Demand and Supply - Agriculture

Question 1

Agricultural Products display short run Price Instability

Answer 1

1. Agricultural products are commodities. A commodity is a good which could be swapped with any other good of the same type without noticeable difference
2. E.g. you could exchange wheat for some different wheat of the same type. It doesn’t matter if that wheat is from a different harvest or was grown in a different place - the goods are similar enough to each other that it doesn’t matter which one is used. Other examples of commodities include oil, sugar and tea.
3. Supply of agricultural products can be affected by disease and weather - both of which can be unpredictable
4. If supply is reduced then the price mechanism will force the price up. The opposite happens when there’s an increased level of supply. These two situations are demonstrated in the DIAGRAMS ON PAGE 32
5. Agricultural products on the whole have inelastic price elasticities of demand (because food is an necessity) and supply (because, for example, it’s difficult to store agricultural products).
6. Price instability can be a feature of markets for agricultural products because the demand for these products is fairly price inelastic. This means that even a small increase or decrease in the quantity supplied can have a large impact on price.

Question 2

Price Instability has several effects

Answer 2

1. The unpredictability in the supply of agricultural products can reduce or prevent investment in agriculture due to the uncertainties about returns on any invesment.
2. Countries dependent on exporting agricultural products can have periods of low income and high unemployment. E.g. a country will recieve export revenue after crops are harvested, but at other times of the year the revenue will be much less. Also, workers employed to harvest a crop are only needed when it’s ready to be harvested. After this period they’re not needed and will be made redundant (also known as seasonal unemployment)
3. Buying food is a major part of ppl’s monthly expenditure. When food prices rise, ppl become worse off. This has more of an impact on ppl on a low or fixed income.
4. Higher food prices can also have a negative impact on the economy as a whole. Increased prices leave less income to spend on other goods, which can => a recession.

Question 3

Changes in Income have little impact on demand for agricultural products

Answer 3

1. Demand for agricultural products is generally income elastic. E.g. as your income changes, your demand for food products isn’t likely to change that much - you still need to buy enough food to survive.
2. Increases in income can lead to changes in the quality of agricultural products demanded. E.g. consumers might switch to steak from mince or from concentrated fruit juice to freshly-squeezed juices.

Question 4

Long Run Prices for Agricultural Products are declining

Answer 4

1. Factors that affect the long run supply of agricultural products include technological change, the supply of food quality land and changes to the climate
   E.g. technological improvements may => increase in the supply of corn as there will be an increase in the efficiency of corn production. This would cause the supply curve to shift to the right, and result in a fall in price. LOOK AT DIAGRAM
2. Factors that affect the long run demand for agricultural products include changing incomes and consumer preferences.
   E.g. the demand for meat may fall in the long run because of an increase in the number of people choosing a vegetarian diet. This would result in the demand curve shifting to the left and a fall in price.
   * LOOK AT DIAGRAM*

Question 5

Buffer Stocks also affect the Price of Agricultural Products

Answer 5

1. Buffer stocks involve the government or its agency setting a minimum and maximum price for a product (e.g. wheat). The aim of buffer stocks is to stabilise market prices for particular products and prevent shortages.
2. If the price mechanism causes the price of the product to go outside of the agreed price range, then the govt will buy or sell the product until the price returns to the agreed range.
   e. g. if the price falls too low, the govt will buy som eof the product in order to raise the price - this shifts the demand curve to the right and restores the price to an acceptable level. This intervention stops prices plummeting at times of high levels of supply (e.g. after a bumper crop).
3. Buffer stocks of a product are stored and sold if the price rises above the maximum allowed price. This will increase the supply and shift the supply curve to the right - lowering the price.
4. A downside of buffer stock schemes is that they can be difficult to manage effectively and can be expensive.