Demand Curve for Agricultural Products

In this article we will discuss about the demand curve for agricultural products.

The conditions determining the shape of the demand curve for agricultural products do not differ very materially from those determining the demand curve for other products. There is much less to be said about the demand curve than about the supply curve. This does not mean that it is less important but merely that it is less peculiar.

There is however, one very important difference between the demands for agricultural and for industrial products. Agriculture, as we know produces mainly foodstuffs, which are one of the main necessities of life; as a result, the demand for all agricultural products, taken together, tends to be inelastic. If the prices of all foods fall, consumption will not greatly expand, nor will it greatly contract if food prices go up.

There will, however, be some change. First, if all food prices fall, the same amount of income will purchase more goods than before. In other words, real income will increase and there will be a consequent expansion in the demand for food. But this is not all.

Besides affecting real income the fall in food prices will have made food cheaper relatively to industrial products. It is, therefore, possible that some people will prefer to purchase better food at the expense, for instance, of more elegant clothes or more cinemas. There may be some substitution of agricultural for industrial products. But this substitution is not likely to be very important, as foodstuffs, taken as a whole, satisfy very different wants from other types of goods.

Similarly, if food prices go up, there must be some contraction in consumption because the fall in real incomes, but there is not likely to be much substitution of industrial for agricultural products. The demand for food, taken as a whole, is inelastic, just as its supply.

Moreover, just as the supply of individual farm products is far more elastic than that of farm output as a whole, so is the demand for individual products. If the price of a single foodstuff varies we can usually disregard the effect of this change on real incomes, as only a small part of any given income will be spent on one food, and can take into account only the possibility of substituting the product of which the price has changed for or by other goods.

Now many foodstuffs satisfy the same wants and are readily substituted one tor the other. Consumers demand, in the main, any vegetables, rather than cauliflower, or cabbage. They want cooking fat, not particularly lard, or olive oil. They require meat, rather than mutton, or pork.

They may, and usually do, have some preference for one product over another, just as they do for some variety of one product over another variety, for sirloin over loin, for fresh over chilled and chilled over frozen mutton, for English or for Danish bacon, and so on. Thus the demand for the different products is elastic, but not completely elastic.

Moreover, the elasticity of demand will be less if the prices of goods which are in composite supply, like mutton and pork, vary together, just as will be the elasticity of supply for products, such as beef and milk, which satisfy a composite demand for a considerable part of the factors of production used in growing them.

There are other foodstuffs, however, for which the demand is far more inelastic. There is no ready substitute for bread, or potatoes, or liquid milk, and the amount of these products consumed will not vary very much if their price is changed.

When any commodity can easily be substituted for another, it is quite certain that a fall in price will cause an increase in the amount bought, and a rise in price a decrease When it cannot, it is possible, though unusual, for consumption to decrease as price falls. This can only occur when the commodity absorbs a large part of consumer’s incomes, so that a change in its price alters appreciably their real income, that is to say, the total amount of goods and services that they purchase.

Then a fall in its price will raise real incomes. The consumption of most foodstuffs increases as real incomes rises that a fall in price will increase consumption both through the process of substitution and through the income effect. But for a few commodities, sometimes called “inferior” goods, consumption falls as income rises.

For such products the incomes effect of a fall in price, tending to decrease consumption, may outweigh the substitution effect, tending to increase it, so that, on balance, consumption decreases as price falls.

Thus in Ireland, in the early 19th century, the country people’s staple diet was the potato, the cheapest product they could get, When, potatoes were plentiful and cheap they could satisfy a great part of their hunger more easily than usual, leaving more money over to buy other foods. Thus, as the result of the fall in potato prices, they actually substituted other foods, wheat or even meal, for pan of the potatoes they usually purchased.

This result, however, is rare. It only comes about when people are too poor to buy a large variety of foods, and when there is one foodstuff far cheaper than others. As a general rule, a fall in the price of one product causes its consumption to increase, often considerably.

It would be wrong, to give the impression that farmers generally react rapidly and automatically to changes in the prices of the goods they produce On the contrary there are several factors which retard the operation of the self-adjusting mechanism of prices as the guide to production in agriculture. Furthermore, there are also factors which often nullify the gain which farmers who respond expect to achieve at the time when the response is made.

