Two statements on complements and on drought and farm revenue

Statement (i): pizza and cold drinks. True, with one point of wording to note.

• Pizza. A fall in the price of pizza is a change in the good's own price. It causes a movement down the existing demand curve for pizza, an expansion of demand, so the quantity demanded of pizza rises.
• Cold drinks. Complementary goods are consumed together, and the demand for a good moves opposite to the price of its complement: a fall in the price of one raises the demand for the other. A change in the price of a related good shifts the whole demand curve, so the demand curve for cold drinks shifts to the right. Buyers who now order more pizzas want more cold drinks to go with them.
• Result. More of both goods is bought. If the supply of cold drinks is unchanged, the rightward shift in their demand raises both their equilibrium price and the quantity bought and sold.
• The wording. Strictly, economists call the change for pizza a rise in quantity demanded (a movement along its curve) and the change for cold drinks a rise in demand (a shift of its curve). The statement uses quantity demanded for both; its substance, that consumers buy more of both goods, is correct.

Statement (ii): a drought across the state and a drought in one district. True, provided the demand for rice is inelastic, which is the usual case.

• Why demand for rice is inelastic. Rice is a staple food. Necessities are bought in nearly the same quantity even when their price rises, so their demand is inelastic.
• A drought across the state. The drought cuts the output of every farmer, so the market supply curve shifts to the left. With demand unchanged, the equilibrium price rises and the quantity sold falls. When demand is inelastic, the percentage rise in price is larger than the percentage fall in quantity, so total revenue, price × quantity, rises. Farmers as a group sell less rice but earn more.
• A drought in one district. The farmers of one district grow only a small part of the state's rice. A loss in their crop barely moves the market price, so they are in the position of price takers, whose revenue is the given price times the quantity they sell. With almost the same price and much less rice to sell, their total revenue falls. Farmers in the rest of the state, whose crop is unharmed, gain slightly from whatever small rise in price occurs.
• Our own figures. Suppose the state grows 100 lakh quintals at ₹2,000 a quintal, worth ₹2,000 crore, and the price elasticity of demand is 0.5.
  • A statewide drought that cuts output by 10% to 90 lakh quintals raises the price by about 10 ÷ 0.5 = 20%, to ₹2,400. Revenue becomes 90 lakh × ₹2,400 = ₹2,160 crore, up from ₹2,000 crore.
  • A district that grows 5 lakh quintals loses 40% of its crop, leaving 3 lakh. State output falls by only 2%, so the price rises by about 4%, to ₹2,080. The district's revenue falls from 5 lakh × ₹2,000 = ₹100 crore to 3 lakh × ₹2,080 = ₹62.4 crore.

Conclusion. Both statements are true. In (i), a cheaper pizza raises the quantity of pizza bought and, because the goods are complements, the demand for cold drinks. In (ii), inelastic demand turns a statewide fall in supply into a rise in farm revenue, while a local loss that hardly moves the price only cuts the local farmers' sales and so their revenue.