READING ASSIGNMENTS
UNIT FOUR (For the FINAL EXAM)
Your first reading assignment in Unit Four is pp. 679-690. For the last section of this course, you will study two areas: agricultural markets and income distribution. In these areas, economics and politics are closely related.
On page 680, note the classification of agricultural markets as purely competitive. Farmers are price takers: if market demand and market supply yield a price of $5 per bushel of soybeans, the individual farmer is not free to raise the price to $5.25 because no one would buy from him at that higher price. Alternatively, there is no need for an individual farmer to reduce the price to $4.75 per bushel because the farmer can sell any quantity he chooses at the market determined price of $5.00. Therefore, it would be irrational to sell below the market price. As you recall from earlier in this course, individual farmers face a demand curve that is horizontal or perfectly elastic.
Study the graph at the top of page 681. American farmers have been so productive for so many years that the supply curve has shifted to the right, putting downward pressure on prices. Improvements in machinery, pesticides, and crop rotation methods have all contributed to increases in productivity and supply. This has resulted in downward pressure on equilibrium prices for agricultural products.
Another challenge facing farmers is that the long-run price elasticity of demand for agricultural products is inelastic. If the price of corn is reduced 50%, do buyers purchase twice as much corn? No. If the price of butter is cut in half, do we buy twice as much butter? No. This price inelasticity of demand combined with increases in supply puts downward pressure on farm income.
In addition to the price inelasticity of demand, consumer demand for farm products is income inelastic. If our household income doubles, do we buy twice as much food? No. Income inelasticity of demand has also reduced the profitability of farming.
Study the added dimension at the top of p. 683. The difficulty is that while individual farmers want high output, an increase in supply (i.e., a rightward shift of the supply curve) causes downward pressure on price when farmers collectively have a bountiful crop.
Look at the price support graph at the top of page 684. The quantity supplied and the quantity demanded are not in equilibrium. Something has to happen to absorb the surplus. The government could buy the surplus or it could pay farmers the difference between the market price (e.g., $4) and the target price (e.g., $5). Another option for government is to pay farmers not to plant a certain amount of acreage. Each option costs the taxpayers money.
The political consequences of these choices are discussed on pp. 687- 690.
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