Transcript Economics: Supply and Demand

Economics
Text extracted from
The World Food Problem
Leathers and Foster, 2004
Supply and Demand
• Supply curve
– If a product sells at a
low price, producers
make little of it
– As the price rises,
producers are willing
to make more of the
product
– The supply curve thus
slopes upward
Supply and Demand
• Demand curve
– When the price of a
product is high,
consumers don’t buy
much of it
– When the price of a
product drops,
consumers are willing
to buy more
– Thus the demand curve
slopes downward
Supply and Demand
• Price reaches an equilibrium at
the intersection of the supply
curve and the demand curve.
• If price is higher than this
point:
– Producers will want to produce
more
– Customers will want to pay less
– Thus price drops back to
equilibrium
Supply and Demand
• Consumers are pursuing
their own best interest
• Producers are pursuing
their own best interest
• “Invisible Hand”
matches supply with
demand
– Adam Smith
Supply and Demand
• Works for
– Individual consumers
and producers
– Aggregate of all
consumers and all
producers
• Aggregate Supply
• Aggregate Demand
Shift in Demand Curve
• Demand curve may shift to the
left
– Not willing to pay as much
– Thus price drops
– Due to drop in income
• Demand curve may shift to the
right
Demand curve shift to the
left
– willing to pay more for product
– Due to:
• Increased population
• Increased income
• Changes in taste
Shift in Supply Curve
• If it becomes easier to
produce a product,
supply curve will shift
to right
–
–
–
–
–
More farmland
More children for labor
Fertilizer available
Water available
Technology available
• Price drops
Engel’s Law
• The proportion of
household budget
spent on food
decreases as income
increases
– Wealthy spend less %
of their wealth on food
Bennett’s Law
• The ratio of starchy
foods in the diet falls
as income rises
• Poor eat more
starchy foods
– Grains
– Root crops
• Wealthy eat more
meat, fruit,
vegetables
Income Elasticity of Demand
• How much increase in
demand for food is there
with a 1% increase in
income?
– Elasticity =1 if is 1%
increase in demand
– Elasticity lower if is lower
than 1% increase in demand
– Ex: East Java income
elasticity for food = 0.58
East Java market
Income Elasticity of Demand
• Depends on income
• Brazil study
– Low income
• elasticity for rice = 2
– High income
• elasticity for rice = 0.2
• Low income people
bought 2% more rice with
1% more income
• High income people
bought nearly same
amount of rice regardless
of income
Price Elasticity of Demand
• Price elasticity
– Change in consumption with a
1% change in the price
• As price increases,
consumption decreases
• Thus price elasticity for a
product is usually negative
• Ex: Indonesia
– Rice: -.63
– Livestock: -1.73
Costa Rica Livestock
• Price elasticity less magnitude
at high incomes:
– don’t care if price rises
Price Elasticity of Supply
• The change in supply in
response to a 1% change
of price
• Less response to food
price in developing world
– Farmers less involved in
market economy
– Lower inputs, therefore
adjustments easier
– More risk adverse
Ecuador Farmer
Food Security
• Food security:
– “Access by all people
at all times to enough
food for an active,
healthy life”
• Lack of food security
is caused by lack of
purchasing power
Food Security Equation
• Amount of food need
is less than or equal
to money available
to purchase food
• If household
produces more food,
will need to buy less
Food Security
• Depends on
– Number in
household
– Ages
– Sex
– Working status
– Health status
– Pregnancy
– Lactation
Household Food Production
• Depends on
India farmers
http://www.idrc.ca/openebooks/337-9/f0068-02.jpg
– Amount of land
– Education of farmer
– Technology
available
– Capital available
– Input prices
– Subsidies
– Taxes
Price of Food
• Depends on
–
–
–
–
Quantity produced
Population demand
Income demand
Taste preference
demand
– Government
• Price controls
• Tariffs
• Subsidies
• Taxes