Unit 2: Elasticity, Consumer Choice, Costs

Lesson 4a: Price Elasticity of Demand and Tax Incidence

Something Interesting - Why are we studying this?

In 2012 there was a severe drought in the US corn growing region. In 2014 the weather was great and the corn crop was at a record high. In which year did farmers make the most money? They made more in 2012 when the weather was bad !!! After studying this lesson you should understand why good farming weather results in low farm incomes and bad farming weather results in high farm incomes. Really! See: Sept. 2012: Despite Record Drought, Farmers Expect Banner Year Sept. 2014: Corn, soybean crop expected to hit record high -- Great season could mean bad prices for farmers ("This year, farming income is expected to drop by 14 percent.") ANSWER: The answer to this paradox is that the demand for corn and soybeans is price INELASTIC. You will learn that bad weather causes the price of crops to increase whch causes farm incomes to increase and good weather causes the price of farm corps to decrease causing incomes to decrease BECAUSE THE DEMAND FOR CORN AND SOYBEANS IS PRICE INELASTIC.

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