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– willing to pay more for

product– Due to:

• Increased population• Increased income• Changes in taste

Demand curve shift to the left

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

• Price elasticity less magnitude at high incomes: – don’t care if price rises

Costa Rica Livestock

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– Amount of land

– Education of farmer

– Technology available

– Capital available

– Input prices

– Subsidies

– TaxesIndia farmers

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Price of Food

• Depends on – Quantity produced

– Population demand

– Income demand

– Taste preference demand

– Government • Price controls

• Tariffs

• Subsidies

• Taxes