3 Questions In Economics Essay Research Paper — страница 2

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inelastic, that is, consumer response (the percentage change of the amount of produce they demand) doesn t vary greatly whether or not the price of produce or the income of the consumer is high or low. If produce comes out exceptionally well in one year, the supply may be great enough to set a low equilibrium price. In reaction to this, a farmer may do one of two things. Because an individual farmer has no real market power, he cannot necessarily alter market prices of his produce by adjusting the supply he puts out. He may choose to grow and sell an alternate product or he may produce less of this product in hopes of selling this product at higher prices. However, because of the time gap between time when the good is planted and finally sold on the market, agricultural market

conditions may be very different than the market the farmer initially responded to. Conversely, a farmer must grow excess goods when prices are high simply in the hopes of cashing in on high prices before they inevitably fall from excess supply. Without government intervention, this becomes a vicious cycle, with the farmer producing more and more at lower prices, if he chooses not to sell an alternate product. These prices may be stabilized in a number of ways. When there is a market surplus, the government can subsidize purchase, destruction, or storage of the excess in order to artificially control the supply and therefore the price of the produce. The government can also encourage or subsidize export of excess farm products and limit, via import quotas and tariffs, goods

entering the US agricultural market. Also, although individual farmers have no market power, collectively, farmers may control the supply on the agricultural market to inflate prices when necessary. The practice of selling agricultural produce in the “futures” market can be a method of price (and therefore income) stabilization for a farmer. That is, there will be a fixed supply (what is to be sold to the futures market) at a fixed price, no matter what the actual market demands and prices will be. In a way, a futures investor is “betting” on what the demand, and therefore, the price of an agricultural good will be. An investor hopes to make money from this “bet” if and when the product sells for a higher price than what he paid for it. He would have bought the

product at a price that is lower than the current market price and sell it for a profit. If his future sells at a lower price than what he paid for it, he then loses money. The farmer s income, however, is stabilized and he has no fears of an agricultural market going sour because a major group of consumers aren t willing or able to buy his product, as was the case in the Asian economic crisis if the late 1990 s. In this, a farmer gains peace of mind and income security. He loses the opportunity cost of a booming agricultural market, since his produce is already sold at a fixed price. A farmer who sells his commodities to a futures market, therefore, cannot take advantage of high demands and the higher prices that come with it.