D1
D
Quantity
The second factor that caused an increase in the price of cotton is “under a World Trade Organization agreement, quotas that distort international trade in textile and clothing are supposed to be phrase out”. When the world trade agreement is established by January 1st 2005, many people will want to invest in the textile factories. This causes the price of cotton to go up as the demand has increased with many investors in the textile manufacturing market. This could be seen in diagram 1. Moreover, with the state-owned banks in China lending money to the investors, it would encourage more people to invest in the textile market. With more people in the market the demand of cotton would increase.
However, as the prices of cotton went up quickly, it fell just as rapidly because of two main reasons. First, the farmers “expand their cotton acreage” rapidly to cope with the huge increase in the demand for cotton. Therefore because of the large increase in supply, the price of cotton increased. Supply is the quantity of goods that sellers are prepared to sell at any given price over a period of time. With the increase in supply, the supply curve would shift to the right from S to S1, therefore the price decrease from P to P1 and quantity shoots up from Q to Q1. It is shown in diagram 2.
Diagram 2: Increase in supply for cotton
Price
S
S1
D
Quantity
Secondly, the price of cotton has decreased because of China’s government policies. The first policy is “government has expanded its cotton import quotas” and this would cause the supply in China to increase as the government has increased the amount of cotton that is allowed enter China. Quota is a physical limit on the quantity of goods imported. Therefore, with the increased supply of cotton, it would cause the price to fall as demonstrated in diagram 2.
The next policy is that the government has included the “textile sector to the list of industries to which bank loans would be curbed”. This means that there would be a fall in the demand as there would be less people investing money into the textile sector. Therefore the demand curve would shift to the left from D to D1 causing the price to fall from P to P1 and the quantity to decrease from Q to Q1. This could be seen in diagram 3.
Diagram 3: Decrease in demand of cotton cause by government policy
Price
S
D1 D
Quantity
Jeff Coey of Cotton Council International predicts that in the long term, the demand for cotton in China will grow. However, for now, the cotton supplied will still fall short in demand because of the government’s want to turn land into grain.
From this article, we have seen two aspects of demand theory. The increase in demand is because of two main reasons which lead to the increase in price of cotton; and the fall in demand is due to the curbing of bank loans which lead to the fall in price. Therefore, the demand theory has demonstrated the two possible outcomes. The supply theory is not as good as it only shows one aspect of the theory. The decrease in supply has caused the price of cotton to increase. However, it does not show that increase in supply will cause the price of cotton to fall. Hence, this article has not shown the entire supply theory. Nevertheless, I feel that this theory have evidently helped to illustrate the rise and fall of the price of cotton.
Alain Anderston, Economics, third edition,2000.Unit 4,pg 23
Alain Anderston ,Economics, third edition,2000. Unit 4, pg 27
Alain Anderston ,Economics, third edition,2000.Unit 5 ,pg 34
Alain Anderston ,Economics, third edition,2000.Unit 40, pg 264
