Question

ANSWER ASAP

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 necessary item having few substitutes especially in the Indian weather. With the increasing demand 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. (15marks)

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

Q1

Sice there are large number of producers in the market, the supply of cotton is highly elastic which means even a small change in price or quantity demanded can effect the supply of cotton highly, the reason being that when a producer is unable to fulfill the market demand there are other producers who rush in to fill the gap. Since supply curve iis highly elastic thats why its inclined inwards so much.

Q2.

The intoduction of biotech seeds will lead to the following result-

First of all demand curve will shift leftwards since the demand of regular cotton seeds will decrease, i.e E1->E2 and his will lead to fall in supply of seeds too since the companies will be inclined towards increasing the production of new seed that will leas to supply curve shifting rightwards, thereore decreasing the supply of regular seeds, I.e E2->E3.

The new equilibrium point will be E3.

Q3.

Price ceiling is set up by the government to keep control over the price of the commodity which in this case is biotech seed. This will upset the producer as they can not charge a penny higher than the ceiling price set by the governmnet which will substantially reduce their profit margin. The price ceiling will create a situation of excess demand or shortage in the market where demand will be greater than supply(Since the demand curve is above the supply curve as shown in the figure above at the ceiling price).

Prolonged application of price ceiling will lead to black marketing of the good at even a higher price tahn the original equilibrium price.

Q4.

As shown in the figure since the subsidy is for the consumer ,that is the farmer in this case , it will lead to rightward shift in the demand curve, since the price will decrease initially it will lead to incrase in the demand of the biotech seeds. The increased demand of the goods will eventually lead in increase in the prices of the commodity again because the subsidy will lead to increased demand which will not be met by supplier later, creating a shortage in the market wich will finally lead to increase in the price of goood.