Question

Consider the market for rice. Explain each statement below in 100 words.

(a)  Is the demand for rice relatively elastic or relatively inelastic with respect to the price?

(b)  Is the demand for rice relatively elastic or relatively inelastic with respect to income?

(c)   Is the supply of rice relatively elastic or relatively inelastic with respect to the price?

(d)  Because of the price elasticity of demand for rice, total revenues received by farmers will rise or fall? What about total profits?

(e)   The market is sending a signal to the farmer. What is it telling the farmer to do?

Answer 1

(a) Is the demand for rice relatively elastic or relatively inelastic with respect to the price?

Demand for rice is considered to be relatively inelastic with respect to price. In most countries, rice is a necessity. People will be willing to pay a higher price, and not reduce consumption much. There are not many substitutes of rice in the same price range.

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(b) Is the demand for rice relatively elastic or relatively inelastic with respect to income?

Demand for rice is relatively inelastic in the lower and middle income consumers. As income levels rise, people continue to consume rice as a basic part of their diet. For high level incomes, people may shift to other goods. There may be other available substitutes in higher price ranges, that appeal to high income consumers.

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(c) Is the supply of rice relatively elastic or relatively inelastic with respect to the price?

Due to adequate agricultural, storage and transport facilities in the modern age, supply of rice is relatively elastic. This means that sellers are able to increase supply when the prices rise. There is sufficient stock available and it can reach the market in reasonable time.

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(d) Because of the price elasticity of demand for rice, total revenues received by farmers will rise or fall? What about total profits?

If the price of rice rises, total revenue received by farmers will rise. This is because demand is inelastic. The percentage increase in price will be larger than the percentage decrease in quantity demanded. As most consumers belong to the low and middle income groups globally, they will not be able to shift to other substitutes. For an inelastic good, if price is increased, total revenue also increases. TR = P x Q

Now, the cost of production of rise hasn't changed much, but a higher price is being charged. This leads to higher total revenues. Profit = TR - TC

Thus, as TR rises, profits will also rise. This will be true as long as costs don't rise.

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(e) The market is sending a signal to the farmer. What is it telling the farmer to do?

If the farmer can understand the above situation with respect to elasticity, the market is signaling the farmer to increase the price of rice, and if required, to also increase the supply of rice. By doing so, the farmer will be able to earn a much higher level of revenues (and profits). As demand is inelastic, consumers will be willing to pay more, and consumption will not fall much.