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Economics

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.

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Economics

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  1. Economics Text extracted from The World Food Problem Leathers and Foster, 2004

  2. 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

  3. 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

  4. 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

  5. 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

  6. Supply and Demand • Works for • Individual consumers and producers • Aggregate of all consumers and all producers • Aggregate Supply • Aggregate Demand

  7. 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 • willing to pay more for product • Due to: • Increased population • Increased income • Changes in taste Demand curve shift to the left

  8. 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

  9. Engel’s Law • The proportion of household budget spent on food decreases as income increases • Wealthy spend less % of their wealth on food

  10. 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

  11. 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

  12. 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

  13. 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 • Price elasticity less magnitude at high incomes: • don’t care if price rises Costa Rica Livestock

  14. 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

  15. 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

  16. 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

  17. Food Security • Depends on • Number in household • Ages • Sex • Working status • Health status • Pregnancy • Lactation

  18. Household Food Production • Depends on • Amount of land • Education of farmer • Technology available • Capital available • Input prices • Subsidies • Taxes India farmers http://www.idrc.ca/openebooks/337-9/f0068-02.jpg

  19. Price of Food • Depends on • Quantity produced • Population demand • Income demand • Taste preference demand • Government • Price controls • Tariffs • Subsidies • Taxes

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