Level 1, SS4, Reading 15, Pages 78 and 79 On page 78 under “Bumper harvest” "An increase in supply brings a fall in price and a decrease in farm revenue. On page 79 “If demand is elastic, farm revenue and the quantity produced fluctuate in the same direction. Bumper harvests increase revenue, and poor harvests decrease it. But the demand for most agricultural products is inelastic, so the case we’ve studied is the relevant one”. My question: For most farm products, such as Wheat, crorn, rice. Does an increase in suppluy, bumper harvest, lower or increase farm revenue? Thanks
even i got confused while reading this. but read it once again. one page 78, while talking about bumper harvest, the demand is inelastic. so, when supply increases, the price decreases and the revenue decreases. remember, for inelastic demand, when price decreases, revenue decreases. however, on page 79, they are refering to elastic demand. bumper harvest increases supply and decreases price. now since the demand is elastic, with the decrease in price, revenue increases. refer to figure 5 on page 13 of the same book for graphical explanation of the above. remember, on page 78, demand is inelastic. on page 79, they are talking of demand being elastic.
to asnwer your question, as it states, the demand of wheat, corn, etc. is inelastic, bumper harvest, increase in supply will result in decrease in price and hence, decrease in revenue. (as per explanation on page 78)
you have to differentiate between price and revenue If quantity increases the price goes down less expressed as procentage (inelastic), therefore the overall revenue is bigger
Have a look here: Thats florinpop’s comment as a picture. http://www.ecoteacher.asn.au/Demand/elastsli/e19.htm
Sorry it’s the other way around loss from price decrease is bigger than revenue from quantity increase. must be tired
@redbaron the link was always right.