Let’s now return to the question posed at the beginning of this chapter: What happens
to wheat farmers and the market for wheat when university agronomists discover
a new wheat hybrid that is more productive than existing varieties? Recall
from Chapter 4 that we answer such questions in three steps. First, we examine
whether the supply curve or demand curve shifts. Second, we consider which direction
the curve shifts. Third, we use the supply-and-demand diagram to see how
the market equilibrium changes.
In this case, the discovery of the new hybrid affects the supply curve. Because
the hybrid increases the amount of wheat that can be produced on each acre of
land, farmers are now willing to supply more wheat at any given price. In other
words, the supply curve shifts to the right. The demand curve remains the same
because consumers’ desire to buy wheat products at any given price is not affected
by the introduction of a new hybrid. Figure 5-8 shows an example of such a
change. When the supply curve shifts from S1 to S2, the quantity of wheat sold increases
from 100 to 110, and the price of wheat falls from $3 to $2.
But does this discovery make farmers better off? As a first cut to answering
this question, consider what happens to the total revenue received by farmers.
Farmers’ total revenue is P Q, the price of the wheat times the quantity sold. The
discovery affects farmers in two conflicting ways. The hybrid allows farmers to
produce more wheat (Q rises), but now each bushel of wheat sells for less (P falls).
Whether total revenue rises or falls depends on the elasticity of demand. In
practice, the demand for basic foodstuffs such as wheat is usually inelastic, for
these items are relatively inexpensive and have few good substitutes. When the
demand curve is inelastic, as it is in Figure 5-8, a decrease in price causes total revenue
to fall. You can see this in the figure: The price of wheat falls substantially,
whereas the quantity of wheat sold rises only slightly. Total revenue falls from
$300 to $220. Thus, the discovery of the new hybrid lowers the total revenue that
farmers receive for the sale of their crops.
If farmers are made worse off by the discovery of this new hybrid, why do
they adopt it? The answer to this question goes to the heart of how competitive
markets work. Because each farmer is a small part of the market for wheat, he or
she takes the price of wheat as given. For any given price of wheat, it is better to