Question

The price elasticity of demand for agricultural products is normally
estimated to be less than 1 in absolute value (inelastic). Use this fact to explain
why farmers as a group succeed financially in years when productivity is low.

Answer 1

Let's consider what happens when productivity is high to justify the answer.Consider the diagram above.

When the farmer's productivity increases,the supply curve will shift to right from S1 to S2 which will result in fall in equilibrium prices and the equilibrium quantity rises.The demand curve between E1 and E2 is inelastic and the total revenue a farmer will receive is lower at E2.Therefore,increase in productivity will increase the supply which will result in fall in prices and if the demand curve is inelastic,a fall in price will result in decrease in total revenue.

Now in case of years when the productivity is low, demand for food items is generally inelastic so, if the supply falls owing to poor weather and other conditions the prices will rise very sharpely but price elasticity of demand being inelastic,consumers will purchase food items even at high prices so this will increase the total revenue of the farmers.

So,the farmers benefit and succeed financially in years when productivity is low.