Explain whether you would expect the price elasticity of supply of an agricultural product, such as rice, in a market to be elastic or inelastic. [8]
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paulcorcomangmailcom (student)
Explain whether you would expect the price elasticity of supply of an agricultural product, such as rice, in a market to be elastic or inelastic. [8]
Supply refers to the amount of a certain product that suppliers are incentivised to produce at every given price levels. The elasticity of supply, measures the responsiveness of the quantity supplied of said good in relation to a change in its price. A highly price elastic supply would be characterised by a very high responsiveness to changes in price, meaning that if the price increases, suppliers would be able to easily increase output to maximise their revenue. An inelastic supply, would be the opposite, it is characterised by an inability of suppliers to adjust the levels of output in response to a change in the price of a product. This can be either due to a long production process, poor transportation technology or a fixed supply of factors of production. In certain cases, the elasticity can be so low, that it can essentially be considered 0; this is known as fixed supply and is characterised by a complete inability of suppliers to adjust output levels in relation to changes in price, at least in the short to mid-term. This is most often the case in markets where increasing output requires very expensive and time consuming investments, such as in the case of movie theatre seats or parking spaces.
Certain aspects of agricultural products make it likely that they will have a low price elasticity of supply. Firstly, the fact that they are agricultural good, means that once a certain harvest has been started, it is impossible to change the quantity produced at the end of the harvest. This combined with the fact that the production process, in this case the cultivation of the crop, is very time consuming, results in a situation where it is very hard to adjust the supply of said crop in the short term, thus lowering its price elasticity of supply. Moreover, ...
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Certain aspects of agricultural products make it likely that they will have a low price elasticity of supply. Firstly, the fact that they are agricultural good, means that once a certain harvest has been started, it is impossible to change the quantity produced at the end of the harvest. This combined with the fact that the production process, in this case the cultivation of the crop, is very time consuming, results in a situation where it is very hard to adjust the supply of said crop in the short term, thus lowering its price elasticity of supply. Moreover, since certain crops must be cultivated on very soft, often swamp-like land, transportation access is likely to be limited due to the unstable nature of the soil. This is particularly true in the case of rice. Thus, the easy transportation of rice is likely to be impeded, in turn limiting the ability of suppliers to rapidly deliver more rice in order to meet an increase in price, and once again lower the price elasticity of supply. Finally, since many of the factors of production required in the production process of agricultural goods tend to be relatively fixed, an increase in the scale of production may not always be feasible. As very specific land is required for the cultivation of most crops, their production will always be limited to the amount of available land in a given geographical region. This once again limits suppliers’ ability to change output in relation to price by tying their potential output to a resource in fixed supply, thus further lowering the price elasticity of supply for rice.
Despite this, there are certain aspects of agricultural goods that are very likely to make their supply more price elastic. Due to the nature of rice as an agricultural product with very low perishability, and recent improvements in storage technology, such as refrigeration, rice can be stocked in high quantities, this also applies to most forms of grains and other agricultural products with a low water content. These large stocks can then be used to match an increase in price by adequately supplying the market, thus helping increase rice’s price elasticity of supply. Furthermore, as a result of advancements in modern transportation techniques, such as the widespread adoption of air transport, the speed at which agricultural goods can be delivered to consumers has increased dramatically, hence allowing suppliers to meet an increase in price much faster, and as such, increasing the elasticity of supply. Similarly, advancements in agricultural machinery have allowed farmers to not only increase their yields, which allows for larger stocks to be kept, but also to farm on less than ideal land, thus helping to ease the issue posed by the fixed supply of land, by allowing farmers to take advantage of more land than was previously possible. This in turn makes it easier for agricultural workers to increase output after an increase in price, in turn allowing for higher elasticity of supply.
Overall, due to the incredibly low perishability of agricultural goods provided by recent advancements in storage technology, together with the improvement in transportation that have allowed supplier to meet changes in price promptly, I would expect the it to be very likely that the price elasticity of supply for agricultural goods to be quite elastic, especially when compared to their elasticity in the past.