Economics

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

http//z.about.com/f/wiki/e/en/thumb/f/f7/Simple_s
upply_and_demand.png/320px-Simple_supply_and_deman
d.png
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Supply and Demand

• Demand curve
• When the price of a product is high, consumers
  dont buy much of it
• When the price of a product drops, consumers are
  willing to buy more
• Thus the demand curve slopes downward

http//z.about.com/f/wiki/e/en/thumb/f/f7/Simple_s
upply_and_demand.png/320px-Simple_supply_and_deman
d.png
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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

http//z.about.com/f/wiki/e/en/thumb/f/f7/Simple_s
upply_and_demand.png/320px-Simple_supply_and_deman
d.png
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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

http//z.about.com/f/wiki/e/en/thumb/f/f7/Simple_s
upply_and_demand.png/320px-Simple_supply_and_deman
d.png
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Supply and Demand

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

http//z.about.com/f/wiki/e/en/thumb/f/f7/Simple_s
upply_and_demand.png/320px-Simple_supply_and_deman
d.png
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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
Engels Law

• The proportion of household budget spent on food
  decreases as income increases
• Wealthy spend less of their wealth on food

http//www.core77.com/blog/images/pd_grocery_07062
9_ms.jpg
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Bennetts 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

http//farm1.static.flickr.com/32/59614420_6ae1eef
13e.jpg?v0
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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
http//farm2.static.flickr.com/1031/1333375656_ea1
2b962ed.jpg?v0
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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

http//simplicityfirst.files.wordpress.com/2008/01
/rice.jpg
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
• dont care if price rises

Costa Rica Livestock
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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

Honduras Farmer
http//farm1.static.flickr.com/26/52737192_a3bb7f8
4c6.jpg?v0
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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

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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

Cooking tizet (corn mush)
in Ghana
http//z.about.com/d/goafrica/1/0/H/2/tizet.jpg
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Food Security

• Depends on
• Number in household
• Ages
• Sex
• Working status
• Health status
• Pregnancy
• Lactation

http//farm2.static.flickr.com/1123/1408758831_a9e
5ab9b14.jpg?v0
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Household Food Production

• Depends on
• Amount of land
• Education of farmer
• Technology available
• Capital available
• Input prices
• Subsidies
• Taxes

India farmers
http//www1.fao.org/media_thumbs/Photos/1997/Feb19
97/Thumbs_384/19480.jpg
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Price of Food

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

Ethiopia market
http//www.scienceinafrica.co.za/pics/07_2003/ethi
opia.jpg