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Inelastic Demand Curve and its Influence in Natural Disasters

Discuss about The role of inventories and speculative trading.

According to the basic economical concept, it can be stated that natural disaster, in general, brings economical loss. The government and the society are faced huge loss due to the heavy destruction. However, in some situations, those natural disasters can bring positive impacts among people (Wallander, Marshall & Aillery, 2017). Moreover, it is possible to analyse and explain those situations by applying some economical concepts, for instance, demand and supply concept and elasticity relate to those and so on.

 Drought could be good for farmers even after it destroys half of all farm crops if those products are faced inelastic demand curve. Inelastic demand curve represents that economic notion, where a small change in product price cannot influence the demand of that product to a large extend (Von Keyserlingk et al., 2017). In this context, the demand curve with it negative slope, tilts towards the vertical axis.

Figure 1: Inelastic demand curve

Source: (created by author)

The above figure has depicted this economic phenomenon clearly. The price has changed by a large amount, that is, from P0 to P1, while the amount of demanded quantity has decreased by Q1Q0 amount. In this context, it is essential to state that total revenue of a product can be influenced by its demand elasticity (Behboodi, Chassin, Djilali & Crawford, 2017). By depending on its elasticity pattern, it becomes easier for a producer to set price.

Hence, a positive relation between total revenue and inelastic demand curve indicates enough opportunity for those farmers to earn revenue after increasing the price of crops (Vives, Jacob & Aguiló, 2018). The economy has faced a shortage in supply of the same, which, in turn, has influenced the price to increase. This situation can be depicted with the help of a demand-supply curve.

Figure 2: Demand and supply curve of crops

Source: (created by author)

In figure 2, the demand curve for crops is represented by the line D. The initial supply curve of the same product is represented by S0. However, after drought, the supply curve has shifted to the left, that is, S1 indicating the decreasing supply of crops. P0 and Q0 are representing equilibrium quantity of price and output at the beginning. However, after shifting of supply curve, the new equilibrium quantity of price and quantity of crops become P1 and Q1, respectively (Hegetschweiler et al., 2017). Thus, total revenue has increased by P1 P0 unit, which is profitable for farmers.

Demand and Supply Curve of Crops

With the help of elasticity concept, it is already proved that drought can help farmers by increasing their total revenue, if crops have faced inelastic demand curve (Atalla, Gasim & Hunt, 2018). However, an argument can be raised over here regarding the intentionally destruction of crops. This concept can be explained with some strong and rational concepts of economics.

Due to the occurrence of drought, total supply of crops has decreased unintentionally, where farmers have gained extra revenue and the concept of inelastic demand curve has already established this economic situation (Miller & Alberini, 2016). On the other side, in the absence of any natural calamity, a farmer individually cannot influence the total supply of crops by decreasing the amount of production (Jadidzadeh & Serletis, 2017). As, the market supply curve of crops includes individual supply curves of all farmers, each farmer has taken the market price of crops as given. Hence, to influence the entire market supply, changes of all individual supply curves is essential. The concept of market demand curve can be depicted with the help of suitable diagrams.

Figure 3: the Market supply curve of crops

Source: (created by author)

The above diagram has represented the market supply curve of crops by aggregating the individual supply curve of two farmers. According to figure 3, the market supply has represented by Sm, which has obtained by summing up the individual supply curves of two farmers, that is, S1 of famer 1 and S2 of farmer 2.  However, this diagram is representing a simple scenario where each farmer has possessed equal market share, which, in turn, help them to influence the market supply curve (Kilian & Murphy, 2014). In real field, each farmer enjoys a very small portion of market supply and for that they have limited access on this.

In the absence of drought, farmers can get the opportunity to earn higher revenue if they together can decrease the entire supply of crops. However, from an economic point of view, this concept of destroying crops productions cannot be supported. In addition to this, to obtain the similar consequences like drought, reduction in supply of crops by a large amount is essential. To take this step, unity among large number of farmers is required, so that the reduced amount can efficiently influenced the market supply curve. The given price level can be changed after taking this mass decision. However, it is a lengthy process that includes large amount of uncertainty and risk. Hence, to take such sensitive decision, a strong support is required for those farmers. Otherwise, those concerned farmers can face a negative impact that, in turn, has led them to bear huge amount of loss. In this context, the government can play a crucial role by implementing various governmental programmes.

