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Demand And Supply For Agricultural Goods

The agricultural sector is a very unique sector in economics because it displays characteristics in terms of the demand for and the supply of its goods not seen in any other sector. The principal characteristics of demand are that it is both income and price inelastic and it has a high dependency on population and tastes which cause demand to be static in both the short and the long run. On the other hand, supply is very volatile in the short run due to extraneous factors because supply is a biological process though in the long run due to technological advances we tend to observe an increasing trend.

Also, because agricultural products are perishable and because the production period is long, supply will be inelastic so producers will have to supply in the short run even at very low prices. Another characteristic of supply is its atomistic structure and asset fixity. These basically imply that there will be a large number of insignificant producers and that most agricultural assets will be fixed. These have various implications for prices which are very unstable in the short run and in the long run present a declining trend. Similarly, farm incomes tend to be unstable in the short run and converge in the long run though it must be noted that this is also due to extensive government subsidization of agriculture.

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In the short run demand in the agricultural industry is affected by the fact that it is income inelastic because of Engel’s law that basically states that with successive increases in income food consumption as a proportion of income declines. At this point, it must be pointed out that consumption is different from expenditure unless all goods have the same price, in other words, the money a consumer spends on food (i.e. expenditure) may increase, remain stable or even decrease but his consumption will decrease as illustrated in the following diagram.

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Demand And Supply For Agricultural Goods. (2021, Mar 17). Retrieved June 15, 2021, from https://essayscollector.com/essays/demand-and-supply-for-agricultural-goods/