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Potential grows for food crisis as prices surge - Essay Example

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Question # 1: The price of the agricultural goods tends to rise at an inflated rate than the other goods such as manufacturing due to inelastic nature of its supply. This inelastic nature is due to production process of agricultural goods that require certain conditions as well as time period to produce…
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Potential grows for food crisis as prices surge
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Potential grows for food crisis as prices surge

Download file to see previous pages... Point where this demand and supply meets determines the equilibrium price level at given point in time (Leamer, 2009). (Arnold, 2008) Agricultural goods demand and supply and its respective equilibrium price are largely intervened by government due to many factors such as maintaining farmers’ income stream etc. It is done by restricting supply by restricting the overall production per acreage, restricting export to certain countries, increasing tariffs, restricting price over and above equilibrium( floor price) etc. Figure below explains demand supply scenario that increases price due to supplier responding to international demand. Initially with given demand D and supply S in a country, the price is determined at equilibrium P. In case of issues in other countries such as drought etc and the country in discussion starts exporting agricultural goods to them, the supply curve shifts in the local market from S to S’. At the current point where local demand in the country is D and the supply squeezes from S to S’, the price in the local market increases from P to P1. Demand from other countries increases and the curve shifts from D to D’ towards right. The supply curve also sifting from S to S’ with supply distributed between local and international market, the new price determined will be P2. This new price is high above then price determined based on local market demand. The supplier to get benefit of this increased demand responds to the international demand, hence neglecting local demand (Mankiw, 2009). To mention as evident from the above figure, it is visible that demand curve had a greater shift towards right as it is incorporating the increased demand from the other countries in trouble, hence causing greater shift in price. The supply curve on the other hand had smaller shift due to inelastic in nature causing comparatively less shift in price (O'Sullivan and Sheffrin, 2003). The scenario can also be reverse as in case the surplus supplies overall worlds is enough to meet the demand. These cause huge variations in the income of farmers, increased supplies causes decline in prices that negatively affects farmers’ situation whereas shortage cause inflated prices and disadvantage to buyer. To control this variation in pricing, government of different countries intervenes in the market and control the supply with restrictions exports and increased tariffs on exports or even bans that maintain the price level in local market (Brickley and Zimmerman, 2009). Whereas to control the declining prices of the agricultural products government fixes floor prices (that is over and above equilibrium prices) and buys from farmer surplus products (Wessels, 2000). When excess is bought by government the level of supply available for customer is less and hence the floor price is adjusted as equilibrium price. (Rittenberg and Tregarthen) The surplus bought from farmer is then used for other purposes. For instance, US government uses this surplus for sending in aid programs. Also to maintain this excess supply, government pays farmer certain amount to reduce the per acreage production. These measures to maintain price from access price are however, harmful as they appear not aimed to maintain the income level of farmer but to maintain the international price level. As evident from the history, the supply has never in excess as compare to increase in demand of entire world keeping in consideration the factor of rising population level around the ...Download file to see next pagesRead More
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