Questions 1A.6 In book it has been mentioned as: "There is no such proof in economics. What the statement is probably referring to is that: Because of bad weather represents a shift of the short-run supply curve to the left. Prices will increase Assuming the prices increases to a greater extent than demand falls A firm revenue will increase if crops are reduced This happens because a large increase in price is needed to eliminate extra demand. The assumption that demand is relatively incentives to price changes is not unreasonable, as farm produce is a necessity. However, an individual farmer will not want to see his crop reduced by bad weather. This is because the output of an individual farm has a negligible effect on the supply curve, and hence the market price, for firm produce. Therefore an individual farmer would lose out - due to lower output, but unchanged prices." My doubts are like: If due to bad weather the farmers(summation of total number of farmer) are unable to get sufficient crops then the price will rise as demand would be the same and supply curve will shift to left for sure. Due to low production there will arise a gap between Demand and Supply Curve and that will be eliminate by the Price Mechanism System which will rise the price and make Equilibrium Point. Therefore by this way we can conclude that the price will rise for the limited production. And individual farmer will get benefit out of it as lower output will have the high price in the short-run. Sometimes we have experienced that the rich countries used to dump their over-produced crops in ocean to make the price constant. Although bad weather price rise mechanism is bad for the long run. Therefore in the short - run every farmer would get benefited due to bad weather as their production cost is same but the selling price is going to be high than the usual price of their crops. Hope that I have mentioned my doubts clearly. Please help.
The price will go up, but the amount the farmer produces will go down. The relative changes are what controls whether or not the farmer is better off in this situation. It's important to realise these are not necessarily "real" examples, in that they don't reflect what would actually happen. They are just meant to illustrate basic consequences of the theoretical mechanisms. One can spend too much time getting into the minutiae of farming when that isn't really the point!
I think I tend to agree there is an additional point in there which is to do with how badly affected our individual farmer has been in relation to farmers in aggregate.
The point the question is making is that, if one farmer loses his crop, then its bad news for that farmer because the demand curve for his produce is completely inelastic. In other words, the farmer cannot change price, so any loss in his supply cannot be offset by a gain in price. But if the whole market loses the same level of crop, the entire market's supply curve shifts and the demand at that level is far more elastic, so the price is free to rise across all farmers. Then each individual farmer's loss/gain will depend on how much crop he lost compared to the average. For example, if the total crop loss across all farmers is 20% (and price then rises by 20%), then if one individual farmer only loses 10% he makes a net gain, if he loses 30% he makes a net loss.
