Microeconomics In The Real World: Chili Prices Hot On Short Supply and Rising

Demand

Summary of the article

This article is produced by P.K. Krishankumar and Jayashree Bhosale in July 16,
2015. It is reported that the chili price increased a lot this year, compared with last year. The
price of chili exported from India, which is a main chili produce country, hovered around Rs
95 to Rs 100 per kilogram compared with last year (Krishankumar & Jayashree, 2015). The
increasing demand and short supply play a very important role in the price change. This year,
there were too many rains, which caused the productivity decreased around 15% to 20%
(Krishankumar & Jayashree, 2015). However, the demand is still very high. The high demand
of chili almost finished all the stock. Both China and Bangladesh imported a great number of
chilies from other countries this year, because they could not meet the supply with domestic
productivity.
It was predicted that the farmers will increase the planting areas for chili to meet the
increasing demand. M G Shembekar of Ankur Seesds said there has been increasing demand
for chili seeds from the states like AP, Maharashtra, MP and Guijarat. China also recognized
the market needs. They will increase the sowing for the next year to meet the high chili
consumption.

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Microeconomics Concepts

a. Market Equilibrium, Demand and Supply

In the market, equilibrium means the price is at a point, which the customers demand
equal to the suppliers supply (Dixon, 2000). However, it is very difficult to keep this balance.
Usually, the situation is either the demand is over the supply or the supply is over the
demand. When the demand is over the supply, the price will increase. On the other hand,
when the supply is over the demand, the price will decrease. From the end of 2014 to 2015,
the chili price hovered a lot compared with previous year. Generally speaking, it is because
the demand is over the supply. This is caused by two reasons. First of all, the rains lead to
decreased production of chili this year. The productivity decreased around 15% to 20%.
Secondly, there is still very high demand, especially export demand. From 2014 to 2015, the
high demand almost finished all the stock. The largest chili production region----Andhra
Praadesh particularly dried up its stock.
The short supply was recognized. This can be proved by the seeds company---- Ankur
Seeds. The seeds company said, there was high interest in chili planting this year. There has
been increasing demand for chili seeds in states like AP, Maharashtra, MP and Gujarat. It was
also reported that the chili sowing in China is also very high. If the weather is good in the
coming days, I believe there will have a good harvest. By that time, the chili supply will meet
the demand or maybe over the demand. As I mentioned above, when the supply is over the
demand, the price will decrease. Lets see what will happen next year.
Overview of Changes in Chili Prices

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Shifts in the Chili Demand (when supply

is not change )
An increase in chili demand
An decrease in chili demand

Leads to chili price to rise

Leads to chili price to reduce

Shifts in the Chili Supply (when the

demand is not change)
An increase in chili supply
An decrease in chili supply

Leads to chili to decrease

Leads to chili to increase

b. Elasticity of Chili Demand/Supply

Elasticity often shows the relationship between price and supply (or demand). If a
product or service is elastic, even small price change will lead large changes in demand
quantity. If the product or service is inelastic, even large price changes will not affect the
demand quantity changes. For some goods or services, the customers can make it very easy to
replace them. For such goods or services, people will be very sensitive to the price change. If
the price increases a lot, customers may stop to buy or immediately turn to substitute. Such
goods or services are elastic. If the goods or services are necessary for the customers or
cannot be easily replaced, the price change will not have great impact on the demand or
supply. Even though the price increases, the customer will consume and buy. There will not
have big demand or supply changes. Usually, elasticity can be roughly measured by supply
and demand changes. To calculate the most scientific elasticity, a formula can be applied:
Elasticity= (% change in quantity)/ (% change in price) (Senate, 2005). Chili is inelastic
product. Chili is a kind of spice, which cannot be replaced easily. Even though the price
increases, there will be small changes of demand quantity. These are the reasons that some
countries, like China and Bangladesh even exported from other countries, when there was not
sufficient supply in their own countries.

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c. Market Structures

The market mainly consists of buyers and sellers. Usually, the sellers are agents who
can use some methods to influence the good price. In the market, there exists two types of
competition: perfect competition and imperfect competition. Perfect competition is thought to
be unrealistic, where no barriers to enter into the market. There are unlimited number of
buyers and sellers. Imperfect competition is made up of different kinds of competition.
Generally speaking, the producers and consumers can influence the price of the goods.
Imperfect competition is mainly divided into three types: monopoly, oligopoly, and
monopolistic competition (Kiri-Ganal Research, 2006). In monopoly market, there is only
one seller, who will have the decisive power to decide the price. In the situation of oligopoly,
there are a series of firms. However, the number of the sellers is very limited. The sellers can
unit together to decide the market price. Monopolistic competition is made up of a great
number of companies, who make similar goods. Because companies produce similar goods,
so there are probably the effects of substitution. Therefore, monopolistic is considered as
competitive market. The chili market belongs to monopolistic completion. There are a great
number of producers and traders in this market. However, most of the stocks stay with the
traders. Nearly 75% of the stocks stay with the traders and the other 25% with the farmers.
The traders have some power to influence the market price.

Illustration with Graph

To better understand and analyze the relationship between chili demand/supply and
price, I developed a graph.

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In the real market, customers and sellers/producers have different reaction to price
changes. If the price is high, the demand will reduce and supply will be encouraged. On the
other hand, if the price is low, the demand will increase and supply will be discouraged
(Fuller & Alson, 2012). When the chili price is very high, the demand will be low. The high
price will attract more chili producers or traders into the market. Farmers may plant more
chili. More traders will come and involve in the chili business. Thus, the supply will increase,
which leads to price decrease. The chili supply continues to increase, and the price continues
to decrease. The lower price will drive more demand. There will always come to the balance,
at which the chili demand and chili supply equals. However, it is very difficult to keep the
balance all the time in the real market. If the chili supply continues to increase and price
continues to decrease, the supply will be discouraged. When the price is too low, the
producers and traders cannot have profit. Therefore, the supply will be discouraged.

References

Dixon, H. (2000). Equilibrium and Explanation. In Creedy. The Foundations of Economic

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Thought. Eur. J. Oper. Res. 2009, 196, 273-288.

Fuller, K.B and Alston, J.M. (2012), The supply & demand curves are plotted with the
independent variable (price) on the vertical axis and the dependent variable on the horizontal
axis, Journal of Economics, 7, 192-212.

Kiri-Ganal Research (2006), What does market structure mean?, Manchester School, 5, 1735.

PK Krishankumar & Jayashree Bhosale (2016), Chilli price hot on short supply and rising
demand.
http://articles.economictimes.indiatimes.com/2015-07-16/news/64495076_1_chilli-priceschilli-crop-paprika-oleos

Senate (2005), The relationship between demand and supply model. Microeconomic Analysis:
34, 90-108.

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