With the supply of cotton going down in the United States, another large exporter has emerged—China. But the cotton supply has also reduced in China, causing there to be a global shortage—when there is not enough of a good or service to satisfy the demand for a good—of cotton. Demand being how much of a good or service is demanded at a particular price.
Cotton futures are being affected the most by this decrease in supply because they are contracts promising a certain amount of cotton at a certain price. Even though there is a shortage, the buyers of the futures are still going to get the amount they paid for at the same price—assuming that changing prices in futures are not affecting previously purchased futures. This is causing there to be a lot less supply, at way higher prices
Supply and Demand Curve of Cotton 1
This graph shows the state of the cotton market, after all cotton future supplies have been distributed. Due to the raise in price, the equilibrium point shifted to the left on the demand curve. Since there was already a shortage of supply, the supply curve shifted to the left as well. These shifts cause there to be a dead weight loss, the amount of demanders lost normally due to a change in price, in the demand for cotton, for cotton suppliers.
Since the United States is still the largest exporter, even though there is a global shortage, many countries—including China—still have high and growing demands for cotton.
Supply and Demand Curve of Cotton 2
Due to the previous change in supply, that shifted the curve to the left, prices were already at a record high. Now that the global demand for cotton has gone up, the demand curve is shifting to the right. The shift of the supply and demand curves, left and right respectively, has caused a higher price for cotton when the same amount is being demanded. This causes there to be a dead weight loss and a dead weight gain—the gain of demanders for a particular good or service. There is a dead weight loss in the supply in cotton, but there is also a dead weight gain for producers because cotton is continuing to be demanded at the same amount as before.
This makes it seem as though cotton is a relatively inelastic good—a good or service that, at different prices, still relatively has the same amount of demand. Even as the supply goes down and the price goes up, consumers still want cotton. However, this could cause major problems on a global scale because the supply of cotton may not be able to satisfy the demand for cotton. If this happens, many industries will have to search for different substitutes—a close alternative for a particular good—for cotton. The good thing is that there are many substitutes for cotton on the world market, making for a good situation.
The supply of cotton projected for the upcoming year is the lowest since 1996. But this shortage may prove to be good for our economy since we are the largest supplier of cotton in the world. This shortage has the potential to not only improve the cotton market but also the market for many other goods.
Javier, Luzi Ann. "Cotton Advances to a Record for Sixth Day on Supply Concerns." Washingtonpost.com. The Washington Post, 8 Nov. 2010. Web. 10 Nov. 2010. <http://washpost.bloomberg.com/Story?docId=1376-LBLJ3F6K50XX01-7JFV0K16U102E1MA7CU6L6UFOP>.
by
ablumfield (student)
