CA Foundation Notes ✅ 29449

Forwarded from CA Exam Tips & Motivational Dose

🧅What Onion teach us about Stocks📈

Tendu Police Station, November 2019.

Police found an empty truck in their area.

A trader from Nashik had complained to the police about not being able to track his goods.

On Nov 11, a truck had left from Nashik, Maharashtra with his goods.
It was supposed to reach Gorakhpur, Uttar Pradesh on Nov 22.

The trader from Nashik had sent 40 tons of onions to a wholesaler in Gorakhpur.

The 40 tons of onions were said to be worth around Rs 22 lakh.
All of it had been stolen.

Onion was selling for around Rs 100 per kg (vs Rs 16 per kg only a few months earlier).

The government explored the idea of buying onions from countries like Egypt and bringing them to India using airplanes.
Onions are an integral part of the Indian diet.

Why were onions so expensive?
India exports many agricultural items. Onions are exported too.
It is believed that in 2019, traders sold too many onions outside India. This led to a shortage of onions within India. And that caused the prices to shoot up.

We have all heard about it – supply and demand.

But how does it happen?
When there is a shortage of items, how does the price shoot up? Who is controlling it? Who decides the new price?
The answer to all of those questions: the market.

Simple Supply and Demand

Let’s say you are trying to sell your house.
Your house has something that most other houses don’t. Maybe a corner plot or a good view.

You put it up for sale for Rs 50 lakh.
Someone comes and offers you Rs 52 lakh. So you’re ready to sell.

But then someone else comes and offers Rs 55 lakh. So now, you will sell the house for Rs 55 lakh.

So just because of the buyers’ willingness to pay a higher price, the price of your house is Rs 55 lakh.

Now, imagine the opposite.
You put it up for sale for Rs 50 lakh. But most buyers want a newer house.

You get one buyer offering to pay Rs 45 lakh. Another one comes and makes a slightly better offer: Rs 47 lakh.

You really need the money. So you sell the house for Rs 47 lakh.
Now, the price of your house is Rs 47 lakh.

The Market

So far, this is quite simple to understand.
It gets more complicated.

When you’re selling a house, it might be very unique. So there’s only one such house on the market.

But what happens when you’re selling something that is not unique? What happens when you are selling something like onions?

There are many sellers. There are many buyers. And there’s competition among them.

Let’s say you are a big buyer. You run a big restaurant chain. You have to buy 50 kg of onions.
You go to the seller who was selling at Rs 20 per kg.

But he only has 30 kg of onions.
You buy 30 kg of onions from him for Rs 20.

But you need 50 kg total. So you still have to buy 20 kg more. You look for the next cheapest option.
There are many sellers but they all want Rs 22.

They know you need more onions – they know you are desperate. So they keep their prices high.
You find another seller who is selling at Rs 21 – and he has enough stocks to sell you 20 kg.
Done.
You bought 50 kg of onions:
-30 kg onion for Rs 20.
-20 kg onion for Rs 21.

Now, let’s make this more interesting.

That same day, news comes in that it has been raining non-stop in Maharashtra. Many fields are flooded.

This means that less onion is going to be produced.

Fearing a shortage of onions, buyers feel like keeping some extra onions at home.

So people start buying more onions.

Sensing this, one shopkeeper raises his price from Rs 21 to Rs 25.
His thinking: ‘People are buying more onions than usual. I am sure people will buy these onions even at a slightly higher price’.

On the other hand, buyers are thinking: ‘Onion prices will rise in the future because of the shortage. Let’s buy as much as possible while it is still relatively cheap’..
This sets off a chain reaction.
Seeing demand, more sellers increase their prices.

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Read Part 2 from here.....

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