Question

Explain why abrupt changes in farm output have a magnified effect on the market prices?

Answer 1

Abrupt change in farm output, will create sudden increase or decrease in supply of the output. But, demand is not ready in the short run to shift to the other substitutes. It causes suppliers to cater the demand at different price. It causes market price to change. For example, a lower output level, will cause supply of the output to shift to the left and decrease. Now people can buy the output at higher price only and price level increase. In some time, people start going to other substitutes. It causes demand for substitutes to shift to the right and increase. It will cause demand to be catered at higher price. As a result, market price will increase.

Besides, the lower supply of output will cause increase in the cost of input materials if these outputs are used as input for other goods. It will cause increase in price of all the goods where the farm output is being used as cost of farm output is already increased.

Hence, price rise takes place using different mechanism when there is an abrupt change in farm output.