3204 3 food demand

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Economics of FoodEconomics of Food

DemandDemand

Dr. George Norton

Agricultural and Applied

Economics,

College of Agriculture

& Life Sciences,

Virginia Tec

International Agricultural Development and Trade

 AAEC 3204

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!"#ecti$es Toda%!"#ecti$es Toda%

Identify determinants of food

demand

Begin discussion of income

elasticities and  price elasticities ofdemand

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Effectivedemand for food

Food NeedFood Need

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Determinants of Food DemandDeterminants of Food Demand

Income

Price (own)

Price (substitutes + complements)

Population

Habits, customs, preferences

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Figure ' Demand Cur$esFigure ' Demand Cur$es

0 500 1000 1500 2000 2500

200

150

100

50

B

 A

Price ! per ton

"uantit# million ton$

per #ear 

Demand curveat %ig%er income &D'(

Demand curveat lo) income &D(

B'

 A'

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Engel(s La) & *ennett(s La)Engel(s La) & *ennett(s La)

Engel’s Law !s income increases,people spend a smaller proportion oft"eir total income on food#

Bennett’s Law $"e ric"er one

becomes, t"e less "e or s"e spendson starc"y staples

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+easure of ncome Gro)t on+easure of ncome Gro)t on

DemandDemand

Income ela$ticit# ofdemand*

2

1

2

3.01

3.0

%%

=

=

⋅∆∆=

∆∆

Q I 

 I Q

 I Q

+o) do )e mea$ure t%e effect of income gro)t%on t%e demand for a commodit#,

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Si-e of income elasticitiesSi-e of income elasticities

%ormal &oods'%ormal &oods'

ero to oneero to one

*uperior &oods'*uperior &oods'

&reater t"an one&reater t"an one 

Inferior &oods'Inferior &oods'

%egatie%egatie

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ncome elasticities of demandncome elasticities of demand

for agricultural commodities infor agricultural commodities inSu"Saaran AfricaSu"Saaran Africa

"eat #-.

/ice #-0

1ai2e #34

1illet #56

/oots 7 tubers #83

Pulses #53

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ncome elasticitiesncome elasticities

differ "% countr%differ "% countr%

9ereals9ereals Beef Beef  1il:1il:

Bra2ilBra2il #56#56 #6;#6; #36#36

%igeria%igeria #5<#5< 5#.85#.8 5#.85#.8

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!)n /rice Elasticit% of Demand!)n /rice Elasticit% of Demand

Q

 P 

 P 

Q

 P 

Q E  p   ⋅

∆

∆=

∆

∆=%

%

Ep = >5> Elastic

  ? 5 @nitary elasticity

  A >5> Inelastic

Price

Quantit#

inelastic

elastic

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ncome Effectncome Effect

f te price of a commodit% increases,

te real purcasing po)er of a gi$enamount of income is reduced, causing

demand to cange "ecause of an

0income effect1.

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Cross /rice Elasticit% of DemandCross /rice Elasticit% of Demand

2

1

1

2

1

2

%

%2,1

Q

 P 

 P 

Q

 P 

Q E  p   ⋅

∆

∆=

∆

∆=

+ *ubstitutes

8 unrelated

complements

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2o) are elasticit%2o) are elasticit%

estimates o"tained3estimates o"tained3

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ePOP dI cP bP aQ wr r    ++++=

Pr 

"r 

Q

 P b

 P 

Q

Q

 P 

r 

r  =∂

∂⋅

Q

 P 

 P 

Q⋅

∆

∆

b P 

Q=

∂

∂

ln

ln&if in log$(

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2omogeneit% Condition2omogeneit% Condition

02,11=∑++  p p   E  E    η 

o)n price

ela$ticit#

income

ela$ticit#

Cro$$

priceela$ticitie$

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E4ample of usingE4ample of using

omogeneit% conditionomogeneit% condition9ommodity 9rossprice elasticity

/ice 7 beans #06

/ice 7 w"eat #48

/ice 7 c"ic:en #58

/ice 7 mil: #86

/ice 7 ot"er goods 8

Income elasticity of

demand for rice#3

+o) muc% )ould t%e rice price %ave to decrea$e in

order to increa$e rice con$umption -# ./,

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5at appens to aggregate food5at appens to aggregate food

demand as income gro)s3demand as income gro)s3

D = P + ng

? rate of growt" of demand

P ? rate of population growt"

n ? income elasticity of demandg ? rate of growt" of per capita

income

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D P ng

Eample*

D 30 &3( 3D 25 .&3(

46

Cange in Aggregate FoodCange in Aggregate Food

DemandDemand

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7evel ofincome

8ate ofpopulatio

n gro)t%

8ate ofper

capitaincomegro)t%

Incomeela$ticit#

ofdemand

8ate ofgro)t% in

demand

9er# lo) 25 05 10 30

7o) 30 10 0 3

:edium 25 40 0. 53

+ig% 20 40 05 40

Cery"ig"

5#8 0#8 8#. 5#4

D P ng

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Commodit% Trends andCommodit% Trends and

/ro#ections/ro#ections Cereal demand &food feed( :eat demand

;rain production in 7DC$ ;rain import$ in 7DC$ <= grain eport$

>ood price$ Per capita food availa-ilit# in 7DC$ C%ild malnutrition

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Cereal mports "% 6egionCereal mports "% 6egion

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Net Trade "% 6egionNet Trade "% 6egion

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Gro)t in Cereal /roduction

C l 7i ld " 6 iC l 7i ld " 6 i

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Cereal 7ields "% 6egionCereal 7ields "% 6egion

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Factors Affecting 6eal /riceFactors Affecting 6eal /rice

*upply factors'*upply factors'

emand factors'factors'

"at are some of t"e factors t"at will"at are some of t"e factors t"at will

affect t"e real price of food oer t"eaffect t"e real price of food oer t"e

neDt 58 .8 years'neDt 58 .8 years'

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Factors affecting location ofFactors affecting location of

te suppl% cur$ete suppl% cur$e Tec%nolog# ?um-er of $eller$ =u-$titute$ in

production Input co$t

Price

"uantit#

S1

S2

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8sing Suppl% & Demand Cur$es8sing Suppl% & Demand Cur$es

5# For a commodity'

.# For groups of commodities'

How can one use supply and demandcurves to predict future price changes?

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Price

Quantity

P1

Q1

Supply

Demand

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6ate of Gro)t of Agricultural /rices6ate of Gro)t of Agricultural /rices

/ c%ange P / c%ange > / c%ange "price ela$ticit# of demand

P ? price

F ? productionG ? uantitydemanded

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2o) do agricultural prices2o) do agricultural prices

affect te poor affect te poor  Farmers'

9onsumers'

Indirect effects' if 

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ConclusionsConclusions

1 Income increa$e$ for t%e poor can %ave alarge effect on nutrition -ecau$e poor $penda %ig% proportion of t%eir -udget on food

2 ?eed to increa$e $uppl# for commoditie$)it% %ig% income ela$ticit# of demand &n(@t%er)i$e price$ )ill ri$e

3 If n i$ lo) -ut countr# )ant$ to increa$e

con$umption of a good need education or a$u-$id#

4  At )orld level* $%ift to feed grain$ a$ income ri$e$