Paper 3 · Price elasticity of demand and agriculture
Agricultural produce generally has price inelastic demand. If a bumper harvest sharply increases the supply of a crop and its price falls by a large percentage, what happens to farmers' total revenue?
ATotal revenue rises, because quantity sold increases by proportionally more than the price falls
BTotal revenue falls, because quantity demanded rises by proportionally less than the price falls
CTotal revenue stays the same, because the fall in price is matched exactly by the rise in quantity demanded
DTotal revenue cannot be determined without knowing the exact shape of the supply curve
Explanation: With inelastic demand, the percentage change in quantity demanded is smaller than the percentage change in price. A large fall in price from oversupply causes only a small rise in quantity demanded, so total revenue (price times quantity) falls overall.
Derived from ZIMSEC Economics Paper 3, November 2007, Q2
