Question

Scenario

Consider the following quotation from The Wall Street Journal:

To U.S. farmers this year, a bountiful harvest is not something to rejoice over. So the news last week that the Agriculture Department is predicting a mammoth fall crop exceeding previous expectations was a shock to this farmland hamlet.

Instructions

Read the scenario and, respond to the following:

1.What is the economic problem?

2.Why would higher output levels diminish farm revenues?

3.What can we infer about the price elasticity of demand for agricultural products?

4.Do demand and supply come into play of the diminishing returns?

Answer 1

1. What is the economic problem?

There is a surplus produce predicted for a fall crop by the Agriculture Department. Since there has not been any increase in demand in the past, this surplus stock is an economic problem for the farmers in the U.S.

2. Why would higher output levels diminish farm revenues?

All of the agricultural produce is mainly based on the demand generated for the particular crop. Based on demand, the crops are planted and harvested. If there are higher outputs it means that the value of goods will get reduced. This, in turn, means lesser revenues.

3. What can we infer about the price elasticity of demand for agricultural products?

Price elasticity is the relationship between the price and the quantity of the product when no other change takes place. In the case of agricultural products, due to the nature of the perishables, there has to be a definitive demand for the products for the price to remain stable at all times. This is why seasonal fruits in offseasons are sold at a higher price and vice versa. Also, when there is excess produce, the price automatically comes down.

4. Do demand and supply come into play of the diminishing returns?

Yes, it does. When there is an increased demand, people put in more of something to increase the supply so as to meet the demand. This is usually counterproductive and causes more expenses for production.