Answer:
<u>Scenario:</u>
1. Agricultural output is affected by the weather.
2. Excessively high temperature + lack of rainfall = less crop yields.
3. Farmers desire to maximize crop yields under the best growing conditions and accept whatever the weather offers.
4. For a particular crop, actual yield < desired yield.
<u>Solution: </u>
1. Conditions for less than desired yield to be beneficial for farmers revenue:
a) Higher market demand: The market demand for the crop this year may be far higher than the supply since the yield is less than desired.
b) With market demand outstripping supply, price for the crop will skyrocket, according to the law of demand and supply.
c) Total revenue may become more this year, given the increased demand, less supply, and increased price per unit.
2. a) The surprising result is possible, because more people will want to buy the crop. The total quantity they may require will be higher than the actual quantity available for sale. The sellers will take advantage of this situation to raise the price per unit.
b) For example, yam tubers cost $2 per pound last year. The total pounds of yam produced was 200 pounds. The total revenue for all sellers would not exceed $400 ($2 * 200 pounds). If the yam produced this year is 50 pounds and the price per pound is $10. The farmers revenue will be $500 ($10 * 50 pounds). With this hypothetical example, it can be clearly seen that total revenue increased by $100 despite the reduced crop yield.
Explanation:
What is operational here is the economic law of demand and supply. The law states that when the demand is higher than the supply, the price will be higher. On the other hand, when the supply is higher than the demand, the price will be lower. Equilibrium price is achieved when demand equals supply, all things being equal.
All things are equal when there is a perfect market with information available equally to sellers and buyers. This enables transactions to be carried out at an arm's length between knowledgeable buyers and sellers. The implication is that buyers and sellers do not take advantage of the other party to cheat on price or act on a cartel basis.
