Now consider the two examples given at the beginning of this chapter.  The computer industry has reduced price and increased income and employment.  When they reduce price the percentage change in the quantity demanded of computers rises more than the percentage change in the price of computers.  The demand curve for computers is elastic.

Agricultural prices have declined and so has income and employment.  The reason this occurs is that agriculture faces an inelastic demand curve.  The percentage reduction in price is greater than the percentage increase in the quantity demanded so total revenue has fallen.

You may ask, if cutting the price of agricultural products causes a fall in revenue, why do farmers cut prices?  The reason is that the demand curve faced by the farmer is different from the demand curve faced by the agricultural industry.  For example, consider a potato farmer.  The demand curve that the farmer faces is very elastic since there are a large number of substitutes to the potato (such as rice, barley etc.).  It would be in the farmers best interest to cut prices and increase his own revenues. But if every farmer in the industry does this (and they will) then total revenue for the industry will fall.  This is because the demand for agricultural products is inelastic.  There are not many substitutes for agricultural products.

Why don't all farmers just raise their prices?  If all farmers raised their prices then the revenues for the industry would rise, but the incentive for a farmer to cut their own price and gain revenue would still be there.  It is advantageous to the individual to cut price although it is not advantageous to the industry.  A farmer that raises price while other farmers keep their price down risks losing all of their revenues, rational farmers won't do this.