In The United States 2007 Was A Bad Year For Growing Wheat

In the United States 2007 Was A Bad Year For Growing Wheat And As W

In the United States, 2007 was a bad year for growing wheat. As wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded along the demand curve. The accompanying table describes the changes in prices and the quantity of wheat demanded: the quantity demanded decreased from 2.2 billion bushels to 2.0 billion bushels, and the average price increased from $3.42 to $4.26 per bushel.

Using the midpoint method, calculate the price elasticity of demand for winter wheat. Determine the percentage change in quantity demanded and price, then divide the former by the latter to find elasticity.

Calculate total revenue for U.S. wheat farmers in 2006 and 2007. For 2006, multiply the quantity demanded (2.2 billion bushels) by the price ($3.42), and for 2007, multiply the quantity demanded (2.0 billion bushels) by the price ($4.26).

Evaluate whether the bad harvest increased or decreased the total revenue of U.S. wheat farmers. Use the elasticity information to predict the effect; if demand is elastic, the increase in price might not offset the decrease in quantity demanded, possibly lowering total revenue, or vice versa. The expectations can be confirmed by calculating the actual revenues.

Paper For Above instruction

The impact of supply shocks on market equilibrium and the total revenue of producers can be significantly understood through the concepts of price elasticity of demand. During the year 2007, the United States experienced a notable decrease in wheat production, which resulted in a surge in wheat prices and a corresponding decline in the quantity demanded. This situation provides an illustrative case to explore the elasticity of demand, the influence on total revenue, and related economic interpretations.

Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Using the midpoint method, the elasticity for wheat can be computed as follows:

The percentage change in quantity demanded is calculated as:

[(Q2 - Q1) / ((Q2 + Q1) / 2)] × 100 = [(2.0 billion - 2.2 billion) / (2.1 billion)] × 100 ≈ (-0.2 billion / 2.1 billion) × 100 ≈ -9.52%

The percentage change in price is:

[(P2 - P1) / ((P2 + P1) / 2)] × 100 = [($4.26 - $3.42) / ($3.84)] × 100 ≈ ($0.84 / $3.84) × 100 ≈ 21.88%

Thus, the price elasticity of demand is approximately:

Elasticity = Percentage change in quantity demanded / Percentage change in price ≈ -9.52% / 21.88% ≈ -0.436

As the absolute value of the elasticity is less than 1, demand is inelastic during this period. This suggests that the percentage decrease in quantity demanded is proportionally less than the percentage increase in price.

Next, calculating the total revenue for 2006 and 2007: in 2006, Revenue = 2.2 billion bushels × $3.42 ≈ $7.524 billion; in 2007, Revenue = 2.0 billion bushels × $4.26 ≈ $8.52 billion.

Despite the decrease in quantity demanded, total revenue increased in 2007 due to the price hike. The inelastic nature of demand explains this: because consumers are relatively unresponsive to price changes, the increase in price more than compensates for the reduced quantity sold, leading to higher total revenue.

Similarly, the elasticity values for Volkswagen Beetles offer useful insights into consumer behavior. The price elasticity of demand for Beetles is 2, indicating that demand is elastic. Therefore, a 10% increase in price would lead to a 20% decrease in quantity demanded. This elastic demand implies that consumers are quite responsive to price changes, and such a price increase would tend to reduce total revenue because the percentage decrease in quantity demanded exceeds the percentage increase in price.

Additionally, the income elasticity of demand for Beetles is 1.5, signifying that as consumer income rises, the demand for Beetles increases. When demand is elastic and income rises, the resulting increase in demand causes the equilibrium price and quantity to both rise. Given the elastic nature of demand, the total revenue—price multiplied by quantity—would tend to increase because the percentage increase in both price and quantity exceeds the percentage increase in income alone.

In conclusion, the decrease in wheat supply in 2007 illustrates how inelastic demand leads to increased total revenue despite falling quantities, while the case of Volkswagen Beetles highlights how elastic demand causes price increases to reduce total revenue. Understanding these dynamics is essential for producers and policymakers to predict the outcomes of supply and demand shocks, formulate appropriate strategies, and interpret market responses accurately.

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