At some point in its development, every business faces the same age-old dilemma: What effect will increasing market share have on my business’s profitability? The economic fundamental that dwarfs all others in answering this timeless question is quantifying the intended market’s elasticity component. An elastic market pays minimal attention to supply because when price is lowered, the market’s demand expands to accept a greater supply. Conversely, an inelastic market wants the supply that it wants and no more. Even slightly oversupplying an inelastic market results in significant downward price pressure. Because U.S. per-capita potato consumption has been declining for decades, the potato market is not only inelastic, it has been shrinking. This exacerbates the price penalty of oversupply.
Consider the age-old example of being given two pairs of pants upon graduation from high school, the only two that you will ever have: One pair has an elastic waistband, and the other pair does not. Both pairs begin with a 32-inch span. As years go by and one’s waist expands such that it now needs a 34-inch waistband, the pair of pants with the elastic waistband expands to accommodate the greater dimension. When the need for a 36-inch waistband arrives, no problem; elastic is always elastic.
However, when wedging a 34-inch waist into an inelastic 32-inch waistband, not to mention squeezing in a 36-inch waist, something has to give. While one’s choices are limited in this circumstance, a solution does come to mind: Since the waistband is inelastic and won’t budge, it is up to the waist’s owner to make his waist fit the waistband, not the other way around.
While it may be possible to squeeze a 36-inch waist into a 32-inch waistband and go about the day in great discomfort, few discomforts match that of being unable to satisfy the bank’s operating line because one contributed to trying to fit a 36-inch potato crop into a 32-inch market. Why not save money by eating less and keeping the same wardrobe in the waistbands’ case, or by planting fewer acres and not oversupplying potatoes’ inelastic market in the other? Why not walk about the neighborhood slim, trim, and fit in the waistband’s case, and in great financial condition in the potatoes’ case?
While the above metaphor clearly demonstrates supply’s effect on price in elastic and inelastic markets, let’s consider the math in the potato case: Annually sending 100 million hundredweight of fresh potatoes into an inelastic market that wants only 96 million hundredweight says that by adjusting national supply by approximately 4 percent—from 100 million to 96 million—the market will return approximately one dollar more per hundredweight at the grower level for every one-percent supply drop. While these percentages are estimates, they do have a historical economic basis, one that you can take to the bank.