Consumer, Firm and Markets

Title: India Shedding Tears over Onion Prices

Batch: 2021-23 Section: B Date: 24-08-2021

Sr. No. Name Roll No.

1. Anand Anadkat 202112074
2. Aniket Agarwal 202112045
3. Hitesh Jain 202112060
4. Payel Adhikari 202112076
5. Pranay Bang 202112075

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 Q1) What factors affected the demand and supply of onions during the period of December
2010 to January 2011?

Reasons for the shortage of onions

➢ Natural factors:
a. Fungal diseases in Maharashtra
b. Erratic and extended monsoon in Maharashtra
c. Heavy downpours and prolonged humid climate in Maharashtra
d. Untimely heavy shower in southern India.

➢ Artificial factors
a. Shortage of onion stock caused by insufficient proper storage facilities
b. Delay in government actions or policies
c. Artificial supply shortage because of hoarding of stocks.
Reasons for the increase of the market demand.
Demand increases seasonally from December to January every year caused by festivals and
Indian weddings. Anticipation to the price of onion also affect demand for the short time.

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Q2: What perceptions have you formed regarding the supply and demand curves for onions
in the short run compared to the medium and long run? How were these curves affected by
the situations depicted in the case, and what was their impact on the market?

For the short run, Demand increases seasonally from December to January every year caused
by Indian wedding season, hoarding, anticipation of future price and major festivals. During the
period, demand curve would shift to the right from D0 to D1, and it led to increase in price from
P0 to P1 as Demand > Supply. Higher price anticipation in the future would encourage more
demand and thus it led to shift in demand curve.

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In the medium run to tackle the situation in the onion market as the government tries to take
immediate measures to help deal with this crisis in the most effective way possible, through
price fixing and exporting of onions from neighboring countries. There comes a steadiness in
the market and we can see from the above graph that there emerges a new equilibrium at A as
market settles down to a relatively higher price than usual.

The above graph is of long run, in the long run supply curve will shift leftwards from S0 to S3
and price will increase marginally from P0 to P3. This happens because in the long run
government will take care of all the effects which lead to unexpected increase in price and price
will get stable somewhere near the normal price.

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Q3: Explain the impact of market forces and the government’s intervention in the form of a
price ceiling on the onion market using a diagram. (Hint: Draw two diagrams: 1. The situation
without the government’s intervention; 2. The situation with the government’s intervention
in the form of a price ceiling – explain what happened when the government-imposed price
ceiling and how the government cleared the market).

To explain the impact of market forces and government intervention by imposing price celling
we made two graphs

The above graph explains the impact of market forces, in this before the price hike the market
equilibrium is at A. in the case we read the demand for onion increases because of wedding
season, festivals like Christmas, Makar Sankranti, etc. as suddenly demand increases it leads to
the increase in price as Demand > Supply. As Demand > Supply it leads to increase in price, in
this onion is out of purchasing power of few people and people will demand less. In this case
new equilibrium will settle at B.

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The above graph explains the impact of government intervention by imposing price celling,
government will use price celling technique when equilibrium price is too high in the market.
Government imposes price celling on the essential commodity or commodity which is
considered almost essential. As onion is consumed by people from all income ranges. To make
onion affordable to people government imposes price celling, in this government will impose
price which is lower than market price. In this government will fix new equilibrium price. In the
above graph, market equilibrium price is P0 which is too high, as very less people can afford the
product, so government imposes price celling and fix new price at P1. P1 is the new equilibrium
price fixed by government. As government has fixed the price so suppliers can supply at a
maximum of P1 so it will lead to shift in supply curve which is a rightward shift as supplier want
to supply less at P1. So new equilibrium quantity will settle at B.

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