This is the story of the prices of tomatoes sold over three different days. Tomatoes in this particular city have been sold only thrice and they were on those three days.
On Day 1, the tomatoes were sold based on a market-determines-the-price method and so 100kg of tomatoes were sold for Rs.2 each. Various people bought these tomatoes without knowing how to use them, whether they would be tasty and how much they would be worth.
The next set of tomatoes (about 250kg) were to be sold on Day 2. By this time, the usage of tomatoes was well known and there was higher demand for the tomatoes. There were many more people ready to buy them now. This time though, the prices were not left to the market. The seller decided to use his own pricing methodology. For some reason, he decided that the selling price would be the same Rs.2 per kg. The tomatoes were hence sold on a First-come-first-served basis and fetched Rs.500. Some of the buyers immediately sold their new tomatoes for Rs.10 per kg and made a quick profit.
By the time the third lot was to be sold, there was already a shortage of tomatoes because of increased consumption. Moreover, the third lot was an improved bunch of tomatoes and hence had increased interest. A combination of the new features and increased demand implied that the prices would go higher this time. The seller decided that the prices of these tomatoes would be determined by the market. Buyers bid against each other and the 200kg of tomatoes were sold at an average price of Rs.40 per kg.
A quick recap:
Lot 1 - 100kg sold at Rs.2 each = Rs.200
Lot 2 - 250kg sold at Rs.2 each = Rs.500 (Some of these were resold immediately at Rs.10 each)
Lot 3 - 200kg sold at Rs.40 each = Rs.8000
Seeing the amount fetched by the sale on Day 3, #outrage ensued in some sections over the price fetched by Day 2. There were allegations of foul play on the underpriced sale on Day 2 and so a committee was set up to investigate this issue.
The committee's primary responsibility was to find out the loss incurred by the seller on Day 2 because of the sale. The committee came up with a two calculations:
Calculation 1: Lot 3 fetched Rs.40 each, so Lot 2 could also have fetched Rs.40 each. So the loss per kg = Rs.38 and the total loss is Rs.9500. What this method conveniently ignores is that the Rs.40 in Lot 3 is so high because of two reasons - A - they are an "improved" variety and B - the previous lot of tomatoes were inefficiently distributed (and thus increasing the demand for Lot 3). So, it would be wrong to conclude that the buyers would have paid Rs.40 for Lot 2.
Calculation 2: Some amount of Lot 2 was resold at Rs.10 per kg. Hence, the entire Lot 2 was worth Rs.10 per kg. So the loss = Rs.8/kg and a total loss of Rs.2000. This too is overstated since only a part of the Lot 2 was resold and hence cannot be the price of the entire lot.
Rubbishing these allegations, a Calculation 3 was offered as a counter-argument saying that there was no loss to the seller at all, since the price was Rs.2 per kg on Day 1 and it is a fair price on Day 2 too.
What do you think? How would you estimate the loss? What do you think the actual loss is?
My estimate is :
Calculation 1 >> Calculation 2 > Actual Loss >> Calculation 3
P.S. This is not really a story about tomatoes. Read the 9500 loss in Calculation 1 as Rs.1.76Lakh Crores and read this again. Calculation 2 is based on one of the CAG member's assessment of 2645 Crores. The And of course, Calculation 3 is based on our good ol' Mr.Kapil Sibal's claim.
On Day 1, the tomatoes were sold based on a market-determines-the-price method and so 100kg of tomatoes were sold for Rs.2 each. Various people bought these tomatoes without knowing how to use them, whether they would be tasty and how much they would be worth.
The next set of tomatoes (about 250kg) were to be sold on Day 2. By this time, the usage of tomatoes was well known and there was higher demand for the tomatoes. There were many more people ready to buy them now. This time though, the prices were not left to the market. The seller decided to use his own pricing methodology. For some reason, he decided that the selling price would be the same Rs.2 per kg. The tomatoes were hence sold on a First-come-first-served basis and fetched Rs.500. Some of the buyers immediately sold their new tomatoes for Rs.10 per kg and made a quick profit.
By the time the third lot was to be sold, there was already a shortage of tomatoes because of increased consumption. Moreover, the third lot was an improved bunch of tomatoes and hence had increased interest. A combination of the new features and increased demand implied that the prices would go higher this time. The seller decided that the prices of these tomatoes would be determined by the market. Buyers bid against each other and the 200kg of tomatoes were sold at an average price of Rs.40 per kg.
A quick recap:
Lot 1 - 100kg sold at Rs.2 each = Rs.200
Lot 2 - 250kg sold at Rs.2 each = Rs.500 (Some of these were resold immediately at Rs.10 each)
Lot 3 - 200kg sold at Rs.40 each = Rs.8000
Seeing the amount fetched by the sale on Day 3, #outrage ensued in some sections over the price fetched by Day 2. There were allegations of foul play on the underpriced sale on Day 2 and so a committee was set up to investigate this issue.
The committee's primary responsibility was to find out the loss incurred by the seller on Day 2 because of the sale. The committee came up with a two calculations:
Calculation 1: Lot 3 fetched Rs.40 each, so Lot 2 could also have fetched Rs.40 each. So the loss per kg = Rs.38 and the total loss is Rs.9500. What this method conveniently ignores is that the Rs.40 in Lot 3 is so high because of two reasons - A - they are an "improved" variety and B - the previous lot of tomatoes were inefficiently distributed (and thus increasing the demand for Lot 3). So, it would be wrong to conclude that the buyers would have paid Rs.40 for Lot 2.
Calculation 2: Some amount of Lot 2 was resold at Rs.10 per kg. Hence, the entire Lot 2 was worth Rs.10 per kg. So the loss = Rs.8/kg and a total loss of Rs.2000. This too is overstated since only a part of the Lot 2 was resold and hence cannot be the price of the entire lot.
Rubbishing these allegations, a Calculation 3 was offered as a counter-argument saying that there was no loss to the seller at all, since the price was Rs.2 per kg on Day 1 and it is a fair price on Day 2 too.
What do you think? How would you estimate the loss? What do you think the actual loss is?
My estimate is :
Calculation 1 >> Calculation 2 > Actual Loss >> Calculation 3
P.S. This is not really a story about tomatoes. Read the 9500 loss in Calculation 1 as Rs.1.76Lakh Crores and read this again. Calculation 2 is based on one of the CAG member's assessment of 2645 Crores. The And of course, Calculation 3 is based on our good ol' Mr.Kapil Sibal's claim.
