Elasticities Revisited AG BM 102

Introduction Elasticities are a valuable analytical tool Allow qualitative and often quantitative answer to what the effects of a change will be Helps to understand why markets behave as they do

Some formulas

Supply Elasticity

Elasticity and total revenue If demand is inelastic, higher prices will increase revenue If demand is elastic, lower prices will increase revenue The item to put on sale is the one with elastic demand If you are going to try to increase profits by raising the price of something, choose something with inelastic demand

Why Are Farm Prices So Volatile? Farm prices move much more than other prices Elasticity of demand is usually inelastic Elasticity of supply in short run is also inelastic

Why is Farm-level Demand So Inelastic? Food demand is inelastic because food is a necessity Farm price is a small portion of food price, yet quantities are about the same Looking at elasticity formula farm demand becomes even more inelastic than food demand R=retail, F = farm

Why is Farm Supply Inelastic In short run, biology prevents adjustments One crop per year Large animals have long production period In longer run, supply is more elastic Prices are determined in short run

With both supply and demand inelastic a small change in supply causes larger changes in the equilibrium quantity than if either were elastic and much larger than if both were elastic

Flexibility The percent change in price in response to a 1 % change in quantity

Flexibility Applies especially to the demand for agricultural products Useful in recognizing that quantity is predetermined and prices adjust to clear market Strawberries, tomatoes, other non-storable products

Concluding Comments Need to be at ease with elasticities One of the best tools in economics You will use them in any other economics courses you take