is less than initial output. Figure 2: Impact on price hike on revenue (Source: created by author) Impact of pest created diseases on plant in the market depends on the price elasticity of demand. As describe by, price elasticity of demand indicates the change in quantity demanded in response to 1% change in price (Babcock, 2012). Crop is necessary product as is relatively less price elastic compared to other products. Hike in price may reduce the quantity demanded for the crops. People, who have low income, may reduce their quantity demanded. Price hike may also exclude some consumers from market for short term. As per the figure 2, decrease in supply to S2, increases price to P2. As demand is price inelastic, hike in price does not have much effect on the quantity demanded. The extent of decrease in quantity demanded for crop products is less compared to hike in price (Cashin et al., 2014). Therefore, revenue of the firm may not reduce significantly. However, in the presence of substitute products, the crops may be price elastic. People can change their consumption to other food products rather than potato, tomato, capsicum, chilli, tomarillo and sweet potato. Initial revenue in both diagrams is 0P1E1Q1 and revenue becomes 0P2E2Q2 after change in price. P*Q is the total amount of revenue. Decrease in supply definitely reduces the revenue of the farmer. However, extent of decrease depends on the relative elasticity of demand and supply curve. As crop production is seasonal, decrease in supply may have effect throughout the year in the absence of proper storage facility. Spread of the tomato potato psyllid borne disease zebra chip has negative externality on the horticulture industry. Negative externality creates market failure, as the damage caused by other does not appear directly (Tomek Kaiser, 2014). Zebra chip virus shrinks horticulture production by 20% to 50%. This virus is spread over the locality quickly via infected agricultural equipments, machinery ort seed stock. Fruits like, banana, chestnut, cucumber. Psyllid is now found on commercial horticulture properties such as Gingin, Yarloop and Busselton. Decreases in horticulture production have negative impact on the GDP of Australian economy (Gopinath, Helpman Rogoff, 2014). The disease also affects human health indirectly through consumption of the infected crops. Increasing cost creates burden on the budget of the virus-affected people. These all are negative externality. As the disease is impossible to control after an outbreak, preventive measures are more effective (Roberts Schlenke ra, 2013). Government can increase public spending to support farmers in taking precautionary measures to reduce cost burden of the farmer. The essay has analysed the possible factors highlighted in the article and their effects on the price of the crops. The focus of the article is the tomato potato psyllid, which is a pest, affecting the major crops of Australia. This pest spreads a disease called zebra chip that not only affects the crops like potato, tomato, chilli and capsicum, but also affects the horticulture industry indirectly. The agricultural production is reduced by 20% to 50% due to this effect, which creates direct effect on the supply and product price in the market. As supply reduces in the domestic market, price starts to increase keeping demand unchanged. Therefore, change in price and quantity has impact on the revenue of the firm in turn. It can be concluded that government intervention is required in order to prevent the negative effect of pest on agricultural production in the economy. References Babcock, B. A. (2012). The impact of US biofuel policies on agricultural price levels and volatility.China Agricultural Economic Review,4(4), 407-426. Bruneel, J., Ratinho, T., Clarysse, B., Groen, A. (2012). The Evolution of Business Incubators: Comparing demand and supply of business incubation services across different incubator generations.Technovation,32(2), 110-121. Canto, V. A., Joines, D. H., Laffer, A. B. (2014).Foundations of supply-side economics: Theory and evidence. Academic Press. Cashin, P., Mohaddes, K., Raissi, M., Raissi, M. (2014). The differential effects of oil demand and supply shocks on the global economy.Energy Economics,44, 113-134. Gopinath, G., Helpman, E., Rogoff, K. (Eds.). (2014).Handbook of international economics(Vol. 4). Elsevier. Prendergast,J., (2017).Tomato potato psyllid: Insect found outside Perth quarantine zone on three commercial properties retrieved on 27 April, 2017 from https://www.abc.net.au/news/2017-03-06/psyllid-found-outside-metro-area/8327732 Roberts, M. J., Schlenkera, W. (2013). Identifying supply and demand elasticities of agricultural commodities: Implications for the US ethanol mandate.The American Economic Review,103(6), 2265-2295. Tomek, W. G., Kaiser, H. M. (2014).Agricultural product prices. Cornell University Press.