economics text extracted from the world food problem leathers and foster, 2004
TRANSCRIPT
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