The agricultural market is a market with PED inelasticity, and very chaotic (i.e. unpredictable) S. S is inelastic due to weather, and conditions, and is also unpredictable.
When farmers have a bad crop, they decrease S to the market. This will increase P. Yet, D is inelastic for agricultural produce, and will remain the same. This means TR increases for farmers. This is profitable for them.
Next year, farmers are encouraged by this high P, and will produce more. S will increase to the market. However, hence, P will decrease, and if D remains the same, TR for farmers will decrease.
Discouraged by this, next year, farmers will S less to the market. This means P increases, so TR increases. Encouraged by increase in P, next year...
...farmers will increase S to the market. P decreases, so TR decreases, and...
...this continues in a cycle.
Solutions to this cycle include CAP (Common Agricultural Policy) where the gvt. buys excess crop produced from farmers for a fair price.
This one is a really good explanation: http://www.youtube.com/watch?v=1vixHc37DII
Following on from the theory session, check out this link which highlights real life supply issues...
The agricultural market is a market with PED inelasticity, and very chaotic (i.e. unpredictable) S. S is inelastic due to weather, and conditions, and is also unpredictable.
ReplyDeleteWhen farmers have a bad crop, they decrease S to the market. This will increase P. Yet, D is inelastic for agricultural produce, and will remain the same. This means TR increases for farmers. This is profitable for them.
Next year, farmers are encouraged by this high P, and will produce more. S will increase to the market. However, hence, P will decrease, and if D remains the same, TR for farmers will decrease.
Discouraged by this, next year, farmers will S less to the market. This means P increases, so TR increases. Encouraged by increase in P, next year...
...farmers will increase S to the market. P decreases, so TR decreases, and...
...this continues in a cycle.
Solutions to this cycle include CAP (Common Agricultural Policy) where the gvt. buys excess crop produced from farmers for a fair price.
This one is a really good explanation:
http://www.youtube.com/watch?v=1vixHc37DII
Sami.