APPLICATION OF PRICE ELASTICITIES TO FARM POLICY ANALYSIS

which relates to elasticities and, thus, suggests First, our illustration of the two approaches their application to policy analysis. His referto examining the market was to demonstrate ence to "truisms" confirms our reasoning for how economic theory could be used to show the presenting the original article-i.e., what econimportance of the world market to producers of omists accept as givens or truisms often are cotton and soybeans. One approach separates not that easily accepted by lay audiences. the total market into domestic and export com- Huang states our estimating procedure is ponents. We pointed out that the elasticity es- "inconsistent" with our reservations about the timates used for the domestic (-.35) and ex- use of a relatively large (30 percent) production port (-1.76) markets and the production data cut. Admittedly, the terminology used in exfor 1976 give a total elasticity estimate for the pressing our reservations was vague. Likewise, U.S. of -. 98 if the world elasticity is -. 5. The our statement "also, elasticities are generally other approach (the primary subject of considered appropriate only over a relatively Huang's comment) uses a single world market small range" should have been explicitly and illustrates how the U.S. affects or is af- stated as "an elasticity coefficient holds only fected by it. Use of the second approach gives a over a relatively small change in price." Huang U.S. elasticity of -1.0 when the world elasti- must agree, because he later points out that city is -. 5. It was not our intention to compare the elasticity does change as one moves along a the two approaches as to consistency of es- demand curve. Obviously, the elasticity coeftimate, although the example may have im- ficient has no effect on the arithmetical proceplied such an argument. Given the same data dure used, but the magnitude of the coefficient base and consistent methods in estimating the is important. separate demand functions, the results should In discussing demand curves versus elasticibe similar. ty of demand Huang claims to discover a misTo illustrate the "flaws" in our analysis, take in the analysis. The analysis was not in erHuang derives the same results for the second ror, but our statement "toward the more inapproach that we presented in Table 1. It is in- elastic portion of the demand curve" [2, 8.109] teresting to note that, as we did not show our is not correct when taken out of context. Discalculations for the table, Huang's comments cussion of the total elasticity for our equation 4 had to be predicated on his assumption of our is based on two separate demand functions, the procedure. However, the issue is not arith- domestic market and the export market. The metic-the table was proposed to demonstrate domestic market is generally considered to be the tendency for the world market to dilute more inelastic for soybeans when estimated as potential benefits to U.S. producers from uni- a separate component of the total market. lateral supply control. Thus, our statement should have been, "ProHuang's dissatisfaction with our results duction cuts will tend to move the U.S. toward may arise from our choosing to show a range of the more inelastic demand curve, as is demonelasticities with U.S production held at close to strated in equation 4." 50 percent of world soybean supplies. Varying Huang's comments point out grammatical the proportion of the market supply would deficiencies in two areas of our paper and offer perhaps have provided a more vivid illustra- some computational insight. Otherwise, his tion, emphasizing that the level of benefits to comments are not at issue with the thrust of domestic producers depends not only on the our article. We used previously estimated market, but also on how large a part we play in demand elasticity coefficients for two someit. what extreme examples of world-traded