Transcript Income Problems

Income Problems
Income problems in agriculture stem
from low price elasticity of demand for
farm output and low income elasticity for
farm output.
Estimated Elasticities
Price Elasticity
(Domestic Demand)
Price Elasticity
(Domestic + Foreign)
Income Elasticity
Short
Term
-0.20
Long
Term
-0.40
-0.25
-0.63
0.15
Price Elasticity of Demand
Price elasticity of demand (Ed) measures the
responsiveness of quantity demanded to a
change in price, ceteris paribus.
Price Elasticity of Demand
• Point Elasticity
• Arc Elasticity
Ed = %Qd / %P
Ed = %Qd / %P
where
%Qd =
where
Qd / Q1X100 %Qd =
%P = P / P1X100 {Qd / [(Q1+Q2)/2]}X100
%P =
Ed=(Qd/P)X(P1/ Q1)
{P / [(P1+P2)/2]}X100
Discussion Questions
From the following quotations what (if anything)
can you conclude about elasticity of demand?
• "Good weather resulted in record corn harvests
and sent corn prices tumbling. For many corn
farmers the result has been disastrous.”
• “Ridership always went up when bus fares came
down, but the increased patronage never was
enough to prevent a decrease in overall revenue."
Discussion Questions
• "When the Cincinnati Telephone Company
started charging for directory assistance calls, the
number of (such) calls dropped 80 percent.”
• The 30 percent increase in postal rates has led us
(The Narrangansett Electric Co.) to have 60
percent of our bills hand delivered instead of
mailed.”
• Coffee to me is essential -- you've gotta have it no
matter what the price."