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27

iange in price as. we move along the supply curve, iowcver. Figure XXXII gives us no movement along a demand curve only two points on two completeK dif-lerent demand curves - so we have no informadon with liich to calculate the elasdcity of demand.

Similarly, imagine now the demand curve is sialic and that the supply curve shifts from S to S in re XXXIII. In this case, weve now picked up two toints along the demand curve, permitdng us to cal-ate the elasdcity of demand, but not the elasticity- of apply. Of course, whether total revenue rises or falls i the supply curve shifts depends on the demand elas-city over the region.

: Farm Problem

Using the tools of demand and supply elastici-; we can view a persistent American problem which 1 spread to Europe in recent years, the farm prob-Em- Essendally farmers face two kinds of problems: able prices from year to year and declining prices long stretches of dme.

Food has no substitutes, consdtmes a fairly Jl percentage of American expenditure, and is a liiecessity. As such, economic theory predicts and empirical results confirm that the demand for agricultural products is inelastic.

Now recall from Section III that weather is an importjuit supply shifter in agriculture: good weather increases agricultural supply whereas bad weather : decreases it. Further, once the crop is ready to harvest supply will be quite inelastic because the farmer must usually sell his perishable crops. Figure XXX1\ illus-ates these facts graphically. In a year with favorable ither, supply will be S), in an average year Sj, and in

a poor year S3. Prices in each of these three years will be P], P2, and P3 respectively. Since demand is inelasdc, small changes in the quantity sold are associated with drasdc changes in the market price. Moreover, inspecdng Figure XXXV where weve plotted farm income as a funcdon of harvest size, we see that small harvests are associated with high incomes and large harvests with low ones.

However, in recent years futiu-es markets have arisen which have shifted the risks associated with fluc-tuadng harvest sizes from farmers onto speculators. Before his crops are planted a farmer can arrange to sell his harvest at a guaranteed price at a specified date in the future. If harvest prices are higher than those provided for in these so-called futures contracts, the speculator will make a profit. If theyre lower, he will

 Fig. XXXIV / / A / /

Market Foi

Fig. XXXV

Short Term Farm Income

Small

- "1 Average Large

Harvest Size (Q)

suffer a loss unless the crop can be resold in a future high priced environment. In general futures markets help farmers by allowing them to specialize in farming while letdng the speculators handle the risk.

We now turn to the problem of declining farm prices over dme. In the analysis that follows we will ignore the effect of inflauon so as to concentrate on the problem at hand. In other words, we wrill consider prices in terms of consuni buying power.

Let the inidal-equihbrium be given in Figure XXXVI along demand and supply curves Dj and Sj. (You can ignore the other curves for now.) Next consider the pattern of prices over time. Three major forces work to shift these curves: rising income, populadon growth and technological progress. Since food is a normal good, demand tends to increase through

D2 and D3 over a period of several years as incor rise. However, the income elasdcity of demand agricultural goods is notoriously low; fundament there is only so much one can eat no matter high income rises. Consequendy the demand shifu are small and caused mosdy by populadon growth

On the other hand, agricultural producU\ih has been increasing enormously over time. The go ernment never ures of building new irrigation proje while at the same time improvements in animal plant genetics, pesticides, and farm machinery like increase the supply. The effect of all this is to shift 1 supply curves through S, S2, and S3 in Figure X) Connecting the equilibrium points together, we net tendency for prices to fall along the arrow. Figure XXXVII we plot the time tiend of farm incoi as it would appear if farmers didnt leave the farm, indicated, farm incomes would tend to fall as a 1 of these developments. This is the markets way ofl ting farmers know theyre more valuable elsewhere;] a tough message to ignore. In fact, without it, United States would remain a nation of farmers ducing a tnily staggering agricultural output and 1 of anything else. Since farmers are unwilling] remain in agriculture in the face of perpetually de ing incomes, the actual increases in supply and term downward tiend of farm income are far less ( tic than weve pictured diem in die figures.

While it may seem perverse that the ment sponsors so many agricultural programs t mately lower farm incomes, consider the incent What Congressman interested in reelection want to tell his constituency that they cant have i federal water project? What landowner would nc

Fig. XXXVI

Fig. XXXVII

Long Term Farm income

Time

WMaTf{£t forces

rdelighted to accept one? WhiJe the net impact of such * projects taken as a whole is to lower farm incomes, each local project showers considerable benefits in the regions affected. After all, one more reclamation pro-r ject is not enough to affect prices much, but it can " make otherwise nearly worthless land extremely \alu-

able. Since the rest of us have such a small stake in the matter, we typically take litde nodce, much less oppose such projects. As a result, theyve been a major component of the farm problem for decades. Ironically the governments agricultural policies often injure the consdmency theyre designed to serve.

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