Model essay (a): why farm prices swing so much

What this lesson teaches

• I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.

  Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus

• I can use price, income and cross elasticities to judge how large those changes will be.

  Syllabus 9570, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply, income and cross elasticities of demand

Make a guess

Why do cocoa prices swing far more than furniture prices from year to year?

1. Weather shifts cocoa supply often, and both its demand and supply are inelastic.
2. Demand for chocolate is inelastic, so cocoa prices must swing.
3. Cocoa farmers can set their own prices each year, but furniture makers cannot.

The answer to part (a)

Introduction

How much a price changes depends on two things: how far demand or supply shifts, and how price elastic demand and supply are. Price elasticity of demand (PED) measures how much quantity demanded responds to a change in price. Price elasticity of supply (PES) measures how much quantity supplied responds. Farm prices change more sharply than prices of manufactured goods because farm markets face bigger shifts and have more inelastic demand and supply.

Paragraph 2: farm supply shifts more

The supply of farm goods depends on the weather and on disease, which no farmer controls. A drought, a flood or a plant disease can wipe out a large part of a harvest. Droughts did this to coffee in Brazil and Vietnam in 2024. Good weather can produce a bumper crop the next year. So farm supply shifts often, and by a lot, in both directions. A furniture maker, by contrast, controls its factory. Its output depends on machines and workers, which change slowly and predictably, so its supply shifts much less.

Paragraph 3: inelastic demand and supply

Farm goods also have inelastic demand and supply. Demand for staple foods is price inelastic because they are necessities with few substitutes, and they take a small share of income in richer countries. Supply is price inelastic in the short run because crops take months, and trees years, to grow. Once a harvest is in, output is fixed, and many crops spoil if stored. In Figure 1, a poor harvest shifts supply from S0 to S1. Because buyers barely cut back, the price must rise a long way, from P0 to P1, before the smaller supply is rationed. If demand were elastic, the same shift would raise the price only to E2.

Paragraph 4: why prices fall sharply too

The same logic works in reverse. A bumper harvest shifts supply right. Since demand is inelastic, consumers will not buy much more food just because it is cheaper, so the price must fall steeply to clear the extra output. This is why farmers can earn less in a good year than in a bad one.

Paragraph 5: manufactured goods are steadier

Manufactured goods face smaller shifts and more elastic supply. Firms can hold stocks of finished goods and run their factories for longer hours, so when demand rises they can raise output fairly quickly. Their supply is more price elastic, so a rise in demand is met mostly by more output rather than a higher price. Many manufactured goods also have close substitutes, such as other brands, so their demand is more elastic too.

Conclusion

Agricultural prices change more sharply because weather causes large and frequent shifts in supply. Both demand and supply are also price inelastic, so each shift has a large effect on price. Manufactured goods face steadier supply that can respond to price, so their prices move less.

Margin notes: how each paragraph scores

Introduction

Defines PED and PES and names the two reasons. The comparison with manufactured goods is set up from the start.

Paragraph 2

The first reason, with real context (coffee in 2024) and a direct contrast with a factory. Each claim is explained, not asserted.

Paragraph 3

Gives the determinants of PED and PES, then uses Figure 1 to show why inelasticity magnifies the price change. Comparing E1 with E2 is precise L3 analysis.

Paragraph 4

Covers price falls as well as rises. Mark schemes for this question type often cap one-direction answers at L2.

Paragraph 5

Completes the comparison by explaining why manufactured goods are steadier, using stocks and spare capacity.

Conclusion

Answers the comparison directly in two sentences.

Overall: L3, 9 or 10 marks

Both the shifts and the elasticities explained, both directions covered, with a diagram and context. Elasticity alone, with no source of the shifts, would cap the answer at L2.

Worked example: A 3-minute plan

Two reasons, each comparing farm goods with manufactured goods.

1. Intro: price changes depend on the size of the shifts and on PED and PES.
2. Shifts: weather and disease move farm supply a lot; factories can plan output.
3. Elasticity: food demand inelastic (necessity, few substitutes); farm supply inelastic (growing time, perishable). Figure 1.
4. Both ways: good harvests crash prices too.
5. Manufactured goods: stable supply, elastic supply from stocks and spare capacity.

Watch out for this

Farm prices are volatile because demand for food is inelastic.

Inelastic demand only makes a shift move the price further. Something must shift first, and in farm markets that is usually supply, driven by weather. A full answer needs both the shifts and the elasticities.

Check your understanding

Why is the supply of coffee beans price inelastic in the short run?

1. Coffee farmers care more about tradition than profit, so they ignore a higher price.
2. Coffee has few close substitutes, so buyers keep buying it even when the price rises.
3. Trees take years to grow, so farmers cannot raise output quickly after the price rises.