Demand, Supply, Elasticity and Price Determination of Farm Products
What the domain covers
The exam tests demand and supply schedules, equilibrium price, shifts versus movements, and price, income and cross elasticities. Farm products typically have inelastic demand, which affects price behaviour and policy.
Core rules and concepts
- Law of demand: price and quantity demanded move inversely, other things equal.
- Law of supply: price and quantity supplied move directly.
- Equilibrium: quantity demanded equals quantity supplied.
- Price elasticity: PED = percentage change in quantity ÷ percentage change in price.
- Elasticity and revenue: if demand is inelastic, a price cut reduces total revenue; if elastic, a price cut raises revenue.
- Shifts come from income, tastes, weather, input costs or technology; movements come from own price.
Worked example
Price falls from ₹10 to ₹9.50, a 5% fall. Quantity rises from 100 to 104 units, a 4% rise. PED = 4 ÷ 5 = 0.8 in absolute terms, so demand is inelastic. Initial revenue is ₹1,000; new revenue is ₹988, a fall of ₹12. Reasoning: with inelastic demand, the percentage rise in quantity is smaller than the percentage fall in price, so total revenue falls.
Traps that cost marks
Confusing a shift in demand with a movement along the curve; dropping the negative sign incorrectly; assuming all farm demand is elastic; ignoring that supply shifts can change equilibrium price without changing demand.