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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