Application of Price Elasticities To Farm Policy Analysis: Reply

Huang's comment on our article in a recent issue of this journal [2] points out two ideas that could have been more clearly stated. We will reply to his comments in the order in which they appear.First, our illustration of the two approaches to examining the market was to demonstrate how economic theory could be used to show the importance of the world market to producers of cotton and soybeans. One approach separates the total market into domestic and export components. We pointed out that the elasticity estimates used for the domestic (—.35) and export (—1.76) markets and the production data for 1976 give a total elasticity estimate for the U.S. of -.98 if the world elasticity is -.5. The other approach (the primary subject of Huang's comment) uses a single world market and illustrates how the U.S. affects or is affected by it. Use of the second approach gives a U.S. elasticity of —1.0 when the world elasticity is —.5. It was not our intention to compare the two approaches as to consistency of estimate, although the example may have implied such an argument. Given the same data base and consistent methods in estimating the separate demand functions, the results should be similar.