4Exploring Economics in the News The market structure and the elasticity

of supply of food

Market Structure and Price Elasticity

New Horizon Economics (Compulsory Part)

12

New Horizon Economics Extended Reading Materials (Compulsory Part) Sample

C01 World news DAILY NEWS 18 April 2008

Global food production fails to reach limit of capacityGlobal food trade is a huge business with an annual turnover of over 200 million tons. Since most regions around the world can produce food, market competition is intense and profits are little. Extensive farmlands are left idle in major food exporters, such as Russia and Ukraine. Most lands in the US, another major food exporter, are not used because of a long-term supply surplus. They are only sowed and harvested once a year.

The US is the

world ’s largest

wheat exporter and

Thailand is the world’s largest

rice exporter.

C01 World news DAILY NEWS 16 April 2008

High food prices cause unrest in poor countriesFood prices has been rising in recent years. Near 40 countries have food shortage; social unrest is found in these countries. All of them are African or developing countries, for example, the Philippines, Indonesia and Egypt. In Haiti,

the hungry public even attacked the presidential palace.

The market structure and the elasticity of supply of food

Theme Analyzes whether the high food prices will persist

Objective To help students understand more about market structures and price elasticity of supply

Related topic(s)Book 4A Chapter 7 Section 7.1 ‘Basic concepts’ (pp.192–197)

Section 7.2 ‘Perfect competition’ (pp.198–200)Book 4B Chapter 10 Section 10.3 ‘Price elasticity of supply’ (pp.93–101)

13

Area 4 Market Structure and Price Elasticity Exploring Economics in the News

The global food market is close to perfect competitionMost regions around the world can produce food. There is no entry barrier and there are many existing and potential suppliers. The global food trade is a huge business. No individual buyer, seller or country can control the price of agricultural produce. So, the global food market structure is close to perfect competition.

Food prices and elasticity of supplyFood cannot be stored for long, so its elasticity of supply in the short run is relatively low. However, as the supply of food does not rely on specialized factor of production, most regions can produce food. With the current global production far below the limit of capacity, the elasticity of supply in the long run is very high.

As Fig 2.3 on the following page shows, because of the relatively inelastic food supply in the short run, the great increase in demand causes the price to rise sharply from P1 to P2. The high food prices mean food production is profitable. Since food production does not rely on specialized factor of production, most regions can produce food. When the high food prices persist, a large number of potential producers will enter the market; the quantity supplied of food will increase sharply.

Oil prices and

elasticity of supply

With the ever-increasing

global oil demand, the oil prices

are constantly high. The high

prices, however, will prompt

countries to actively develop

other energies as substitutes.

In the long run, oil supply will

be more elastic and lower oil

prices can be expected.

An increasing demand for food causes the global food prices to keep rising. Below are the trends of international wheat prices and overall food prices in the last few years.

Fig 2.1 The trend of international wheat prices in 2002–08.

Fig 2.2 The trend of overall food price indices in 2000–07.

Source: ‘High Food Prices – A Harsh New Reality’, The World Bank, 2008.

14

New Horizon Economics Extended Reading Materials (Compulsory Part) Sample

Should governments of different countries invest more on farming so as to produce more

food?

1. The four characteristics

of per fect compet i t ion

are: many buyers and

sel lers, f ree entry into

and exit from the market,

homogeneous products

and perfect information.

2. I f t h e p r o d u c t i o n o f

certain goods does not

rely on specialized factor

of production, i ts price

elasticity of supply will be

higher.

3. Price elasticity of supply in

the long run is higher than

that in the short run.

Output will increase sharply in the long run and the price will fall to P3.

1. An increase in demand causes the price to rise from P1 to P2.

2. With time, the elasticity of supply increases. The price falls from P2

to P3.

Fig 2.3 The price elasticity of food supply is higher in the long run.

In sum, food supply will become more elastic with time and the price will fall correspondingly. 5