Question

[Related to Solved Problem 3.4 on page 94\(]\) The demand for watermelons is highest during summer and lowest during winter. Yet watermelon prices are normally lower in summer than in winter. Use a demand and supply graph to demonstrate how this is possible. Be sure to carefully label the curves in your graph and to clearly indicate the equilibrium summer price and the equilibrium winter price.

Short answer

The price of watermelons is lower in the summer due to a significant increase in supply, which exceeds the increase in demand, leading to a market surplus and hence a lower price. In winter, decreased supply outpaces the decrease in demand, leading to a market shortage, and as a result, the price rises.

Step-by-step solution

Understanding Demand and Supply Curves

To start with, let's establish what demand and supply curves represent. A demand curve shows the quantity of a product that consumers are willing and able to purchase at various prices, holding everything else constant. A supply curve, on the other hand, represents the quantity of a product that producers are willing and able to offer for sale at various prices, holding everything else constant. These curves usually have a negative and positive slope respectively.

Plotting the Demand and Supply curves for Summer

In the summer, demand for watermelons increases as consumers desire more of this refreshing fruit. However, because it is also the harvesting season for watermelons, producers can supply a lot more. This increase in supply is larger than the increase in demand, resulting in a surplus of watermelons in the market, leading to a decrease in price. Plot a graph with 'Price' on the Y-axis and 'Quantity' on the X-axis. Draw a downward sloping demand curve labeled 'Summer Demand' and an upward sloping supply curve labeled 'Summer Supply'. The intersection of these two curves determines the equilibrium 'Summer Price' and 'Quantity'.

Plotting the Demand and Supply curves for Winter

In winter, the demand for watermelon decreases. Simultaneously, winter is not a harvesting season, so the supply also drastically decreases. The decrease in supply is greater than the decrease in demand, causing a shortage in the market which leads to an increase in price. On the same graph, draw a new lower demand curve labeled 'Winter Demand' and a significantly lower supply curve labeled 'Winter Supply'. The intersection of these curves will determine the 'Winter Price’ and 'Quantity'. This price will be higher than the summer price due to the lower supply.

Key concepts

Equilibrium Price

The equilibrium price is a fundamental concept in economics where the demand for a product matches its supply. At this point, the market is in a state of balance, and there is no tendency for the price to change, assuming other factors remain constant. This convergence of supply and demand determinesthe most efficient market price, where the amount producers are willing to sell equals the quantity that consumers are ready to buy.

When graphically representing equilibrium on a supply and demand curve, the point of intersection of the demand curve (downward sloping, reflecting higher quantity demanded at lower prices) and the supply curve (upward sloping, indicating that higher prices incentivize producers to offer more of the product) indicates the equilibrium price and quantity. In the context of watermelon prices, during the summer, the high supply meets high demand at a lower equilibrium price due to the prevalence of the fruit. Conversely, in the winter, both the supply and demand are lower, but the supply decreases more significantly compared to demand. This shift means the winter equilibrium price will be higher despite a lower quantity.

Market Surplus and Shortage

Market surplus and shortage occur when there is an imbalance between supply and demand, leading to either excess goods on the market or insufficient goods to meet demand. A market surplus happens when the quantity supplied exceeds the quantity demanded at a given price. This scenario typically prompts producers to lower prices to clear excess inventory, aligning the market back towards equilibrium. For watermelons, this surplus naturally occurs in summer when harvests are plentiful.

A market shortage, on the other hand, arises when the quantity demanded exceeds the quantity supplied. Producers may raise prices in response, reducing consumer demand and eventually returning the market to equilibrium. In winter, watermelon encounters a shortage, with limited availability due to off-season growing conditions leading to higher prices. Understanding these concepts can help explain the seasonal differences in watermelon pricing, independent of their demand peaks.

Seasonal Price Fluctuation

Seasonal price fluctuation refers to the regularly occurring changes in price levels due to seasonal variations in supply and demand. This pattern is often observed with agricultural commodities, such as watermelons, where the supply can vary significantly depending on the time of year.

During growing seasons, the supply of these products increases, often leading to lower prices if the increase in supply outpaces the rise in demand. Conversely, during off-season months, the supply drops as growing conditions become less favorable, causing prices to increase if demand remains relatively stable or does not decrease proportionally.

Impact of Seasons on Price

In the case of watermelons, the summer brings an abundance of supply, which often leads to lower prices despite high demand. In winter, supply constraints due to non-harvesting season result in higher prices. This seasonal fluctuation is a natural outcome of the agricultural cycle affecting the equilibrium of the market.