Question

Suppose the market price for corn drops from \(\$ 1,00\) per bushel to \(\$ .75\) per bushel. In reaction to this, the farmers decide to sell one third less corn to the market. Has the supply of corn to the market decrease?

Short answer

Yes, the supply of corn to the market has decreased. The farmers' decision to sell one third less corn, despite not being directly influenced by the price drop, has effectively reduced the volume of corn they are willing and able to sell. This results in a decreased supply of corn on the market at the new price of \(.75\) per bushel compared to the old price of \(1.00\) per bushel.

Step-by-step solution

Understand the Situation

Farmers used to sell corn at a price of \(1.00 per bushel, but the market price has dropped to \).75 per bushel. In reaction to this, they have decided to sell one third less corn to the market. It's important to understand that the farmers' decision to sell less wasn't necessarily influenced by the lower price — it’s stated directly in the exercise that it was a conscious choice they made.

Define Demand and Supply

The quantity of a certain goods that buyers are willing and able to purchase at different prices is referred to as 'demand'. Conversely, 'supply' is the quantity of a certain product that sellers (like our farmers) are willing and able to sell at different prices.

Analyze the Farmers' Decision

By deciding to sell one third less corn, the farmers have effectively reduced the volume of corn that they are 'willing and able' to sell. Despite the decreased market price, they are not willing to sell their corn at this lower price.

Identify the Change in Supply

Normally, the supply of a product would change as a direct result of changes in its price. But in this case, the supply was changed not because of the price drop, but due to the conscious decision of the farmers.

Conclude

The decision of the farmers to sell one third less corn has led to a decrease in the supply of corn. They are essentially supplying less corn to the market at the new price of \(.75 per bushel compared to what they used to supply at the old price of \)1.00 per bushel. Hence, despite the reason not being the price drop, the end result is the same: the supply of corn on the market has indeed decreased.

Key concepts

Market Price

The market price is the current price at which a good or service can be bought or sold. In the context of supply and demand, it is determined by the interaction of buyers and sellers in the market. A change in the market price can influence both the behavior of consumers and producers. For instance, if the market price for corn decreases from $1.00 to $0.75 per bushel, consumers may purchase more due to the lower price, while producers might earn less profit per unit.
However, it's important to note that a price drop might not always cause producers to sell less. Their response can depend on various factors such as production costs, alternative markets, and long-term business strategies. In the exercise, although the market price for corn decreased, farmers decided to sell less. This shows that market price is one of the many factors affecting the supply decisions.

Farmers' Decision

When farmers choose how much corn to sell, several factors come into play. Their decisions are often based on costs, profit margins, and potential sales. In this scenario, farmers chose to sell one third less corn in response to the lower market price. This decision illustrates how producers can exercise control over the quantity they supply, independent of price changes.
Considering this choice, it's clear that producers consider the viability of selling at the new market price. If they anticipate losses or insufficient gains, they may opt to supply less. Hence, the farmers' decision to sell less corn despite a price drop indicates a strategic choice aimed at maximizing their economic advantage, regardless of the lower price.

Quantity Supplied

The term 'quantity supplied' refers to the amount of a product that sellers are willing and able to sell at a specific price. It is closely linked to supply, which represents the relationship between price and the quantity supplied over various price levels.
In the case provided, when the price of corn dropped to $0.75 per bushel, the farmers' quantity supplied decreased by one-third. This reduction in quantity supplied highlights an important point: supply isn't always directly correlated with price changes. While economic theory often assumes that lower prices result in lower supply, the exercise demonstrates that supply can also be influenced significantly by the sellers' decisions. In this instance, the farmers intentionally chose to decrease the quantity supplied due to strategic reasons, rather than purely due to the price change.