I was watching the news today and I read something that has hit a nerve...

Onion prices in cities all over India have gone up and the BJP spokeperson made a comment to the effect of is the government going to tell us global onion prices have increased and in a different comment onion prices are a classic case of inflation going up and not really decreasing as was reported earlier.

I am not a congress supporter infact I am believer of a good governance implies little governance....

But these statements got me thinking. If a senior politician can say this obviously the common man is going to say the same thing. Teach economics to the general population came the reply... but economics is filled with numbers people may not like it... I have always saud I would want to make a difference and this is the first time something has made enough sense to start...

Inflation and the price of onions:

What is inflation exactly? How does this index come about? And can the price of a particular commodity be controlled by the government in a free market?

In simple terms the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling is called as inflation.

The formula for calculating the Inflation Rate using the Consumer Price Index is relatively simple. Every month the Bureau surveys prices and generates the current Consumer Price Index (CPI). Let us assume for the sake of simplicity that the index consists of one item and that one item cost 1.00 in 2010. The Bureau published the index in 2010 at 100. If today that same item costs 1.85 the index would stand at 185.0. This would imply that the price has gone up. Generally the CPI basket comprises of a number of goods that are essential for the people. If the price of a majority of these goods increases we say that there is inflation.

Now we come to the bone of contention the Price of Onions

How much do you think it costs to grow one Kilo of Onions. Well there is the price of land, water, electricity, seeds, the upkeep of the machinery, the cost of the farmer, petrol, and then the opportunity cost which cannot be calculated. In India the monsoon season also plays a huge role in determining the cost of onions. For the sake of this argument we shall not consider the impact of the rains.

Now, petrol prices are in every turmoil which makes it expensive for the farmer to plough his land with a tractor, but using cattle is not as efficient. So the cost to produce has gone up a little.

Land is not something that we have in abundance. The number of people to the land under cultivation is low. This means that the farmer needs to produce more onions than every before from the same piece of land. But the land will become infertile if it is over cultivated so he might buy fertilizers and pesticides which all cost money. He might instead go and get better land which will cost him and again the price increases.

Now the onions are ready to send to the market. Well petrol will be there so will transportation. The middle men are a different story and we shall eliminate them for the sake of argument right now.

Well the onion has reached the market place and we have not put in the price increase for the sake of the farmer and his family. After increasing the price for a good profit margin we can sell it in a market that is free. Which implies that if the demand for my product grows and the supply is limited the price of my product will increase.

Economics is amazing. In very simple terms we are able to link the prices of goods and the external non-financial environment to the price of one commodity. Can it be controlled? Well yes it can be but not completely eliminated. In fact there should be a small amount of inflation in any economy but more on that in another rant.