Question

a. Define the demand function of a good, and then discuss the price elasticity of demand for agricultural product such as rice.

b. Use a demand/supply diagram to discuss why rice farmers may not benefit from a technological improvement in producing rice.

Answer 1

(a) The demand function of a good gives the relationship between price of the good and it's quantity. It shows how many units of a good will be purchased at different prices.Therefore, the graphical representation of the demand function ( which is often referred to as the demand curve) has got a negative slope.

We can express demand as a func­tion of price in the following manner:

Qx = ƒ(Px)

In this function, the other variables (income, and so on) are assumed to be constant. Here, the quantity demanded of a commodity is a function of the price of the good, holding constant the other (proximate) determi­nants of demand.

The following is an eample of a demand schedule and coresponding demand curve:

Price elasticity of demand shows the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when other demand determinants are held constant.

A price inelastic demand means that an increase in price would not necessarily lead to a decrease in the quantity demanded or the percentage change in quantity demanded of a commodity is very less as compared to the percentage change in price of the commodity.

Demand tends to be price inelastic for agricultural products such as rice for the following reasons-

1. Price changes don’t affect consumption much. We still eat to survive in event of a price rise of such goods. And we also cannot increase our consumption of food to a great extent owing to biological constraints even if the price falls. Hence price changes doesn't affect consumption much.
2. These goods are mostly necessities. We are willing to buy a well defined amount of such goods and sacrifice consumption of other not so important goods if there is an increase in the price of these necessities.
3. These goods are generally low priced and a relative change in the price doesn't affect a consumer much and doesn't effect his demand.
4. Possibility of postponement is not there for most of these goods. They are consumed on a regular basis. We can't postpone it for future in case of price rise.

---------------------------------------------------------------------------------------------------------------------------------------------------------(b)The supply of rice would increase if there is a technological improvrement in tn producing rice. The supply curve for rice will shift to the right. The demand for rice will also increase with rising population and with rising income and with better quality of rice. But as incomes rise, people spend a smaller and smaller fraction of their incomes on food. While the demand for rice will increase, that increase will not be nearly as great as the increase in supply. The following figue shows the “Supply and Demand Shifts for Rice” . It shows that the supply curve has shifted much farther to the right, from S1 to S2, than the demand curve has, from D1 to D2. As a result, equilibrium quantity has risen dramatically, from Q1 to Q2, and equilibrium price has fallen, from P1 to P2.

On top of this long-term historical trend in agriculture, agricultural prices are subject to wide fluctuations over shorter periods. Droughts or freezes can sharply reduce supplies of particular crops, causing sudden increases in prices. Demand for agricultural goods of one country can suddenly drop if the government of another country imposes trade restrictions against its products, and prices can fall. Such dramatic shifts in prices and quantities make incomes of farmers unstable and uncertain.

Therefore, rice farmers may not benefit from a technological improvement in producing rice.