Multiple Choice
The supply of product X is considered elastic if, when the price of X rises by 10%, the quantity supplied:
4. Elasticity
Price Elasticity of Supply
Multiple Choice
Why are agricultural prices often volatile even when harvest changes are small?
A
Because agricultural supply is highly inelastic in the short run, so small changes in harvest cause large price swings.
B
Because agricultural markets have very high price elasticity of supply, amplifying small harvest changes into large price movements.
C
Because governments and traders frequently change price supports and taxes whenever harvests vary slightly.
D
Because consumers' demand for food is highly elastic, so small harvest changes lead to big price volatility.
Verified step by step guidance1
Step 1: Understand the concept of price elasticity of supply, which measures how much the quantity supplied responds to a change in price. A highly inelastic supply means quantity supplied changes very little even if prices change significantly.
Step 2: Recognize that in agriculture, the supply is often inelastic in the short run because farmers cannot quickly adjust the amount of crops they produce due to biological and time constraints (e.g., growing seasons).
Step 3: Analyze how small changes in harvest quantity (supply) affect prices when supply is inelastic. Since quantity supplied cannot adjust much, even a small decrease in harvest leads to a large increase in price to balance demand and supply.
Step 4: Contrast this with demand elasticity. Agricultural products typically have inelastic demand because consumers need food regardless of price changes, so demand does not drop significantly when prices rise.
Step 5: Conclude that the combination of inelastic supply and inelastic demand means that small changes in harvest quantities cause large price fluctuations, explaining why agricultural prices are often volatile even when harvest changes are small.
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