Case Study: Primary Products
Low PED
Low PES
Case study: Low PES of Primary Products
Low YED
Low PES
Demand for agricultural products is price inelastic
Cost of raw materials constitutes a low proportion of total cost of production of final product
Food is a necessity, which people already spent significant portion of their income on.
Amount of food we can consume is limited by biological constraints
NO SUBSTITUTES
World Income Rise
Smaller proportion of income is spent on agricultural products (esp. developed economies)
Food is a necessity; People already spent significant portion of income on basic foodstuffs
Increase in incomes spent more on luxuries, less on necessities
Price Elasticity of Supply
% change in qty supplied/
% change in price
Responsiveness of quantity supplied of a good to a change in its own price, C.P.
Movement along the supply curve in response to a price change
Short run problem - Fluctuations in primary product and producer incomes
Long run problem - Decline in prices and producer incomes relative to manufactured goods
Unplanned fluctuations in supply
Cyclical fluctuations in supply
Agricultural crops are subject to variations in output because of many factors completely beyond farmers' control
Seasonal Nature
Unexpected circumstances (e.g. pests, flood, drought, exceptionally favourable conditions)
Bumper crop
Sends prices down
Poor harvest
Sends prices up
% change in qty supplied < % change in price
Due to price inelastic demands, fluctuations in price tends to be large in response to unplanned changes in output
In Graph drawing, note big differences in price btw demand inelastic and demand elastic at different supplies as a result of different conditions (pg71)
Price inelastic supply curves (P.I.S.C.) as land, labour and machinery devoted to non-agricultural uses cannot quickly return to agricultural use when demand rises
Given a P.I.S.C. for primary products as a whole, primary products will be sensitive to demand shifts
In graph drawing, note big differences in price btw supply inelastic and supply elastic at different demand curves, showing larger fluctuations in price than supply elastic
Over time, there will be shifts in both demand and supply
Assume there is steady growth in the productive capacity of the economy, increases in money income in the long run lead to increase in demand for goods
Demand for agricultural products rises relatively slower as people spend significant portion of increase in come on luxury goods
Supply of agricultural products shifts to the right owing to vast improvements in agricultural technology (new machinery, better fertilisers) or government subsidies)
Based on graph drawing, can tell that total revenue is lower
Consequences on downward trend in farm prices
Slower growth in farmers' income relative to incomes of manufacturers
Pressure for resources to move out of the agricultural sector to other expanding sectors
Movement not fast enough, as farm workers usually do not possess alternative skills
Need for govt aid to agriculture to bolster their incomes