Elasticity of Demand for Agricultural Products PDF

Elasticity of Demand for Agricultural Products INTRODUCTION TO AGRIBUSINESS Elasticity of Demand a measure of how much the quantity demanded of a good or service changes in response to a change in one of its determinants, such as price, income, or the prices of related goods. 1. Perfectly Elasti...

Elasticity of Demand for Agricultural Products INTRODUCTION TO AGRIBUSINESS Elasticity of Demand a measure of how much the quantity demanded of a good or service changes in response to a change in one of its determinants, such as price, income, or the prices of related goods. 1. Perfectly Elastic Demand Refers to a situation in which the demand for a product is infinitely sensitive to price changes. Graphical Representation (PED) The demand curve is a horizontal line at the given price, indicating that consumers are willing to buy any quantity at that price but none at a higher price. Example of Perfectly Elastic Demand Agricultural Products in a Competitive Market: 1.Assume multiple farmers sell identical mango in a perfectly competitive market. 2.Consumers will buy from any farmer offering the lowest price. If one farmer raises their price even slightly, consumers will switch to other 2. Perfectly Inelastic Demand Occurs when the quantity demanded of a good or service remains constant regardless of changes in its price. In other words, consumers are completely unresponsive to price changes. Graphical Representation (PID) The demand curve is a vertical line, showing that the quantity demanded does not change regardless of the price. Example of Perfectly Inelastic Demand 1.Life-Saving Medicines: A diabetic patient requires insulin to survive. No matter how much the price of insulin increases, the patient will continue to purchase it because it is essential for their health. 2. Rice in Some Countries In regions where rice is a staple food and there are no immediate substitutes, its demand could be considered perfectly inelastic. If the price of rice rises, people still need to consume it to survive, so their consumption doesn't decrease even if prices increase. 3. Relatively Elastic Demand Refers to a situation where the quantity demanded of a good or service changes significantly in response to a small change in its price. Graphical Representation (RED) The demand curve is flatter (more horizontal) compared to an inelastic demand curve. A small change in price causes a relatively larger change in the quantity demanded.  Examples of Relatively Elastic Livestock Demand Products (e.g., Pork, Beef, Chicken) If the price of beef rises, consumers may switch to cheaper meats like chicken or pork. The presence of alternative protein sources makes the demand for specific meats relatively elastic. Coffee and Tea Price increases in coffee or tea can lead to a drop in demand, as consumers may switch to other beverages like juices, soft drinks, or water. 4. Relatively Inelastic Demand Refers to a situation where the quantity demanded of a good or service changes only slightly in response to a change in price. In other words, the demand for the good is not very responsive to price changes. Graphical Representation (RID) The demand curve for relatively inelastic goods is steep (almost vertical). A small change in price leads to a relatively smaller change in the quantity demanded, indicating that demand is less sensitive to price. Examples of Relatively Inelastic Demand 1.Basic Food Staples (e.g., Rice, Wheat):  In many regions, basic food items like rice or wheat are essential for daily nutrition. Even if the price of these items rises, the quantity demanded doesn't decrease significantly because they are necessities. Example: If the price of rice increases by 10%, people will still continue to buy roughly the same amount, because rice is a staple food with no immediate substitute. 5. Unitary Elastic Demand Occurs when the percentage change in the quantity demanded of a product is exactly equal to the percentage change in its price. This means that total revenue (price × quantity) remains constant regardless of changes in price. Market Equilibrium Analysis of Agricultural Products  EQUILIBRIUM Refers to a state where market supply and demand are balanced, resulting in a stable price and quantity for goods or services. Market Equilibrium Occurs when the quantity of agricultural products demanded by consumers equals the quantity supplied by producers, resulting in a stable price and quantity.  Demand for Agricultural Products: Demand for agricultural goods is often influenced by: Population growth. Consumer preferences. Income levels. Seasonal variations. Price of substitutes and complements. Agricultural products often have inelastic demand due to their necessity for survival.  Supply of Agricultural Products: Supply is determined by: Weather conditions (e.g., droughts, floods). Farming technology. Government policies (e.g., subsidies, price supports). Storage capacity and transportation costs. Seasonality: Many agricultural products are produced only during specific times of the year, leading to fluctuations in supply. Equilibrium Price and Quantity: The equilibrium price (also called the market- clearing price) is where the quantity of agricultural products consumers are willing to buy equals the quantity producers are willing to sell. If price is above equilibrium: Surplus occurs (excess supply). If price is below equilibrium: Shortage occurs (excess demand). Graphical Representation of Market Equilibrium 1. Supply and Demand Curve: The demand curve slopes downward, showing that as price decreases, quantity demanded increases. The supply curve slopes upward, showing that as price increases, quantity supplied increases. Equilibrium is where the supply and demand curves intersect, determining the equilibrium price and quantity. Graphical Representation of Market Equilibrium 2. Impact of Shocks: Supply Shock: A drought reduces supply, shifting the supply curve left, leading to higher prices and lower quantities at the new equilibrium. Demand Shock: Increased income in a population may increase demand for agricultural products, shifting the demand curve right, leading to higher prices and quantities at the new equilibrium. Example of Market Equilibrium in Agricultural Products Scenario: Rice Market in the Philippines Rice is a staple food in the Philippines, making it a key agricultural product for analysis. Let’s consider how market equilibrium is determined and the impact of changes on prices and quantities in peso terms.