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1. Free Slides from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
Supply and Demand:
Will Fracking Enrich
India’s Guar Farmers?
July 30, 2012
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2. What is Guar?
 Guar is a small bean that is the
source of guar gum, a substance
that forms a gel when mixed with
water
 Guar gum is widely used in foods
ranging from baked goods to ice
cream, which need to retain
moisture for maximum shelf life
 More than 80 percent of the
world’s guar is produced in India
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

3. Fracking Sends Guar Prices Soaring
 Guar is also used in hydraulic
fracturing (fracking), a method of
producing oil and gas
 Increased use of fracking sent
guar prices soaring in early 2012
 In the first half of the year guar
prices more than doubled as big
producers built up stockpiles to
guard against supply
interruptions
 These events have people
asking, will fracking bring riches
Hydraulic Fracturing Operation, Texas
to India’s guar farmers?
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

4. Question: How Does the New Use Affect the Price?
How does fracking, the new use for guar,
affect the price?
 Does the demand curve shift? If so,
show the new demand curve as D2
 Does the supply curve shift? If so,
show the new supply curve as S2
 Show the new equilibrium price as P1
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

5. Answer: How the New Use Affects Price
 The new use of guar will shift the
demand curve to the right. The new
demand curve is shown here as D2
 Nothing has affected the “other things
being equal” conditions behind the
supply curve, so the supply curve does
not shift
 The market moves along the supply
curve until a new equilibrium price is
reached at the level P1
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

6. Short-Run Supply Effects: Growing Conditions
 Guar supply, like that of any farm
product, is subject to changes in
growing conditions
 In 2012, monsoon rains were late in the
parts of India that grow guar, causing
possible crop loss
Monsoon Season in India
Photo source: deeptrivia
http://commons.wikimedia.org/wiki/File:Ladakh_india_monsoon_clouds.jpg
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

7. Question: How Do Late Rains Affect the Price?
Other things being equal, how do poor
growing conditions (late rains)affect
the price?
 Does the demand curve shift? If so,
show the new demand curve as D2
 Does the supply curve shift? If so,
show the new supply curve as S2
 Show the new equilibrium price as P2
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

8. Answer: How Late Rains Affect the Price
 Poor growing conditions will cause the
supply curve to shift to the left, for
example, from S0 to S2 as shown here.
 Other things being equal, growing
conditions will not affect the demand
curve
 The market moves long the demand
curve until a new equilibrium price is
reached at the level P2
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

9. Short-Run vs. Long-Run Supply
 In the short run, supply of guar is inelastic
because opportunities to expand
production is limited
 In the long run suppy is more elastic
because guar can be substituted for other
crops, like cotton
 Also, guar crops could be established
outside India in countries including
Australia, Argentina, and the United States
Cotton Ready for Harvest
Photo by Kimberley Vardeman
http://commons.wikimedia.org/wiki/File:Cotton_field_kv43.jpg
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

10. Question: Short-Run vs. Long-Run Market Adjustment
 How do you expect long-run adjustment of
the guar market to differ from short-run
adjustment when there is a permanent
shift in demand? (Assume normal growing
conditions)
 Draw a diagram that shows both short-run
and long-run supply curves
 Show a rightward shift in the demand
curve
 Show how the market first moves to a
short-run equilibrium E1 and then to long-
run equilibrium E2
 What happens to the price over time? Cotton Ready for Harvest
Photo by Kimberley Vardeman
http://commons.wikimedia.org/wiki/File:Cotton_field_kv43.jpg
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

11. Answer: Short-Run vs. Long-Run Market Adjustment
 In the short run, the shift in demand
causes the market to move along the
short-run supply curve SSR from E0 to E1
 In the long-run, expansion of the crop to
new growing areas allow the market to
move to equilibrium E2 on the more elastic
long-run supply curve SLR
 Over time, then, the shift in demand
causes the price first to rise sharply to P1,
and then to fall back partway to an
intermediate price like P2
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

12. The Bottom Line
 The bottom line? In the short-run, new
demand from fracking will bring
prosperity to India’s guar farmers
 Over time, high prices will encourage
spread of the crop to new areas
 The price will moderate. Farmers in
favorable growing areas will still earn
good profits, but not as high as the
short-run windfall profits they enjoyed
in 2012
P120730 published Aug 1, 2012 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/