Free Slides from Ed Dolan’s
Econ Bloghttp://dolanecon.blogspot.com/ Supply and Demand: Will Fracking EnrichIndia’s Guar Farmers? July 30, 2012 Terms of Use: These slides are made available under Creative Commons License Attribution— Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.

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/

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/

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/

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/

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/

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/

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/

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/

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/

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/

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/