Friday, January 28, 2011

Chinese cotton farmers are with-holding cotton in hopes of getting a higher price---how does this affect the Supply Curve? Shift it or Move along it?

Timely---We are doing the basics of Demand and Supply right now in class.  In today's Wall Street Journal there is an article on Chinese farmers hoarding cotton in hopes of getting a higher price in the near future:

WSJ: Chinese Take a Cotton to Hoarding
""Yu Lianmin, a cotton farmer in Huji, China, harvested 6,600 pounds of cotton this year. Despite record cotton prices, he didn't sell any of it.

Instead, mounds of cotton are piled up in two empty rooms of Mr. Yu's home, and the homes of many of the farmers in his small township of Yujia, which is part of the bigger township of Huji in northern Shandong province, 220 miles southeast of Beijing. The farmers are holding out for higher prices, aiming to help overcome higher costs of labor and fertilizer, which are up about 20% in the past year.

"I think there's still hope for prices to go higher," he said....""
This affects the supply-side of the market.  One of the determinants of supply is "Producer Expectations". If the farmers have a reasonable expectation the price of cotton will be higher in the future they will with-hold some/all of that supply.  Graphically, it looks like this:

The quantity supplied at every price is LESS on Supply1 relative to Supply*.  The Supply curve shifts to the left, representing a decrease in Supply.  Now, these farmers are VERY small suppliers in a world-wide market for cotton so their with-holding of cotton would NOT increase the price as illustrated above. What they are hoping for is a continued INCREASE in Demand for Cotton world-wide (and domestically) which WILL tend to increase the price:

The farmers can then increase their QUANTITY SUPPLIED of Cotton (13 bushels) at the higher price (this will help the cotton market move ALONG the supply curve from Point "A" to Point "C").  Remember, they are not increasing their quantity supplied at a lower price, which would shift the whole supply curve to the right. A subtle but important difference.

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