Transcript Document
Economics of Food Demand International Agricultural Development and Trade AAEC 3204 Dr. George Norton Agricultural and Applied Economics, College of Agriculture & Life Sciences, Virginia Tech Objectives Today Identify determinants of food demand Begin discussion of income elasticities and price elasticities of demand Food Need Effective demand for food Determinants of Food Demand Income Price (own) Price (substitutes + complements) Population Habits, customs, preferences Figure 1: Demand Curves Price, $ per ton 200 Demand curve at low income (D) Demand curve at higher income (D’) A’ A 150 B’ B 100 50 0 500 1000 1500 2000 2500 Quantity, million tons per year Engel’s Law & Bennett’s Law Engel’s Law -- As income increases, people spend a smaller proportion of their total income on food. Bennett’s Law -- The richer one becomes, the less he or she spends on starchy staples Measure of Income Growth on Demand How do we measure the effect of income growth on the demand for a commodity? Income elasticity of demand: % Q Q I % I I Q 0 .3 0 .3 1 2 2 1 Size of income elasticities Normal Goods? • Zero to one Superior Goods? • Greater than one Inferior Goods? • Negative Income elasticities of demand for agricultural commodities in Sub-Saharan Africa Wheat .92 Rice .93 Maize .46 Millet .15 Roots & tubers -.04 Pulses -.14 Income elasticities differ by country Cereals Beef Milk Brazil .15 .58 .45 Nigeria .17 1.20 1.20 Own Price Elasticity of Demand %Q Q P Ep %P P Q Ep > |-1| Elastic Price inelastic = -1 Unitary elasticity < |-1| Inelastic elastic Quantity Income Effect If the price of a commodity increases, the real purchasing power of a given amount of income is reduced, causing demand to change because of an “income effect”. Cross Price Elasticity of Demand E p1, 2 %Q2 Q2 P1 %P1 P1 Q2 + Substitutes 0 unrelated - complements How are elasticity estimates obtained? Qr a bPr cPw dI ePOP Pr Qr P Qr P b Q Pr Q ln Q b ln P Q P P Q (if in logs) Homogeneity Condition E p1 E p1, 2 0 own price elasticity income elasticity Cross price elasticities Example of using homogeneity condition Commodity Cross-price elasticity Rice & beans -.35 Rice & wheat .60 Rice & chicken .10 Rice & milk -.05 Rice & other goods 0 Income elasticity of demand for rice .4 How much would the rice price have to decrease in order to increase rice consumption by 7%? What happens to aggregate food demand as income grows? D = P + ng D = rate of growth of demand P = rate of population growth n = income elasticity of demand g = rate of growth of per capita income Change in Aggregate Food Demand D = P + ng Example: D = 3.0 + .9(-3) = .3 D = 2.5 + .7(3) = 4.6 Level of income Rate of Rate of populatio per n growth capita income growth Income elasticity of demand Rate of growth in demand Very low 2.5 0.5 1.0 3.0 Low 3.0 1.0 0.9 3.9 Medium 2.5 4.0 0.7 5.3 High 2.0 4.0 0.5 4.0 Very high 1.0 3.0 0.2 1.6 D = P + ng Commodity Trends and Projections Cereal demand (food, feed) Meat demand Grain production in LDCs Grain imports in LDCs U.S. grain exports Food prices Per capita food availability in LDCs Child malnutrition Cereal Imports by Region Net Trade by Region Growth in Cereal Production Cereal Yields by Region Factors Affecting Real Price What are some of the factors that will affect the real price of food over the next 10 – 20 years? Supply factors? Demand factors? Factors affecting location of the supply curve Technology Number of sellers Substitutes in production Input cost Price S1 S2 Quantity Using Supply & Demand Curves How can one use supply and demand curves to predict future price changes? 1. For a commodity? 2. For groups of commodities? Price Supply P1 Demand Q1 Quantity Rate of Growth of Agricultural Prices % change P = % change F - % change Q price elasticity of demand P = price F = production Q = quantity demanded How do agricultural prices affect the poor Farmers? Consumers? Indirect effects? if Conclusions 1. Income increases for the poor can have a large effect on nutrition because poor spend a high proportion of their budget on food. 2. Need to increase supply for commodities with high income elasticity of demand (n). Otherwise, prices will rise 3. If n is low, but country wants to increase consumption of a good, need education or a subsidy. 4. At world level: shift to feed grains as income rises.