How Weather Can Affect Food Prices (Simple Supply and Demand)
How weather can affect food prices
Diagram 1 - supply and demand: P = Price
Q = Quantity
D = Demand
S = Supply
Q₁, P₁ = Original equilibrium
Q₂, P₂ = New equilibrium
Diagram
The main factor that I will focus on in this price shift is the weather. That is because the weather is one of the most important factors when it comes to agriculture. As you can see in the diagram above; when the supply decreases there will be a lack of food (shortage) which will result in enormous price risings. But one important thing to notice is that the demand is slightly decreased. This is because food is inelastic. What inelasticity means is: “When a price change has no effect on the supply and demand of a good or service, it is considered perfectly inelastic. An example of perfectly inelastic demand would be a life saving drug that people will pay any price to obtain. Even if the price of the drug were to increase dramatically, the quantity demanded would remain the same” [1]. Evaluation
One thing to have in mind is that there is always billions of other factors that effects the prices of food, not just the weather. A few other factors are - but not limited to - the rising prices of oil and transport, the lowered production [2] of grain, the increase of the world population and the production of ethanol [3]. All these factors have together caused the price of corn to double in the past year, the price of wheat has been increased by 70% and the price of soybeans has been increased by 50% [4]. Just to point out, there will not be a winner in neither the short nor the long run of the food crisis - this applies to everyone; governments, companies, stakeholders etc. How does this affect people around the world today?
We, westerners, who live our rich lives will not be affected by the raising prices other than that we will complain a bit while shopping in our air
Diagram 1 - supply and demand: P = Price
Q = Quantity
D = Demand
S = Supply
Q₁, P₁ = Original equilibrium
Q₂, P₂ = New equilibrium
Diagram
The main factor that I will focus on in this price shift is the weather. That is because the weather is one of the most important factors when it comes to agriculture. As you can see in the diagram above; when the supply decreases there will be a lack of food (shortage) which will result in enormous price risings. But one important thing to notice is that the demand is slightly decreased. This is because food is inelastic. What inelasticity means is: “When a price change has no effect on the supply and demand of a good or service, it is considered perfectly inelastic. An example of perfectly inelastic demand would be a life saving drug that people will pay any price to obtain. Even if the price of the drug were to increase dramatically, the quantity demanded would remain the same” [1]. Evaluation
One thing to have in mind is that there is always billions of other factors that effects the prices of food, not just the weather. A few other factors are - but not limited to - the rising prices of oil and transport, the lowered production [2] of grain, the increase of the world population and the production of ethanol [3]. All these factors have together caused the price of corn to double in the past year, the price of wheat has been increased by 70% and the price of soybeans has been increased by 50% [4]. Just to point out, there will not be a winner in neither the short nor the long run of the food crisis - this applies to everyone; governments, companies, stakeholders etc. How does this affect people around the world today?
We, westerners, who live our rich lives will not be affected by the raising prices other than that we will complain a bit while shopping in our air
References: 1. http://www.investopedia.com/terms/e/inelastic.asp 2. http://www.truth-out.org/rising-prices-changing-climate67967 3. http://www.technologyreview.com/energy/18173/ 4. http://www.fox2now.com/news/ktvi-us-food-prices-oil-mid-east-china-india-022111,0,3465470.story 5. http://www.smh.com.au/opinion/politics/a-new-food-crisis-is-on-our-plates-20110221-1b2f3.html 6. http://www.guardian.co.uk/business/2010/jun/15/food-prices-rise-un-report