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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

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

Demand curve
at low income (D)

200

Demand curve
at higher income (D)

150

100

50

500

1000

1500

2000

2500
Quantity, million tons
per year

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

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

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


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

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

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?

Factors affecting location of


the supply curve

Technology
Number of sellers
Substitutes in
production
Input cost

Price

S1
S2

Quantity

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?

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.

2.

3.

4.

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.