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FULL ARTICLE:
In several cities prices of the vegetable have doubled in recent weeks, prompting the
government of the world’s biggest onion exporter to take steps to calm prices ahead of key
state elections later this year.
In June, India withdrew 10 per cent export incentives on onions after prices started to rise
due to dwindling supplies from last year’s harvest and a delay in planting of the summer-
sown crop.
Excessive rainfall in the second half of the monsoon season has led to crop damage in several
states and stocks held by traders are insufficient to meet demand until the new crop arrives at
end-October.
Earlier this month, the government also imposed a $850/tonne minimum export price (MEP)
on onion shipments.
The government has also attempted to bring down prices by releasing more onions from
federal buffer stocks, prices have remained fairly high
CRITERION A: DIAGRAMS
The graph above shows that the supply of onions has decreased and thus the supply curve has
shifted from S to S1. This means that a lower quantity of onions will be supplied at every
price, and that the quantity of onions that producers are willing and able to supply has
decreased. The reasons for the decrease in supply have been discussed below. The demand
for onions has remained the same as onion is a highly inelastic good and is considered a
necessity in many homes. As a result, the price of onions has gone up significantly from P to
P1. The shortage in the quantity supplied of onions is the difference between Q and Q1. Thus
the market is in disequilibrium, and it would be socially optimal to have a higher quantity of
onions supplied.
DEMAND CURVE FOR ONIONS
This graph shows the demand curve for onions. We see that the curve is very steep through
which we can infer that the price elasticity of demand for onions is highly inelastic. This
means that the consumers of onion are very unresponsive to a change in its price. Thus even
when there is a large increase in the price of onions, there is a very small change in the
quantity demanded. We see that when the price of onions rises from P3 to P4, the quantity
demanded shifts only from Q3 to Q4. This is because onion is considered as a necessity in
many homes, as it is a core ingredient in many Indian recipes. As onions are a necessity, and
their demand is highly inelastic, the government has intervened and has imposed a high
minimum export price on onions so as to discourage the export of onions and to try and keep
CRITERION B: TERMINOLOGY
-Demand: Demand is defined as the willingness and the ability of consumers to buy a
-Supply: Supply is defined as the willing ness and the ability od producers to provide a
-Exports: Goods produced in one country are shipped to another country for future sale or
trade
-Shortage: A shortage is the condition in which the quantity demanded is greater than the
quantity supplied.
-Price Elasticity of Demand (PED): Price elasticity of Demand is the measure of the
-Market equilibrium: Market Equilibrium is the condition in which the quantity demanded
demanded is not equal to the quantity supplied, and there is either a shortage or a surplus.
-Necessity: Necessity goods are those goods that have a very low price elasticity of demand,
-Minimum Export Price: It is the price below which exporters are not allowed
When analysing this situation the following economic theories must be taken into
consideration.
Price mechanism: refers to the system where the forces of demand and supply determine
the prices of commodities and the changes therein. It is the buyers and sellers who actually
The law of supply: The law of supply states that there is a direct relationship between the
It is important to understand the difference between supply and quantity supplied. The supply
is dependent on non-price factors while the quantity supplied depends on the price. In the
case of this situation, the supply has not decreased due to a change in price, but due to
factors such as flooding and excessive rainfall, crop damage, delay in the sowing of the crop,
etc.
In the case of this situation the supply of onions has decreased due to natural calamities such
as flooding which have led to crops being damaged. Due to unpredictable weather, the
summer crop was sown too late in the year and thus a large number of onion crops have been
destroyed due to heavy rainfall. Thus the damage of resources and the destruction of natural
The law of demand: The law of demand sates that there is an inverse relationship between
Again, it is important to note the difference between demand and the quantity demanded. The
demand for a good is affected by the non-price determinants of demand while the
CRITERION D AND E: ANALYSIS AND EVALUATION
India is the world’s second largest onion producer, with an acreage even higher than that of
China, however the yield for onions in India is one of the lowest in the world. This shows us
that although we are growing a large number of onions, many of them are not reaching our
grocery stores because of various reasons. The most evident one, this year especially, are the
natural calamities that have led to a widespread destruction of the onion crop. Not only was
the summer crop sown very late this year, but excessive rainfall and flooding have destroyed
a large percentage of the crop and have significantly decreased the supply of onions. Another
reason for the decrease in supply is that not many onions remain from last years harvest.
Onion is a staple ingredient in most Indian homes, and thus is required all year round, thus
the lack of onions from the previous harvest has led to a large decrease in the supply.
As we have seen, the price elasticity of demand for onions is highly inelastic, through which
we infer that onions are seen by many as a necessity and thus when a good is a necessity and
its PED is highly inelastic, this leads to government intervention. Usually in such a case, the
government would give a subsidy on such a good in order to reduce the price. However, in
this case they have taken measures such as increasing the minimum export price to 850
dollars per tonne in order to discourage producers from exporting onions and trying to ensure
that the supply of onions does not decrease further. I think that this is a helpful measure as
producers have less incentive to export onions than they did before, and in the short term this
should help in keeping the prices of onions stable. The other measure that the government has
taken is to release onions from the federal buffer stocks in order to bring down the prices.
This is done so that the supply of onions can increase which will help in bringing the price
back down. Again, I do believe that this measure will be effective in the short term. However
the federal buffer stocks are predicted to run out quickly thus this method will not be
effective in the long term. The measures taken by the government are just temporary
measures to try and help the situation, rather than long term solutions. In the long term, I
think it is important to try and find more effective and reliable agriculture methods. Of course
things like rainfall cannot be controlled by us, but there are scientific and technological
methods that can help us to not only predict these natural calamities but will also show us
when to plant our crops so that they are not affected by these factors. Irrigation methods can
also be improved so that we are not as dependent on nature, and the summer crop can be
grown on time. Thus the methods taken by the government now are suitable, but in the long
term our natural capital and technology must improve so that such situations can be