Over the past decade, global demand for soybeans has risen sharply, driven by their use in plant-based foods, animal feed, and biofuels. For many farmers, soybeans have become their most profitable crop.
In the province of Santa Verde, Farmer Li manages a 400-hectare soybean farm. During the last growing season, unusually heavy rainfall delayed planting, reducing yields by 15%. At the same time, a trade dispute between two large importers temporarily reduced global demand, causing soybean prices to fall from $500 per tonne to $400 per tonne.
When prices fell, Li noticed that his total revenue dropped sharply, even though the reduction in quantity sold was relatively small. However, after the price recovered to $500 per tonne, Li struggled to quickly increase output because it takes at least one full growing season to expand production.
Meanwhile, rising incomes in nearby cities have boosted demand for soy-based products like tofu and soy milk, but this demand is relatively steady compared to the volatile global feed market.
To reduce risk, Li is considering investing in greenhouse-controlled production, which would allow year-round planting and faster responses to price changes — though at a high initial cost.
Year | Market Price (per tonne) | Quantity Demanded (million tonnes) | Quantity Supplied (million tonnes) | Average Household Income ($000) |
2023 | $400 | 90 | 85 | 30 |
2024 | $500 | 80 | 95 | 33 |
Additional information:
– Greenhouse technology would increase Li’s short-run production capacity by 20%.
– Price rise from 2023 → 2024: 25%.
– Household income rise from 2023 → 2024: 10%.
a) Calculate the price elasticity of demand (PED) for soybeans between 2023 and 2024.
b) Comment on whether demand is elastic or inelastic
c) Draw a demand-curve diagram showing the effect of the price increase on total revenue.
d) Calculate total revenue in 2023 and 2024, and explain why this outcome matches your PED result.
Incomes for urban consumers rose by 10%, and sales of soy-milk rose from 40 to 46 million litres.
a) Calculate the income elasticity of demand (YED) for soy-milk using the formula.
b) Interpret whether soy-milk is a normal or inferior good and how income changes might influence Li’s revenue.
c) Draw a supply and demand diagram for soy-milk showing the change in income.
a) Using the data provided, calculate the price elasticity of supply (PES) for soybeans between 2023 and 2024.
b) Comment on whether the result shows elastic or inelastic supply and explain why agricultural supply tends to behave this way.
c) On a diagram, illustrate the 2023 → 2024 change and label equilibrium price and quantity.
d) If Li invests in greenhouse technology that increases potential output by 20%, draw and label the new supply curve and show the effect.
e) Explain how this change affects Li’s price stability and income volatility.
🌾 Extension Question: The Drought Dilemma
The following year, 2025, Santa Verde experienced an unexpected drought, reducing soil moisture and limiting planting during the dry season.
Despite prices rising from $500 per tonne to $600 per tonne, the quantity of soybeans supplied only increased from 95 million tonnes to 98 million tonnes.
Farmer Li’s greenhouse system allowed him to maintain some production flexibility, but most traditional farms in the region could not respond quickly to higher prices due to the lack of irrigation and available farmland.
a) Calculate the Price Elasticity of Supply (PES) for soybeans in 2025.
b) Draw a supply and demand diagram showing the change in equilibrium from $500 to $600 and label the elasticity on the supply curve.
c) Explain one key determinant of PES shown in this case and how it affects the responsiveness of supply.