Economics, 3rd Edition

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FIGURE 4.15

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CHAPTER 4  ELASTICITY AND ITS APPLICATIONS  97

The Effect of Increases in Demand and Supply of Wheat on Farm Incomes

Twenty years ago, the supply of wheat is represented as supply curve S

1

 with output per acre at 2.0 tonnes per acre. The demand for wheat at 

that time is represented as demand curve D

1

. If the market price of wheat is 

€200 per tonne, the farmer’s income is €400,000.

The output of wheat per acre rises with increases in productivity and as a result the supply of wheat today increases and 

is represented by supply curve S

2

 with output per acre now 3.0  tonnes per acre. However, as demand is both price and income 

inelastic, the demand for food has increased only slightly in that 20-year period; the new demand curve is shown as D

2

. The 

combination of a considerable rise in supply and only a small rise in demand means farmers get a lower price per tonne and 

income is actually lower.