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Policies to Increase Price Elasticity of Supply of Agricultural Goods

Question

Discuss the policies that a government might adopt to increase the price elasticity of supply of agricultural goods in an economy and consider which policy is likely to be most effective. [12]

Category:

Elasticity

[CIE AS level November 2016]

Preview Answer


Step ➊ : Define ‘price elasticity of supply’ in the introduction and briefly explain why PES is relevant in agricultural markets.


Price elasticity of supply is particularly relevant in agricultural markets. Price elasticity of supply (PES) measures of the responsiveness of quantity supplied to a change in price.

The formula for PES is as follows :

% change in quantity supplied

% change in price

For valid climatic and geographical reasons, it is often difficult and sometimes impossible for producers to increase crops or switch to more lucrative ones when price rises. Producers may not have the additional land, or conditions may not allow them to grow a crop when price has increased. For example, coffee growers in Brazil or tea growers in Kenya cannot suddenly switch to growing corn, irrespective of the increase in price of corn. Even if they could, it would take time and there would be the added risk that prices may well have fallen.

Consequently, the government may implement supply-side policies in an attempt to increase the price elasticity of supply of agricultural products. Free market supply-side policies involve policies to increase competitiveness and market efficiency. Several points must be considered before concluding which supply-side policy will be more effective.


Step ➋ : Discuss the policies the government can implement to increase the price elasticity of supply of agricultural goods

There are several measures the government can adopt to increase the PES of agricultural products

➤ 2.1. The government should encourage producers to keep sufficient stocks.

The government can directly provide better storage facilities for farmers in order to encourage them to keep sufficient stocks. This will enable businesses to increase their stocks (such as dried fruits and vegetables). The government can also provide better refrigeration facilities to make the storage of perishable agricultural goods (such as fruits and vegetables) easier. Furthermore the government can offer subsidies to farmers so that they can invest in better storage facilities.

If firms can stockpile goods, then they can easily respond to increases in demand and price. Helping businesses to build stock will increase PES.

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➤ 2.2. The government can provide training programmes in order to increase the availability of labour with appropriate skills.

Some firms producing agricultural goods such as ethanol or organic agricultural products may come across labour constraints, especially if the work requires skilled labour. For example, the supply of extra biofuels following a rise in demand may be limited by the ability to employ sufficiently skilled labour. Thus public and private employment training programs can be established by the government to allow workers to increase their occupational labour mobility by teaching them new skills.

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