Another problem is that the aggregate demand for farm products is highly 

 inelastic (i.e., the percentage change in the quantity demanded is always less 

 than the percentage change in price), yet the demand curve confronting the 

 individual farmer is almost perfectly elastic (i.e., the individual farmer can 

 sell all he wants at a given price). The farmer has little control over the 

 price at which he sells, but may sell all he likes at the market price. This 

 encourages the farmer to increase production because it is the only way income 

 may increase when productions costs are high and prices are low. As each 

 farmer strives to increase profits, market supply of farm products increases 

 and prices fall. Given an inelastic aggregate demand for food, a decline in 

 prices lowers total revenue. In the long run, the fanner is caught in a 

 rather vicious circle. The cobweb theorem states that farmers react dif- 

 ferently in the short run than in the long run. During lower prices, farmers 

 tend to plant less acres in the year following price cuts. Some producers 

 take even more drastic steps such as slaughtering livestock and destroying 

 crops to reduce supply and increase prices. 



In recent years, the real income of Florida farmers has steadily 

 declined, but retail food prices have increased. The price index of food 

 items prepared by the Survey of Current Business rose 86% in 1959-74, but con- 

 sumer prices rose only about 70%. Much of the inflation in consumer prices 

 can be attributed to rising U.S. retail food prices. Since 1974, rising 

 energy costs have replaced high food prices as the major contributor to infla- 

 tion. The real prices of peanuts and corn have remained relatively stable 

 despite rising current prices. Both current and real beef prices rose during 

 this period. In the case of beef, it means that region farmers are receiving 

 more income per acre. Whereas real retail food prices have soared. In short, 

 while the amount of the consumers' income spent on food has risen, the amount 

 received by the farmer has declined. 



In view of the price dilemma, farmers should know how consumers react to 

 a change in the price of a commodity or to a change in their income. Price 

 elasticity indicates the percentage change in the quantity demanded by con- 

 sumers when prices change as little as 1% (Table 12). 



Table 12. Price and income elasticities (percentage change) of major food 

 groups (U.S. Department of Agriculture 1981). 



Food group Price Income 



Meat 0.6196 0.1212 



Vegetables 0.0933 0.1816 



Poultry, fish 0.6591 0.1682 



Fruits 0.4134 0.2613 



Eggs 0.0679 0.0625 



115 



