Question

Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease. a. Based on this information, almonds have a more inelastic supply in the short run because little can be done to change production in the short run. it is impossible to infer anything about the price elasticity of supply for these two crops. barley has a more inelastic supply in the short run because barley is more dependent on price in the short run. the crops have the same price elasticity of supply because they are both agricultural commodities. Supply Supply Almonds Barley Quantity b. Consider the graph which illustrates two potential supply curves. Move the points to label the curve that most likely represents the supply curve for each crop. c. Select each factor which helps determine the price elasticity of supply for a product. flexibility of inputs or resources used to make a product ease of firms to enter or exit the market the ability to store product

Answer 1

1. The correct answer is based on this information, (a) almonds have a more inealstic supply in the short run because little can be done to change production in the short run.

option (b) is incorrect since the determinants of supply of both crops are mentioned.

option (c) is incorrect since barley's output can be increased to a greater extent than that of almond. Thus barley's supply is not inelastic.

option (d) is incorrect since both being agricultural commodities is not a criteria for same price elasticity of supply.

2. The steeper supply curve refers to almond's supply while the relatively flatter (and lower) supply curve refers to barley's supply.

3. The price elasticity of supply is the measure of the responsiveness in quantity supplied to a change in price for a specific good.

i.Flexibility of inputs or resources used to make a product have direct impact on the price elasticity of supply as supply can not be increased with response to change in prices if the availability of inputs is inelastic.

ii.The ease of firms to enter or exit the market affects the price elasticity of supply in the sense of number of producers. If the price of a product increases and there are no barriers to entry, new producers will enter the market as high price is an incentive in the form of high profits. Thus the supply will increase. If there are barriers to entry or exit, the changes in increase or decrease in supply are relatively smaller.

iii.The ability to store a product also influences price elasticity of supply as the inventories are readily sold in the market when price level turns favorable. If a product is of perishable nature and can not be stored, inventories can not be build up and the supply can not be readily increased in the short run.