The price of sugar has gone up due to a fall in supply from India and increasing demand in Brazil for the production of ethanol. In economics, a market where the price of a commodity is influenced by supply and demand is regarded as perfect competition. A perfectly competitive market is characterized by product homogeneity, no trade barriers, many buyers and sellers, no transaction costs, and perfect information about the price of a good.
In this case, sugar is not differentiated, and the writing of the article clearly reveals that the author has perfect information pertaining to the price of sugar. These attributes qualify the market for sugar to be classified as perfect competition.
In a perfectly competitive market, the price of a commodity is fixed at the point of intersection between the market supply and demand curves. This also means that individual firms are simply price takers; they have no power to influence the market price of a normal good.
Should a firm desire to raise the price of the commodity, it means customers will buy from other firms causing the firm to increase the price to reduce profits as sales decline. The market demand curve under perfect competition is downward sloping from left to right. The supply curve is also downward sloping from right to left. The point of intersection of the two curves is the equilibrium price, which is equal to the market price.
Different factors in the market can cause either the supply curve or the demand curve to shift, which will lead to a change in the equilibrium price. Some of the factors include technological changes, weather patterns, and input prices, among others.
In this case, the supply of sugar from India has been depressed because of low rainfall leading to low production of sugar as crops in the farms were destroyed. Figure 1 indicates the impact of the fall in sugar supply on the equilibrium price.
From figure 1 above, DD0 is the demand curve showing the demand for sugar, and the SS0 supply curve shows the normal supply of sugar to the market. Point X0 shows the normal point of equilibrium at which the demand curve of sugar intersects with the normal supply curve of sugar. At this point, the normal price of sugar would be P0.
Given bad weather in India, less sugar is produced, affecting the supply to the market. Given the reduced supply of sugar, the supply curve of sugar will shift to the left to SS1. At the same time, the demand for sugar increases, especially in Brazil, causing the demand curve to shift upwards to DD1. As a result, we have a new point of equilibrium X1. At point X1, the market has to pay a higher price for sugar, P1.