Ag Prices and the Elasticity of Demand

Barton wordmark logo

Great Bend Tribune
Published June 28, 2020

The six to ten day outlook (July 1 to 5) above normal temperatures and precipitation for our area.  This will help the corn, milo, and soybeans, especially corn as it is mostly about to enter the critical growth phase where water stress will impact yield.  Looking out eight to fourteen days (July 3 to 9) indicates above normal precipitation and temperatures. The drought monitor indicates some improvement in conditions with the rains the past week, especially in Southwest things are still bad.  Barton has improved to just abnormally dry with a part of the eastern section is out of dry conditions.  Stafford, Rice, and counties to the east are no longer even abnormally dry.  The significant rains much of the area received the last week or so greatly benefitted hay and summer row crops and as this is being written on Thursday, where the soil is dry enough, combines are starting to roll again.  The last two weeks we discussed prices, supply, demand, markets, and what is going on in the meat packing industry.  Something worth a minute, and actually interesting, is the elasticity of demand and supply and how it effects what you pay at the store.

Elasticity is simply how supply or demand change relative to a change in price.  Remember as price goes up, demand goes down and vice-versa for supply.  In more technical terms elasticity is “The percentage change in one economic variable with respect to a percentage change in another economic variable.”  This can be a change in the price of a good or a myriad of other factors.  Today, let’s focus on price.  In simple terms, what does a one percent change in price do to supply and demand?  If the price changes by one percent and supply or demand change by one percent it is termed unitary elasticity.  Not a terribly common occurrence.  If a one percent change brings about a larger change in supply or demand, the good is termed elastic or more responsive.  If a one percent change in price brings about a less than one percent change in supply or demand, the good is inelastic or not terribly responsive to a change in price.

Goods and services that are elastic, very responsive to a change in price tend to be those less necessary goods or “luxury” goods – things you can buy less of or don’t really need.  Producers know this price accordingly.  As a side note, there are other factors involved we don’t have space to discuss such as the relative prices of other goods and the availability of substitutes.  If there are ready substitutes such as chicken or pork for beef, demand tends to be elastic and consumers will switch.  This doesn’t mean the producer won’t raise prices but will be careful as to how far.  This is why we have many generic brands.

If a good is inelastic, less responsive to price, the producer can raise prices more than with elastic demand.  However, not to whatever they want, there are limits.  Inelastic goods tend to be necessity goods, not luxury goods – bread, milk, fuel, etc.  Here producers must be more careful in the marketplace.  In fact some of these goods and services such as utilities, have regulations in place and boards to monitor price increases.  Here the consumer has less flexibility and therefore the producer can raise prices without losing much demand.

The next time you go to purchase groceries, think about this as you shop.

< Back to News