Some of the more important of these factors are mentioned below:

(1) Lack of Price-Sensitivity on the Part of Farmers:

The lack of price- sensitivity on the part of farmers, and especially the rank and file of family farmers, is also not without its influence on the elasticity of supply of individual farm products.

Thus the response of many farmers to outside stimulus, be it price or what not, is always tempered by this general inertia derived from technical conservatism, the force of custom and attachment to long-established programmes of production.

This general inertia is not entirely conservatism in any bad sense, but it arises from a sense of continuity and possibly from a feeling that price changes in the long run correct themselves so that the individual producer can drive through the heights and the hollows over a considerable period, averaging out his gains and losses to a successful end.

(2) Difficulty in Assessing Before Hand the Financial Advantages of any Changes in Tempo of Production Programmes:

It was to be recognised that farmers have a difficult task in assessing beforehand the financial advantages of any changes in the tempo or content of their production programmes. The difficulty is two-fold.

(i) Early Advent of Law of D R:

In the first place a decision to change the scale of production of any commodity already being produced on a farm must depend not only on the price of the commodity but also on its costs of production. Here the complications resulting from the early advent in fanning of conditions of increasing costs (or of diminishing returns) is a serious factor.

(ii) Complementary and Supplementary Character:

But the greater difficulty arises from the complementary and supplementary character of most farm production. This means that the farmer is concerned with the comparative prices of the several commodities which he produces. Moreover, he has to consider the effect of increasing or decreasing the scale of any one product on the financial results for the farm as a whole.

For instance, a fall in the price of sheep might show a reduction in the size of the sheep flock, but this might affect the fertility of land wanted to grow barley, and barley prices may have risen. In other words, opportunity costs play such an important role in most farming systems that the issue posed by a change in the price of any one product confronts the farmer with a problem in management which is by no means simple and straightforward.

(3) Not Current Prices but Future Price:

In general the farmer’s response is to current prices, whereas it is future prices that arc of critical relevance to changes in the plan of production on the farm. Changes in the prices of farm goods are often due to passing causes which have little bearing on future trends. It is not easy for the mass of farmers to distinguish between those changes in prices which are fleeting and those which are significant for the future.

But the substantial time-lag in agriculture between the decision to alter production and the actual appearance of the changed supplies on the market makes it very dangerous to assume that current prices are reliable indicators of future prices even a year ahead.

(4) Hazards of Nature:

The response of the farme r to changes in price can only affect the output he intends to produce. It does not, decide the change in supply which may result from the change in the farmer’s production programme. Here, again it is the dependence of all farm production on the hazards of nature that is the final arbiter.

For example, a farmer’s decision to increase his output of a particular crop in response to a rise in its price is manifested in an increase in the acreage sown to that crop; the quantity of the crop finally harvested is largely outside the control of the fanner. There is less risk of disparity between projected and actual outputs in the case of livestock, though here also the final supply is by no means completely determined by the farmers intentions.

What has been said above throws some light on the apparent paradox of a relatively stable agriculture existing side by side with a relatively elastic supply of individual farm products. But the paradox is capable of another reconciliation more consistent with the economic theory of marginal supply.

“Agriculture can be conceived as consisting of a central block of farmers (…… ) following a consistent policy relatively little affected by prices. This central block is surrounded by a fringe of producers who may be described as in-and-out producers. Both the central block and the fringe are of two kinds. Some of the central block of farmers are merely conservative. But may be among the very best and most progressive farmers both in the technical and in the economic sense. Now these efficient farmers may be consistent farmers because their costs of production are low, and therefore they are well within the margin in all normal shifts of prices. Their costs may be low either because they are on good land, favourably situated to markets, or because they are technically and managerially efficient. The fringe of in-and-out producers are also of two kinds. Someday be good fanners who are farming land which becomes quickly sub-marginal for some particular purpose when there is a drop in price. But many are marginal farmers whose skill is not equal to making things pay except when prices are exceptionally favourable, but who, nevertheless, show a remarkable tenacity in clinging to their farms through good and bad times. In theory, the marginal farms are the farms which should be in and out of production of certain commodities as a quick response to price conditions. A quick response to price conditions implies, however, extremely capable knowledge of farming conditions and of the technical and managerial business of farming. But we do not find in practice that it is the efficient farmers who are usually farming the marginal land. Indeed, there is some evidence that marginal farmers tend to gravitate towards marginal farms. If it were otherwise we should get a much quicker response to the shifts in prices.”