The Market Supply Curve of Crops

Instead of that, farmers can earn higher amount of revenue through other economical activities. Due to large number of farmers, the market of crops is facing perfect competition, where the market price of that product is determined by the interaction of market demand and market supply curve of the same. However, by implementing some policies, the government can control the entire supply of crops. The chief tool of the government is rationing system. With this economical tool, the entire supply of crops in market can be restricted. Through hoarding of crops, the government can influence the market supply of that product, while the market demand of that product has remained same as before or even can increase over time (Antwi & Matsui, 2018). Due to this incidence, the price of crops is going to increase that successively helps farmers to earn more revenue than before. By applying this economical tool, the government can also earn revenue, especially when the economy is enjoying a shortage of crops supply due to natural calamity. In this situation, consumers can obtain those items at a normal price rate because of governmental intervention. Hence, by adopting this strategy, the government tends to maintain economical welfare among farmers and customers even in the presence of any natural disaster.

Thus, at the end of the discussion, it can be stated that drought is good for farmers if the related crops are faced inelastic demand curve. After some economical consequences, the price level of crops has increased, which, in turn, has helped farmers to earn more revenue. As drought can influence the market supply curve to a large extend, the market price of crops can be influenced by this natural calamity. However, that price level cannot be influenced by a single farmer. Hence, a single farmer, by intentionally decreasing the production level, cannot earn extra revenue. However, in the absent of drought, farmers can earn extra revenue by increasing the price of crops due to governmental intervention. The government, by applying its hoarding strategy, can decrease the supply of crops in market, which in turn, helps o increase the price of crops, as a whole. However, without this governmental intervention, destruction of crops without drought may bring various risks and uncertainty for farmers. Thus, without any governmental activity, it becomes very difficult for farmers to take any decision to destroying their crops intentionally.

Reference:

Antwi, A. O., & Matsui, K. (2018). Price perception on weights and measures at the local markets of Ghana. Kasetsart Journal of Social Sciences.

Atalla, T. N., Gasim, A. A., & Hunt, L. C. (2018). Gasoline demand, pricing policy, and social welfare in Saudi Arabia: A quantitative analysis. Energy Policy, 114, 123-133.

Behboodi, S., Chassin, D. P., Djilali, N., & Crawford, C. (2017). Interconnection-wide hour-ahead scheduling in the presence of intermittent renewables and demand response: A surplus maximizing approach. Applied energy, 189, 336-351.

Hegetschweiler, K. T., de Vries, S., Arnberger, A., Bell, S., Brennan, M., Siter, N., ... & Hunziker, M. (2017). Linking demand and supply factors in identifying cultural ecosystem services of urban green infrastructures: A review of European studies. Urban Forestry & Urban Greening, 21, 48-59.

Jadidzadeh, A., & Serletis, A. (2017). How does the US natural gas market react to demand and supply shocks in the crude oil market?. Energy Economics, 63, 66-74.

Kilian, L., & Murphy, D. P. (2014). The role of inventories and speculative trading in the global market for crude oil. Journal of Applied Econometrics, 29(3), 454-478.

Miller, M., & Alberini, A. (2016). Sensitivity of price elasticity of demand to aggregation, unobserved heterogeneity, price trends, and price endogeneity: Evidence from US Data. Energy Policy, 97, 235-249.

Vives, A., Jacob, M., & Aguiló, E. (2018). An online hotel demand model for two resort hotels in Mallorca. Revista Turismo & Desenvolvimento, 2(27/28), 251-254.

Von Keyserlingk, M. A., Cestari, A. A., Franks, B., Fregonesi, J. A., & Weary, D. M. (2017). Dairy cows value access to pasture as highly as fresh feed. Scientific reports, 7, 44953.

Wallander, S., Marshall, E., & Aillery, M. (2017). Farmers Employ Strategies To Reduce Risk of Drought Damages. Amber Waves.

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