Presentation on theme: "Economics of Food Demand Dr. George Norton Agricultural and Applied Economics, College of Agriculture & Life Sciences, Virginia Tech International Agricultural."— Presentation transcript:
Economics of Food Demand Dr. George Norton Agricultural and Applied Economics, College of Agriculture & Life Sciences, Virginia Tech International Agricultural Development and Trade AAEC 3204
Objectives Today Identify determinants of food demand Begin discussion of income elasticities and price elasticities of demand
Determinants of Food Demand Income Price (own) Price (substitutes + complements) Population Habits, customs, preferences
Figure 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 curve at low income (D) B’ A’
Engel’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 Demand Income elasticity of demand: How do we measure the effect of income growth on the demand for a commodity?
Size 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 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 CerealsBeefMilk Brazil.15.58.45 Nigeria.171.201.20
Own Price Elasticity of Demand E p > |-1| Elastic = -1 Unitary elasticity < |-1| Inelastic Price Quantit y inelastic elastic
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”.
Homogeneity Condition own price elasticity income elasticity Cross price elasticities
Example of using homogeneity condition CommodityCross-price elasticity Rice & beans-.35 Rice & wheat.60 Rice & chicken.10 Rice & milk-.05 Rice & other goods0 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
D = P + ng Example: D = 3.0 +.9(-3) =.3 D = 2.5 +.7(3) = 4.6 Change in Aggregate Food Demand
Level of income Rate of populatio n growth Rate of per capita income growth Income elasticity of demand Rate of growth in demand Very low2.50.51.03.0 Low3.01.00.93.9 Medium2.54.00.75.3 High2.04.00.54.0 Very high 1.03.00.21.6 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
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. 1. Income increases for the poor can have a large effect on nutrition because poor spend a high proportion of their budget on food. 2. 2. Need to increase supply for commodities with high income elasticity of demand (n). Otherwise, prices will rise 3. 3. If n is low, but country wants to increase consumption of a good, need education or a subsidy. 4. 4. At world level: shift to feed grains as income rises.