Download price elasticities - Economics of Agricultural Development

Economics of Food
Demand
International Agricultural Development and Trade
Dr. George Norton
Agricultural and Applied
Economics,
College of Agriculture
& Life Sciences,
Virginia Tech
Objectives Today


Identify determinants of food
demand
Begin discussion of income
elasticities and price elasticities of
demand
Food Need
Effective
demand for food
Determinants of Food Demand

Income

Price (own)

Price (substitutes + complements)

Population

Habits, customs, preferences
Figure 1: Demand Curves
Price, $
per ton
200
Demand curve
at low income (D)
Demand curve
at higher income (D’)
A’
A
150
B’
B
100
50
0
500
1000
1500
2000
2500
Quantity, million
tons per year
Engel’s Law & Bennett’s Law


Engel’s Law -- As income increases,
people spend a smaller proportion of
their total income on food.
Bennett’s Law -- The richer one
becomes, the less he or she spends
on starchy staples
Measure of Income Growth on
Demand
How do we measure the effect of income growth
on the demand for a commodity?
Income elasticity of
demand:
%Q Q I


%I
I Q
0.3
 0.3
1
2
2
1
Size of income elasticities

Normal Goods?
• Zero to one

Superior Goods?
• Greater than one

Inferior Goods?
• Negative
Income elasticities of demand
for agricultural commodities in
Sub-Saharan Africa
Wheat
.92
Rice
.93
Maize
.46
Millet
.15
Roots & tubers
-.04
Pulses
-.14
Income elasticities
differ by country
Cereals
Beef
Milk
Brazil
.15
.58
.45
Nigeria
.17
1.20
1.20
Own Price Elasticity of Demand
%Q Q P
Ep 


%P P Q
Ep > |-1| Elastic
Price
inelastic
= -1 Unitary elasticity
< |-1| Inelastic
elastic
Quantity
Income Effect
If the price of a commodity increases,
the real purchasing power of a given
amount of income is reduced, causing
demand to change because of an
“income effect”.
Cross Price Elasticity of Demand
E p1, 2
%Q2
Q2 P1



%P1
P1 Q2
+ Substitutes
0 unrelated
- complements
How are elasticity
estimates obtained?
Qr  a  bPr  cPw  dI  ePOP
Pr
Qr
P Qr
P

b
Q Pr
Q
 ln Q
b
 ln P
Q
P

P
Q
(if in logs)
Homogeneity Condition
E p1     E p1, 2  0
own price
elasticity
income
elasticity
Cross
price
elasticities
Example of using
homogeneity condition
Commodity
Cross-price elasticity
Rice & beans
-.35
Rice & wheat
.60
Rice & chicken
.10
Rice & milk
-.05
Rice & other goods
0
Income elasticity of
demand for rice
.4
How much would the rice price have to decrease in
order to increase rice consumption by 5%?
What happens to aggregate food
demand as income grows?
D = P + ng
D = rate of growth of demand
P = rate of population growth
n = income elasticity of demand
g = rate of growth of per capita
income
Change in Aggregate Food
Demand
D = P + ng
Example:
D = 3.0 + .9(-3) = .3
D = 2.5 + .7(3) =
4.6
Level of
income
Rate of
Rate of
populatio per
n growth capita
income
growth
Income
elasticity
of
demand
Rate of
growth in
demand
Very low
2.5
0.5
1.0
3.0
Low
3.0
1.0
0.9
3.9
Medium
2.5
4.0
0.7
5.3
High
2.0
4.0
0.5
4.0
Very
high
1.0
3.0
0.2
1.6
D = P + ng
2000 to 2025 trends








Cereal demand (food, feed)
Meat demand
Grain production in LDCs
Grain imports in LDCs
U.S. grain exports
Food prices
Per capita food availability in LDCs
Child malnutrition
Cereal Imports by Region
Net Trade by Region
Growth in Cereal Production
Cereal Yields by Region
Factors Affecting Real Price
What are some of the factors that will
affect the real price of food over the
next 10 – 20 years?

Supply factors?

Demand factors?
Using Supply & Demand Curves
How can one use supply and demand
curves to predict future price
changes?
1.
For a commodity?
2.
For groups of commodities?
Factors affecting location of
the supply curve




Technology
Number of sellers
Substitutes in
production
Input cost
Price
S1
S2
Quantity
Price
Supply
P1
Demand
Q1
Quantity
Rate of Growth of Agricultural Prices
% change P = % change F - % change Q
price elasticity of demand
P = price
F = production
Q = quantity
demanded
How do agricultural prices
affect the poor

Farmers?

Consumers?

Indirect effects?
if
Conclusions
1.
Income increases for the poor can have a
large effect on nutrition because poor spend
a high proportion of their budget on food.
2.
Need to increase supply for commodities
with high income elasticity of demand (n).
Otherwise, prices will rise
3.
If n is low, but country wants to increase
consumption of a good, need education or a
subsidy.
4.
At world level: shift to feed grains as income
rises.