CAN GOOD NEWS FOR FARMING BE BAD NEWS FOR FARMERS?

INTRODUCTIONLaw of Demand: When Price of the good rises its quantity demand decreases and vice-versa, remaining other things same.

Law of Supply: When price of the good rises its quantity supply also rises, remaining other things same.

Movement and Shift in Demand Curve

Movement and Shift in Supply Curve

Elasticity of DemandMeasures how much one variable responds to changes in another variable. Varity of Price Elasticity of Demand: Perfectly Inelastic Demand Inelastic Demand Unit Elastic Demand Elastic Demand Perfectly Elastic Demand

Inelastic Demand

Quantity demanded does not respond strongly to price changes. Price elasticity of demand is less than one.

CASE STUDY AND ANALYSISUniversity agronomists discover a new wheat hybrid that is more productive than existing varieties. Discovery of the new hybrid affects the supply curve. The demand curve remains the same.

An increase in supply in the market for wheatPrice of Wheat2. leads to a large fall in price. . . $3 1. When demand is inelastic, an increase in supply . . .

S1 S2

2

3. and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220.

Demand 0 100 110 Quantity of Wheat

Farmers total revenue = Price of wheat X Quantity sold Due to hybrid Q rises and P falls. Total revenue depends upon the elasticity of demand. Demand for basic foodstuffs such as wheat is usually inelastic, for these items are relatively inexpensive and have few good substitutes. In inelastic demand curve decrease in price causes total revenue to fall from $300 to $220. Competitive market and farmers have to take the price of wheat as given so better to use new hybrid.

Two hundred years ago, most Americans lived on farms. Advances in farm technology increased the amount in food supply, together with inelastic food demand, caused farm revenues to fall, which in turn encouraged people to leave farming. In 1950, there were 10 million people working on farms in the United States, representing 17 percent of the labor force. In 1998, fewer than 3 million people worked on farms, or 2 percent of the labor force. Despite the 70 percent drop in the number of farmers, U.S. farms produced more than twice the output of crops and livestock in 1998 as they did in 1950.

Certain farm programs try to help farmers by inducing them not to plant crops on all of their land. Their purpose is to reduce the supply of farm products and thereby raise prices. No single farmer would choose to leave his land fallow on his own because each takes the market price as given. But if all farmers do so together, each of them can be better off.

ConclusionWhat is good for farmers is not necessarily good for society as a whole. Improvement in farm technology is surely good for consumers who pay less. Reducing the supply of farm products may raise incomes of farmers, but it does so at the expenses of consumers.

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