Agriculture Reference
In-Depth Information
demand and supply relationships for specifi c commodities in order to better understand the
dynamics of markets.
Derived demand
The demand for most agricultural products is a
derived demand
. Derived demand is not
based directly on general consumer demand, but rather on the need for a product that indi-
rectly relates to consumer demand. For example, the agricultural producer's demand for
fertilizer is derived from the consumer's demand for corn. When export demand for corn
shifts because of economic growth in China, the price of corn increases. In turn, this also
increases the demand for fertilizer, since higher corn prices encourage farmers to produce
more corn. This is one reason why agribusiness managers and marketing experts are so con-
cerned about general economic trends. Anything that signifi cantly shifts consumer demand
for agricultural products will also have an impact on the demand for farm inputs through the
process of derived demand.
Elasticities of demand
Besides understanding shifts in supply and demand, agribusiness managers are also con-
cerned with predicting how consumers will respond to changes in price, income or prices of
other goods. Economists calculate three different types of
elasticity
as a measure of how
quantity demanded responds to a change in price, income, or price of other goods, respec-
tively. Understanding how to interpret the various types of elasticity allows agribusiness
managers to make informed decisions. The most common type of elasticity is price elasticity
of demand, or a measure of consumer response to price changes. Income elasticity of demand
measures the response of quantity demanded to changes in income, while cross price elastic-
ity of demand measures how the quantity demanded for one product responds to a price
change in a different product.
Calculating price elasticity of demand
Price elasticity of demand refl ects the percentage change in the quantity demanded when the
price changes by 1 percent. If the quantity demanded for bluegrass seed increases by 1 per-
cent when its price decreases by 1 percent, the price elasticity of demand for bluegrass seed
is 1.0. The formula for price elasticity of demand or
ε
d
is:
Price Elasticity of demand
change in quantity demande
e
=
d
%
d
=
change in price
new quantity
%
⎡
⎢
old quantity
⎤
⎥
⎡
⎢
new priceold price
new priceold price
⎤
⎥
+
=
−
⎡
⎣
⎤
⎦
⎡
⎣
⎤
⎦
×
new quantity
old quantity
+
o
As
Figure 3.5
shows, if the price of bluegrass seed decreased from $40 to $30 per 100-pound
unit, the quantity demanded would increase from 100 to 200 units.
⎡
⎢
200
100
⎤
⎥
⎡
⎢
30
⎤
⎥
100
300
70
10
40
+
Price Elasticity of demand
−
= −
233
e
⎡
⎣
⎤
⎦
×
⎡
⎣
⎤
⎦
=
==
d
200
100
30
40
+
−
−
