A Food Staple in all Households According to Reuters, there has been a seven-fold rise on the market price of onions due to a lack of supply in India albeit a constant demand prompting the government to take action. The government of India has placed a price floor which is a minimum legally allowable price of 850 USD per ton of onions exported overseas reducing global market size and subsequently affecting its trade relations with other countries such as Malaysia, UAE, and BangladeshIn a free market economy, market price is governed by the relationship between supply and demand and the intersection of these two curves. Referencing the article, the market price (price equilibrium) for overseas sales is $700 per ton which can be seen in Figure 2 as P(e). Holding all other factors constant (ceteris paribus), the law of …. States that a decrease in supply available to consumers will create an increase in price which is shown in figure 1. Supply shifts can have important effects on price and quantity.
The onion crops of India have suffered a supply shock with crop production expected to drop at least 25% due to sudden environmental changes. Heavy rainfall and flooding during the time of sowing had heavily damaged the crops disrupting the normal supply of goods. The shift left of the supply curve from S to S1 in figure 1 means that at any given price, there will be a decreased supply of onions available in the global market, a shortage. The leftward shift has decreased the quantity available from Q(e) to Q(1) which creates excess demand at the original price forcing producers to respond by increasing their prices.
The law of demand states that there is an inverse relationship between price and demand; such that as price increases, demand will decrease.To promote domestic growth (Indian economy) and prevent an increase in the price of onions (which will yield an even lower demand), the government has placed a price floor on onion exports of $850/ton well above the price equilibrium of $750/ton. By reducing the supply available to export, the government is inflating the demand from trading partners driving prices higher and higher until they surpass the price of the binding price floor.