If demand for farm products is highly inelastic, a large crop yield may reduce farm incomes...?

Question

Don't understand this statement...please help

Answer 1

The first statement "demand for farm products is highly inelastic" would mean that demand does not change much. So if demand does not change, and yields go up (bushels per acre), then you end up with more supply than can be consumed. Supply and demand says that the price per bushel then goes down, and since the market demand has not changed, you end up selling the same volume of produce for a reduced price per unit, so you actually make less money, and have product left over that doesn't sell. And since most farm products have a shelf life, much of it ends up being scrapped out.

Answer 2

A highly inelastic demand curve means that there will be very little change in the quantity demanded of a product in response to a change in price. Price may fall by 10%, demand may increase by 0.02%. In the extreme case, where demand is perfectly inelsatic then a fall or rise in price will leave the quantity demanded unaffected. Price falls by 10%, demand increases by 0%. That is because a perfectly inelastic demand curve is a vertical line. Also keep in mind that total income is the price times the quantity sold (P x Q). So if price the price of a good is $2.00 and the quantity sold is 100, then total income is $200.00.

Now assume that there is a large crop yield. This suggests that the supply of the product increases. Remember an increase in supply (which is different from an increase in the quantity supplied) means that the upward sloping supply curve will shift outward and downward to the right, thereby cutting the vertical demand curve at a lower point and resulting in a new and lower equilibrium price. Simply put, an increase in supply will cause the market price to fall. So in our example the price falls from $2.00 to $1.50.

However, if the demand is perfectly inelastic, a fall in price will result in NO change in demand. The price in our example fell from $2.00 to $1.50 - which is a 25% drop, and demand increases by 0%. The total income is now - P x Q - 1.50 x 100 = $150.00. Income falls by $50.

So the increased supply from the large crop yield caused a drop in price but because demand is inelastic there is no increase in the quantity demanded and the farmer gets a lower total income.

If the good is not perfectly inelastic, the demand curve would not be vertical, but almost vertical. A fall in the price of the good may result in a very small increase in quantity demanded, but this small increase in demand and the additional income earned from this small increase may be insufficient to compensate for the loss in income from the price fall. So if a 25% fall in price results in a 5% increase in quantity demanded (i.e. an additional 5 units of the good sold - 5% of 100), then the loss from the price fall is $50 and the additional income earned at the new price is 5 x 1.50 = $7.50. The new total income is $200 - $50 + $7.50 = $157.50. The increase in income is insufficient to compensate for the loss resulting in overall lower income.

So we can conclude that if the demand for farm products is highly inelastic, a large crop yield may reduce farm incomes.

Answer 3

Let me help you picture a Demand Supply diagram.
As you know, the horizontal axis is quantity of products and vertical axis represents price of the product.
Demand curve has a negative slope and supply curve has positive slope.
The intersection ot these curves give you the equilibrium price and quantity.
In your case, the demand curve is very steep (highly inelastic) because huge changes in prices cause only small changes in the quantity demanded.
Now, when there is a large crop yield, the supply curve will shift rightward (or more like downward in your diagram). The new equilibrium price will be lower and the equilibrium quantity will be higher. However the fall in prices will be more than the rise in quantity (because of the steep demand curve). As farm income is obtained by multiplying the price and quantity, the new income will be lower.

Numerical example:
Equilibrium price=USD10
Equilibrium quantity= 8 million tons
Farm revenue= USD80 million

Supply curve shifts;
New Equilibrium price=USD6
New Equilibrium quantity= 10 million tons
New Farm revenue= USD60 million

Answer 4

There are some good answers here. Here's one that's even simpler than these, without graphs:

Imagine that there is only one food on earth: potatoes. We all eat potatoes. You personally either eat 5 potatoes a day or you will slowly starve to death. Eat more, and you gain weight. Thus, your demand for potatoes is almost completely inelastic - you buy 5 per day, regardless of the price. That's the definition (layman's definition) of inelasticity.

In aggregate, food is like this. We eat what we eat, no more and no less (on average).

Let's say we have a really bad growing year and half of the crop dies in a blight or something. People will fight for the potatoes that are harvested so that they don't starve. This fighting will happen via money. They will "bid the price up" or the farmer will let them starve.

The evil farmer, knowing that he's got you by the short hairs, raises prices from $1 per pound to $3 per pound. Ouch.

People are hungry, however, and they buy everything he sells. THAT'S the essence of in-elasticity.

So the math works out that although he sold only half as much (remember, half of the crop died), he sold each unit for 3 times more than he would have if it hadn't died. He planted 1,000 pounds of potatoes, figuring that he'd sell them for a buck per pound, and make $1,000. Instead he only sold 500 pounds - the stuff that lived - but he made $3 per pound. That comes to $1,500, gross... $500 more than he planned, for selling half as much.

The answer to your question is this scenario, in reverse. I'll let you do the math, but basically it starts when the farmer plants 1,000 pounds of potatoes but the fertilizer is *excellent* and he gets 3,000 pounds of yield. If every other farmer has the same results, the market is flooded with potatoes. If he wants you to buy *his*, he'd better lower the price - and at some point it goes so low that he actually makes less (gross or net - you can calculate it either way).

Now the farmer isn't evil, he's a victim and Willie Nelson sings for him.

And, btw, it's interesting to apply this whole discussion to corn, when you realize that the demand for bio-energy might compete with the demand for it as food.

Might be a good time to invest in John Deere... LOL

Answer 5

Farm produce like rice, wheat, vegetables, fruits cannot be stored for long without putting them in refrigeratiors. Due to historically low prices of farm produce, it is very costly to transport these to remote places. This means that most of these should be consumed locally only in the area near to produce. Now if suddenly the productions goes up, there will be less competition in the market. A classic demand supply case. Buyers will have more choices while sellers will be forced to sell at lower price. Since the input in production remains the same per unit of production while realization goes down per unit of productions, seller will lose due to large crop yield.

I hope this clarifies a bit.

Disclaimer: I read economics in High school only around 15 years ago.