Price Determination of Wine Grapes in South Australia
The determination of price of wine grapes in South Australia assuming a perfectly competitive market involves finding the equilibrium point between supply and demand (Case & Fair 1999). Figure 1 in the appendix shows that the price of wine grapes is determined by finding the point in which the amount of grapes produced and supplied by vineyards in South Australia is equal to the amount demanded by consumers composed of local and international wine manufacturers. At this level, the price that wine grape producers are willing to accept in exchange for their produce is also the amount that buyers are willing to pay in exchange for a specific quantity of grape wine. In perfect competition, a certain quantity of wine grape has a corresponding price so that determining the quantity where both suppliers and buyers agree on a price per unit leads to the determination of price. The equilibrium level in perfect competition is considered as the point of maximum or optimum efficiency because there is no excess supply or demand since the quantity demanded is equal to the quantity supplied at the agreed price between buyers and sellers.
Dominant Factors Determining Price Elasticity of Demand and Supply for Wine Grapes
Several price-related factors influence the responsiveness of demand to changes in price, in the wine grape industry in South Australia. Price-related factors include the price of other grape wine suppliers in other areas in Australia as well as other countries and the price of raw materials used in the production of grape wine. Wine grape buyers are receptive to the price differences of different producers in different areas resulting to competition in price offerings. In the present market, wine grape suppliers compete for market share. (South Australian Farmers Federation 2005) Ideally, Figure 2 in the appendix shows that demand is inversely related to price so that elasticity is a negative number. In practice, a decrease in the price of other wine grape suppliers relative to South Australia results to a higher demand for the produce of other suppliers that pulls a commensurate percentage of the market away from South Australian producers. In case of an increase in the price of raw materials, this result to an increase in production cost that in turn increases the price that South Australian growers are willing to receive. Since, the quantity demanded by buyers change inversely with price, the increase in price is expected to decrease demand with buyers shifting to growers with lower price offerings.
There are several price factors influencing producers or suppliers in South Australia in terms of the quantity supplied to the market. Price factors affecting supply are increase in demand, decrease in supply of other growers, and increase in price of raw materials or production cost (Case & Fair 1999). Figure 3 in the appendix shows that change in supply is directly related to changes in price. This indicates that the increase in demand and production cost and a decrease in the supply of other growers heighten the ability of producers in South Australia to increase price.
Including elasticity as a consideration in looking at the price determination of wine grape producers in South Australia, it has identified the different factors and market conditions affecting the industry and the response of South Australia growers to changes in these factors. Elasticity of demand and supply explains the policy inclinations of buyers and suppliers of wine grape to changes in market price. Unlike in perfect competition, different factors present in the dynamics of the wine grape industry are considered to have a more complete view of the economic status of the industry.
Impact on Price, Quantity and Total Revenue w/ Increased Supply
Using the supply and demand model [Figure 4, Appendix] and assuming that price equilibrium is on the inelastic side of the demand curve before and after the supply change, an increase in supply would reflect a lower price, an increase in quantity demanded and a corresponding increase in revenue (Case & Fair 1999). Figure 5 in the appendix shows the relationship between supply, demand and price and implying the expected revenue, with revenue calculated by multiplying quantity and price at given points. When supply increases, there is a corresponding decrease in price due to market forces. With a decrease in price, the quantity demanded by buyers would also increase because they would definitely want to purchase a bigger quantity due to the lower price. Because there is a bigger demand, growers are able to sell more produce, earning greater revenue.
Impact on Price, Quantity and Total Revenue w/ Increased Demand
Based on the supply and demand model [Figure 4, Appendix] and assuming that the price equilibrium is at the elastic portion of the demand curve prior to and after the change in demand, an increase in demand would hike up the price of wine grapes, increase the quantity supplied and increase revenue (Case and Fair 1999). The bigger price incentive for suppliers would increase the quantity supplied. Bigger quantities sold at a higher price would then increase revenue for wine grape growers. Figure 6 in the appendix shows that with an increase in demand for wine grapes, its price is pushed upwards and suppliers or growers are encouraged to improve their production to meet the increased demand. In case the growers are able to match the increase in demand, there is an increase in revenue because bigger units of quantity are multiplied with a bigger price per unit.
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