Question

In order to meet the rising demand from an increasing global population, the United Nations Food and Agriculture Organization had estimated that food production would have to increase by 70 percent to cope with demand. Given the finite supply of arable land and water, producing higher yields through increased farm productivity was seen by many as the only viable option. Biotechnology (Biotech) crops offered one means to increase productivity by offering greater yields while potentially using fewer natural resources such as land, fertilizers, herbicides, pesticides and water. Driven by these opportunities, in 1996, two different biotech seeds- soybean and cotton- were farmed commercially for the first time. Both were developed by Monsanto, a leading global producer of biotech seeds.
Consider the market for cotton seeds in India. Cotton is a neccessary item having few substitutes especially in the Indian weather. With the increasing denmand for cotton, the cotton farmers were keen to buy the biotech seeds. Monsanto , the biotech seed producing company was a pioneer in cotton seed production. It has been doing business in India since 1949. In 2002, Monsanto, through a joint venture, introduced the first in-the-seed cotton trait biotechnology. This trait served to protect cotton crops against potentially devastating pests, thereby reducing the need for pesticides and improving yields. By 2010, over 40 Indian seed companies had begun to offer similar biotechnology cotton seeds, thereby improving the yield of cotton and making the market competitive. Biotech seeds became very popular and became necessary for cotton production. Suppliers of biotech seeds also became sensitive to changes in price of biotech seeds. By April 2010, the governments of three Indian provinces, collectively accounting for 70 percent of cotton production in the country had established a ceiling price that seed companies could charge farmers for biotech cotton seeds. This was a dramatic departure from the free market mechanisms put in place by the central government since the economic reforms launched in 1991. Companies producing biotech seeds were upset with this decision of the government. They did not understand why the government has to step in and bring down prices in such a competitive market.

1. Consider the market for cotton in India. Draw the demand and supply of cotton production in India and comment on the elasticity.

2. What would be the impact on equilibrium price and quantity of cotton due to the introduction of biotech cotton seeds?

3. Why do you think the biotech cotton seeds producing companies are unhappy with the government's decision of price ceiling on biotech cotton seeds? Explain (with the help of a well-labelled diagram, drawn by hand) how a price ceiling impacts production of a commodity.

4. Suppose, instead of price ceiling, the government announced a subsidy on biotech cotton seeds, to help the farmers producing cotton. Explain (with the help of a well-labelled diagram, drawn by hand) how this would impact the market equilibrium price and quantity?

Answer 1

Answers will be in context to the information mentioned :

Answer 1. The cotton in India has very less substitutes available and owing to the climatic conditions in India the demand is increasing making the DEMAND LESS ELASTIC , as a result the demand curve will be STEEPER as in 1. of diagram shown making equibirium to be at where demand and supply intersect and price will be at P and quantity at Q

Answer 2. Biotech seeds , has been the blessing of better technology owing to which the supply will be better. As initially the price was P and quantity was Q , at demand D and SS supply curve , with better technology the supply will shift to right from SS to S1S1 ,improving the quantity supplied and reducing the price i.e. new price will be P1 and Q1.

Answer 3. The price ceiling : is done by the government in favour of consumer as here the price is set below the equibirium level , from P the price will drop to P1 and owing to this the quantity supplied at equibirium is Q at however due to it quantity supplied gets on left QS and on right QD, bringing SHORTAGE. At this point the demand will exceed supply ,at P1 (price ceiling)

Answer 4. Owing to subsidies, it helps the producers to produce more goods and services ,this will increase overall supply . Which will shift the supply curve to right initally the demand D and supply P makes equibirium price and quantity at P and Q respectively. However with subsidy the producers can produce more ,supply curve is now S1S1 on right and new equibirium price and quantity are P1 and Q1 respectively.

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