Economics, 3rd Edition

96  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

Why Have Farmer’s Incomes Fallen Despite Increases in Productivity?

In many developed countries, agricultural production has increased over the last 50 years. One of the reas-

ons is that farmers are able to use more machinery, and advances in science and technology have meant 

that productivity – the amount of output per acre of land, has increased. Assume a farmer has 1,000 acres 

of land and grows wheat. Twenty years ago each acre of land yielded an average of 2.0 tonnes of wheat. 

We say an average because output can be dependent on factors outside the farmer’s control such as the 

weather, pests, diseases and so on. Assume that the price of wheat is 

€200 per tonne. Twenty years ago 

the average income for our farmer would be 2,000 tonnes 

× €200 = €400,000.

Ceteris paribus, if productivity increases meant that average output per acre was now 3.0 tonnes per 

acre, income would rise to 

€600,000.

However, this assumes other things are equal. Research suggests that the demand for food is relatively 

price inelastic and also income inelastic. Over the 20-year period we are assuming in our analysis, the 

demand for wheat may only have risen by a relatively small amount and also is price and income inelastic. 

People may earn more money now than they did 20 years ago but Engel’s law (see Chapter 2) tells us that 

the proportion of their income devoted to food tends to decline.

Figure 4.16 shows a representation of this situation. In the first time period the supply curve represent-

ing output per acre of 2.0 tonnes intersects the demand curve D

1

 at a price of 

€200 per tonne giving the 

farmer an income of 

€400,000.

20 years later, the productivity improvements at the farm see the supply curve shifting to S

2

 represent-

ing an average output per acre of 3.0 tonnes. However, over the 20-year period, demand has increased but 

only by a small amount as people spend a smaller proportion of their income on food as they get richer. The 

fact that food is relatively price inelastic is indicated by the relatively steep demand curve and the result is 

that the market price has fallen to 

€100 per tonne with the farmer now selling 3,000 tonnes. The farmer’s 

income has fallen to 

€300,000.