Economics of Food Demand

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Economics of Food Demand
International Agricultural Development and
Trade AAEC 3204
Dr. George Norton Agricultural and Applied
Economics, College of Agriculture Life
Sciences, Virginia Tech
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Objectives Today

• Identify determinants of food demand
• Begin discussion of income
  elasticities and price elasticities of demand

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Food Need
Effective demand for food
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Determinants of Food Demand

• Income
• Price (own)
• Price (substitutes complements)
• Population
• Habits, customs, preferences

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Figure 1 Demand Curves
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Engels Law Bennetts Law

• Engels Law -- As income increases, people spend
  a smaller proportion of their total income on
  food.
• Bennetts Law -- The richer one becomes, the less
  he or she spends on starchy staples

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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

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Size of income elasticities

• Normal Goods?
• Zero to one
• Superior Goods?
• Greater than one
• Inferior Goods?
• Negative

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Income elasticities of demand for agricultural
commodities in Sub-Saharan Africa
Wheat .92
Rice .93
Maize .46
Millet .15
Roots tubers -.04
Pulses -.14
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Income elasticities differ by country
Cereals Beef Milk
Brazil .15 .58 .45
Nigeria .17 1.20 1.20
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Own Price Elasticity of Demand
Ep gt -1 Elastic -1 Unitary elasticity
lt -1 Inelastic
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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.

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Cross Price Elasticity of Demand
Substitutes 0 unrelated - complements
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How are elasticity estimates obtained?
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(if in logs)
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Homogeneity Condition
own price elasticity
income elasticity
Cross price elasticities
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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 7?
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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

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Change in Aggregate Food Demand
D P ng Example D 3.0 .9(-3) .3 D 2.5
.7(3) 4.6
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Level of income Rate of population growth Rate of per 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
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Commodity Trends and Projections

• 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

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(No Transcript)
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Cereal Imports by Region
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Net Trade by Region
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Growth in Cereal Production
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Cereal Yields by Region
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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?

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Factors affecting location of the supply curve

• Technology
• Number of sellers
• Substitutes in production
• Input cost

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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?

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Price
Supply
P1
Demand
Quantity
Q1
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Rate of Growth of Agricultural Prices
P price F production Q quantity demanded
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How do agricultural prices affect the poor

• Farmers?
• Consumers?
• Indirect effects?

if
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Conclusions

• Income increases for the poor can have a large
  effect on nutrition because poor spend a high
  proportion of their budget on food.
• Need to increase supply for commodities with high
  income elasticity of demand (n). Otherwise,
  prices will rise
• If n is low, but country wants to increase
  consumption of a good, need education or a
  subsidy.
• At world level shift to feed grains as income
  rises.