Question

Consider the following forecast: "Next month, we predict that the demand for oranges will continue to increase, which will tend to raise the price of oranges. However, the higher price will increase supply, and a greater supply tends to lower prices. Accordingly, even though we predict that demand will increase next month, we cannot predict whether the price of oranges will rise or fall." There is a serious mistake of logic in this forecast. Can you find it? Explain.

Short answer

The logical mistake in the forecast lies in its assumption that supply can instantly increase in response to an increase in price due to higher demand. In reality, there usually is a time delay in the ability to increase supply in response to increased prices, especially in the context of agricultural products like oranges.

Step-by-step solution

Understanding the forecasting logic

In the forecast, it's predicted that demand for oranges will increase in the next month, which should naturally cause the price of oranges to increase, based on the principle of supply and demand. In economics, as demand for an item increases and supply remains unchanged, a higher equilibrium price will occur.

Analyzing effect of price on supply

The forecast then mentions that the higher price of oranges will increase the supply. This is based on the fact that as price increases, suppliers are more motivated to produce and sell the item to capitalize on the profit potential. A greater supply, as the forecast points out, tends to lower prices referencing again to the law of supply and demand.

Identifying the mistake

The mistake of logic in this forecast lies in the assumption that supply can change within the same period of increased demand. Usually, in any production cycle, there's a time lag between the identification of increased prices (and thus increased demand) and the ability to increase supply. In other words, the growers of oranges cannot instantly increase their supply in response to increased prices during the same month. An immediate reaction of supply to an increase in price is unrealistic. Therefore, the forecast should actually anticipate an increase in the price of oranges due to increased demand, at least in the immediate term. The increased supply (and possibly lower prices) might be processed later once suppliers react and produce more oranges, but not simultaneously.