Main issue
On March 20th, 2006, cyclone Larry devastated the banana industry in Australia. This was a cyclone with devastating effects which destroyed fruit worth of $300 million and approximately 4000 employers left without work. It was an event that took the producers by surprise because during a whole day they saw their work being wiped out, with farmers saying it may take years to recover. According to the Australian Banana Growers Council the bulk of the industry’s production “would be in ruins for about a year, and shoppers could be paying hefty prices as the fruit becomes scarce” (Blanchard, 2006, p.4). The cyclone hit the region with the higher percentage of plants of bananas, Queensland, with 95 per cent of the nation’s growth. Because of this, now the nation is experiencing a lack of bananas and the price is expected to grow. Craig Allen, CEO of the Australian Banana Promotions Company said, “Not that loyal banana consumers want to hear it, the current pricing is simply a matter of supply and demand” (Blanchard, 2006).
“Banana prices have hit record levels of over $100 per carton, and we are unlikely to see any relief until production from the Innisfail and Tully areas of Far North Queensland return to some form of normality, which will not be until November at this stage.
Australians consume around 20 million cartons of bananas a year, which equates to one box per person per annum or 13kgs of bananas each. Production in the six months between now and November will be between 30,000 and 50,000 cartons per week, a shortfall of some 350,000 cartons per week compared with normal supply.
The impacts may be huge and somehow immediate. There were about 3000- 4000 people who were working in the plants and now, because of the devastating effects, will lose their job for a period of time. And with no bananas to pick there’s nothing to pack. There’s going to be a chain effect phenomena which can affect other companies related to the banana plants.
Key stakeholders and main impacts
Stakeholders that can be listed are many. And the effects of this disaster that can be listed are numerous. It is like a chain effect phenomena that touches not only the closest stakeholders of the banana plants industry, but also other ones.
We can start from the companies or farms which possess the banana plants and now they see their land destroyed by the cyclone are going to have less or nothing business to run. This can affect not only in their economies, but that of the region, too.
The plants workers are another category which is going to find them without work for a period of time. This may lead to less ability to spend for some commodities, which means that many other businesses will be affected because people will have less money to spend.
But there can be mentioned others. There is the category of the close collaborations of the banana companies or plant. There can be mentioned the companies/ workers which packed the bananas that now have little or nothing work. There are the transportations companies that were used to deliver different orders of bananas in different stores or cities or regions. As was mentioned before it is a chain effect phenomenon that affects many parts of the industry.
It is hard to pick which of the above impacts may be the worst and which of the categories is affected the most. But I think that the main impact will be felt by the closest stakeholders of the banana plant, the owners and the workers. That because in their case it is the only thing which they worked with which is going to be destroyed.
Supply and demand theory
Many authors have described prices and quantities as “the most directly observable attributes of goods produced and exchanged in a market economy” (Brody, 1987). As Blanchard would summarize it:
“The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting power. Demand-and-supply analysis is used to explain the behavior of perfectly competitive markets, but as a standard of comparison it can be extended to any type of market. It can also be generalized to explain variables across the economy, for example, total output (estimated as real GDP) and the general price level, as studied in macroeconomics”. (Blanchard, 2006)
Traditionally, demand is described as the quantity that buyers are able and willing to purchase with a specific given price and at a specific time.” (Jordan, 1982, p.34)
In our case, the cyclone has affected the demand curve. Because of the lack of the supply (bananas), the big demand for the product cannot be satisfied.
On the other hand, the supply theory is concerned about the quantity of goods and services that a manufacturer is capable of supplying to the market. These goods should be supplied at a given price and at a given moment in time. The basic law of this theory is that “as the price of commodity rises, producers expand their supply into the market.
This theory is also explained through a graph which shows the relationship between price and quantity a producer/firm/company/market is willing to offer”. (Besanko & Braeutigam, 2005, p.55)
In trying to define the terms, we should say that supply is the ratio between the quantity of a good which is available in the market and the price at which it is available. There are various visual representations of it, if forms of table or graphs. It is the basic axiom of business that it should be profit maximizing at any cost. This means that businesses have always attempt to increase production (and thus supply) of various goods. This in turn will bring them the highest profit possible from sales. In literature, supply is typically represented as a “directly-proportional relation between price and quantity supplied (other things unchanged). That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift; say from a change in the price of a productive input or a technical improvement.” (Blanchard, 2006, p. 56)
On the market, there are some factors of production which are described as relatively variable for short periods of time. They are known to affect the cost of changing output levels. Among these factors we can mention electrical power needed to produce the products, raw-material which serves as the input for production and any related temporary work. There are other factors which are considered to be relatively fixed. Such factors include the factory building, all the equipment inside it and the key personnel needed to run it. These factors are constantly manipulated by the management of a business in order to bring the best results possible for it. These manipulations are represented in the changing of the supply curve in the short and long run. They also affect the change of the price-quantity ratio.
But demand and supply have also other applications in the market. Some of them include “the distribution of income among the factors of production, including labor and capital, through factor markets” (Blanchard, 2006, p.58). In a competitive labor market for example the quantity of labor employed and the price of labor (the wage rate) depends on the demand for labor (from employers for production) and supply of labor (from potential workers). Labor economics examines the “interaction of workers and employers through such markets to explain patterns and changes of wages and other labor income, labor mobility, and (un)employment, productivity through human capital, and related public-policy issues” (Freeman, 1987, p.8).
Through this graph we, by maintaining all other factors that effect on supply, beside price, can move through the supply curve. By that we understand that by increasing the price we can increase the supply quantity. On the other hand, by decreasing the price there results a decrease on the supply quantity.
This can be related to our case. Favorable weather conditions can result in an increase of supply and unfavorable weather conditions can result in a decrease of supply.
This may be considered as a specific case of the supply analysis, because the increase of price of some commodities can bring to increase the price of those products which are made by these commodities. So, the increase of the price of bananas can bring to the increase of the price of those products for which bananas are used as ingredients.
References
Besanko, D. and Braeutigam, R. (2005) Microeconomics. Toronto, Palgrave-Macmillan.
Blanchard, O. (2006) Macroeconomics (4th ed.), Ch. 7, “Putting All Markets Together: The AS–AD Model.” London, Prentice-Hall.
Brody, A. (1987) “Prices and quantities”. The New Palgrave: A Dictionary of Economics, v. 3, p. 957.
Freeman, R.B. (1987) “Labor economics”. The New Palgrave: A Dictionary of Economics, v. 3, pp. 72–76
Jordan, J.S. (1982). “The Competitive Allocation Process Is Informational Efficient Uniquely”. Journal of Economic Theory, 28(1), p. 1–18.)