Ramy

Omar #900143091 Microeconomics Assignment #3

Explain why the following statement might be true: A drought around the country raises the
total revenues that farmers receive from the sale of agricultural goods. What information would
you need about the market for such agricultural goods to assess the validity of that statement?
Explain your answer using a relevant diagram.

Revenue is Quantity Demanded by Price, QD x P = Revenues. Any change in P or QD will affect the
Revenues in turn. Mathematically, if any of the QD or P increased while the other is held constant, the
whole revenue will increase and the other way around is true. However, in reality, according to the law
of demand QD and P are inversely related so an increase in P will be matched with a decrease in QD and
vice versa. This means that Revenue will be suspect to the determinant (P or QD) that has a greater
percentage change versus the other.

To assess the validity of the statement given, and examine what will happen to the revenue, one will
need to know the PED (Price Elasticity of Demand) of the good in question. This information is crucial
to be able to judge.

Assuming that the (equilibrium) price of wheat increases as Supply shifts to the left and the Demand
schedule remains unchanged:

If the wheat was an inelastic good (i.e. Ed < 1), the response to the percentage decrease in the Price will
be matched by a smaller percentage decrease in the Quantity Demanded, yielding a higher overall
Revenue. In this case the statement will be valid.

On the other hand, if the wheat was an elastic good (i.e. Ed > 1), the response to the percentage increase
in Price will be matched by a greater percentage decrease in Quantity Demanded, yielding a lower
overall Revenue. In this case the statement will no be valid.

Upon checking the slides, wheat is indeed an inelastic good due to several determinants, meaning that
the statement is valid. To conclude, if the coefficient of Elasticity of Demand for wheat was < 1, the
statement will be valid. While if the coefficient of Elasticity of Demand was > 1, the statement will be
invalid.