Economics of Food Demand

1. 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

2. Objectives Today • Identify determinants of food demand • Begin discussion of income elasticitiesandprice elasticities of demand

3. Food Need Effective demand for food

4. Determinants of Food Demand • Income • Price (own) • Price (substitutes + complements) • Population • Habits, customs, preferences

5. Price, $ per ton Demand curve at low income (D) Demand curve at higher income (D’) 200 150 100 50 A’ A B’ B 0 500 1000 1500 2000 2500 Quantity, million tons per year Figure 1: Demand Curves

6. 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

7. 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?

8. Size of income elasticities • Normal Goods? • Zero to one • Superior Goods? • Greater than one • Inferior Goods? • Negative

9. Income elasticities of demand for agricultural commodities in Sub-Saharan Africa

10. Income elasticities differ by country

11. Price inelastic elastic Quantity Own Price Elasticity of Demand Ep > |-1| Elastic = -1 Unitary elasticity < |-1| Inelastic

12. 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”.

13. Cross Price Elasticity of Demand + Substitutes 0 unrelated - complements

14. How are elasticity estimates obtained?

15. Pr Qr (if in logs)

16. Homogeneity Condition own price elasticity income elasticity Cross price elasticities

17. Example of using homogeneity condition How much would the rice price have to decrease in order to increase rice consumption by 7%?

18. 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

19. Change in Aggregate Food Demand D = P + ng Example: D = 3.0 + .9(-3) = .3 D = 2.5 + .7(3) = 4.6

20. D = P + ng

21. 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

23. Cereal Imports by Region

24. Net Trade by Region

25. Growth in Cereal Production

26. Cereal Yields by Region

27. Factors Affecting Real Price • Supply factors? • Demand factors? What are some of the factors that will affect the real price of food over the next 10 – 20 years?

28. Technology Number of sellers Substitutes in production Input cost S1 Price S2 Quantity Factors affecting location of the supply curve

29. Using Supply & Demand Curves • For a commodity? • For groups of commodities? How can one use supply and demand curves to predict future price changes?

30. Price Supply P1 Demand Quantity Q1

31. % change P = % change F - % change Q price elasticity of demand Rate of Growth of Agricultural Prices P = price F = production Q = quantity demanded

32. Farmers? Consumers? Indirect effects? How do agricultural prices affect the poor if

33. 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 incomerises.