India Shedding Tears over Onion Prices
This case highlights the demand and supply factors that caused a sharp rise in onion prices during the period of December 2010 to January 2011. These factors ranged from natural demand and supply forces to manmade forces such as government price interventions in the form of a minimum export price and ceiling price, and a supply shortage that was artificially created by hoarders in anticipation of higher prices in the ensuing period. Government price interventions prevented price mechanisms from clearing the market. Hence, alternative clearing mechanisms such as maintenance of the surplus stock or rationing were used in the onion market. The cost of such alternative clearing mechanisms, however, falls on taxpayers. The case highlights the dilemma faced by policy makers and analysts: whether the government should intervene in the market in the short run by providing subsidies when prices are exorbitantly high, or incur heavy investment expenditures to bring about long-run stability in onion prices.
The case is aimed at:
- Illustrating the factors affecting demand and supply in the short run as well as in the medium and long run;
- Explaining how changes in various factors result in simultaneous shifts in the demand and supply curves and fluctuations in price and quantity demanded;
- Depicting the impact of government policies on price fluctuations;
- Illustrating the impact of price interventions by the government on the market and rationing as an alternative to market mechanism;
- Demonstrating the impact of alternative clearing mechanisms on society.
The case is designed to illustrate the application of the following concepts:
- Factors affecting demand and supply;
- Movement along the demand and supply curves;
- Shifts in the demand and supply curves;
- Demand and supply elasticity in the short and long run;
- Perfect competition;
- Government price interventions: ceiling price and floor price;
- Market mechanism vs. rationing.