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Economics of Food Economics of Food DemandDemand
Dr. George NortonAgricultural and Applied
Economics,College of Agriculture
& Life Sciences,Virginia Tech
International Agricultural Development and Trade
AAEC 3204
Objectives TodayObjectives Today
Identify determinants of food demand
Begin discussion of income elasticities and price elasticities of demand
Effective demand for food
Food NeedFood Need
Determinants of Food DemandDeterminants of Food Demand
Income
Price (own)
Price (substitutes + complements)
Population
Habits, customs, preferences
Figure 1: Demand CurvesFigure 1: Demand Curves
0 500 1000 1500 2000 2500
200
150
100
50
B
A
Price, $ per ton
Quantity, million tons per year
Demand curve at higher income (D’)
Demand curveat low income (D)
B’
A’
Engel’s Law & Bennett’s LawEngel’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 Measure of Income Growth on DemandDemand
Income elasticity of demand:
21
2
3.01
3.0
%
%
Q
I
I
Q
I
Q
How do we measure the effect of income growth on the demand for a commodity?
Size of income elasticitiesSize of income elasticities
Normal Goods?Normal Goods?• Zero to oneZero to one
Superior Goods?Superior Goods?• Greater than oneGreater than one
Inferior Goods?Inferior Goods?• NegativeNegative
Income elasticities of demand Income elasticities of demand for agricultural commodities in for agricultural commodities in
Sub-Saharan AfricaSub-Saharan AfricaWheat .92
Rice .93
Maize .46
Millet .15
Roots & tubers -.04
Pulses -.14
Income elasticities Income elasticities differ by countrydiffer by country
CerealsCereals BeefBeef MilkMilk
BrazilBrazil .15.15 .58.58 .45.45
NigeriaNigeria .17.17 1.201.20 1.201.20
Own Price Elasticity of DemandOwn Price Elasticity of Demand
Q
P
P
Q
P
QEp
%
%
Ep > |-1| Elastic
= -1 Unitary elasticity
< |-1| Inelastic
Price
Quantity
inelastic
elastic
Income EffectIncome 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 DemandCross Price Elasticity of Demand
2
1
1
2
1
2
%
%2,1 Q
P
P
Q
P
QEp
+ Substitutes
0 unrelated
- complements
How are elasticity How are elasticity estimates obtained?estimates obtained?
ePOPdIcPbPaQ wrr Pr
Qr
Q
Pb
P
Q
Q
P
r
r
Q
P
P
Q
bP
Q
ln
ln(if in logs)
Homogeneity ConditionHomogeneity Condition
02,11 pp EE
own price elasticity
income elasticity
Cross price
elasticities
Example of using Example of using homogeneity conditionhomogeneity 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%?
What happens to aggregate food What happens to aggregate food demand as income grows?demand as income grows?
D = P + ngD = rate of growth of demandP = rate of population growthn = income elasticity of demandg = rate of growth of per capita
income
D = P + ng
Example:
D = 3.0 + .9(-3) = .3
D = 2.5 + .7(3) = 4.6
Change in Aggregate Food Change in Aggregate Food DemandDemand
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
Commodity Trends and Commodity Trends and ProjectionsProjections
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 RegionCereal Imports by Region
Net Trade by RegionNet Trade by Region
Growth in Cereal Production
Cereal Yields by RegionCereal Yields by Region
Factors Affecting Real PriceFactors Affecting Real Price
Supply factors?Supply factors?
Demand factors? factors?
What are some of the factors that will What are some of the factors that will affect the real price of food over the affect the real price of food over the
next 10 – 20 years?next 10 – 20 years?
Factors affecting location of Factors affecting location of the supply curvethe supply curve
Technology Number of sellers Substitutes in
production Input cost
Price
Quantity
S1S2
Using Supply & Demand CurvesUsing Supply & Demand Curves
1. For a commodity?
2. For groups of commodities?
How can one use supply and demand curves to predict future price
changes?
Price
Quantity
P1
Q1
Supply
Demand
Rate of Growth of Agricultural PricesRate of Growth of Agricultural Prices
% change P = % change F - % change Qprice elasticity of demand
P = price
F = production
Q = quantity demanded
How do agricultural prices How do agricultural prices affect the pooraffect the poor
Farmers?
Consumers?
Indirect effects? if
ConclusionsConclusions1. 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.