Use basic tools of economic analysis to show how markets for goods and services in the agri-food sector operate.

Price driving demand 

Prices give important signals to consumers: 

1. Economic theory assumes that consumers will always prefer lower prices to higher prices (ceteris paribus) 

How prices are influenced and how they affect demand otherwise:

1. Competition strategies affect prices  

2. Oligopy  

3. Prices for substitute goods and complimentary goods 

Factors driving demand other than price 

These things shift the demand curve meaning consumers will buy more at any given price.

1. Income

2. Consumer Behaviour
   Advertising

3. Good news

Income driving demand

Engel’s Law in economics shows that as consumers become wealthier, the percentage of income spent on food starts to decline. Absolute amount of money spent on food may continue to increase 

Consumer Behaviour driving demand

• Aging populations  

• Changing household sizes   

• Lifestyle factors   

• Tastes and preferences  

• Migration 

• Education on health and environment 

• Budget

Advertising driving demand

Promotion based off of price / non price strategies 

What drives supply other than price 

These things shift the supply curve, signifying, producers will produce more or less at any given price. 

1. Price for alternative good

2. Costs of production

3. Technology and policy factors (CAP, regulation, subsidies etc).

Prices serving as information

Prices serve as information signals about excess supply, scarcity, volatility etc. 

Equilibrium 

Price in which there is no excess of supply or demand. 

Classical Economics / Economic Theory

1. Prices guide the market as supply and demand interact through price. 

2. The supply and demand situation for a good will adjust if the price is left to adjust, allowing the market to adjust towards an equilibrium where demand and supply are equal. 

3. This works best with limited government interference. 

Economic theory assumes that consumers will always prefer lower prices to higher prices (ceteris paribus) 

Government Intervention 

Markets can be “managed” by introducing: 

1. Price floors (minimum prices), such as CAP 

2. Price ceilings (maximum prices) 

3. Quotas (restrictions on levels of output) 

Elasticity of demand definition

Price Elasticity of Demand is a measure of the magnitude of change in demand from consumers in response to price changes. 

Price Elasticity of Demand

Price Elasticity of Demand is a measure of the magnitude of change in demand from consumers in response to price changes. 

PED = % change in quantity demanded of a good / % change in its price 

Elastic demand - “more negative” than –1 

Inelastic demand – between 0 and –1 

Drivers of EOD 

More substitutes – higher elasticity 

Necessities with few substitutes – lower elasticity 

Cross price elasticity of Demand 

Measures how consumers respond in terms of demand for good X when price of good Y changes. 

CPED = % change in Qd of good X / % change in price of good Y 

Income Elasticity of Demand 

Measures the magnitude of change for the price of a product when income changes. 

IED = % change in Qd of good / % change in income. 

Inferior Goods 

Inferior goods refer to low-cost, low-quality goods consumed when income is a severe constraint. 

Cheap food staples and coal 

Inferior goods: IED <0 

Normal Goods 

Higher incomes mean higher demand for most types of good (“normal goods”) 

Normal Goods: IED >0 

Luxury Goods 

Goods with IED > 1 are “luxury goods” 

Research suggests these include wines/spirits; food service; overseas travel; home technology etc. 

Implications of elasticity on tax

• Elasticity of demand income underpins government policy – tax goods such as alcohol and cigarettes as their demand is inelastic. Hower an implication of this is that taxing inelastic goods is inflationary. 

• Tax can be put on elastic goods with substitutes such as sugary drinks, to improve health. 

• Regresive taxation – which taxes will hurt lower income households harder

Implications of elasticity on business

Pricing decisions are made based on how price sensitive their consumers are, in order to maximise revenue. 

Elasticity of supply 

Price Elasticity of Supply is a measure of the magnitude of change in supply from suppliers in response to price changes. 

Are always positive 

PES = % change in Qs of a good / % change in its price 

Quotas etc can change it too and make the PES 0 / a straight line. 

Producer Behaviour 

They act in a way to maximise profits. 

How is profit maximised?

This can be done via: 

• Minimising costs 

• Maximising quantity produced 

• Maximising price per unit produced sold 

Irish Farmers are price takers, so they must minimise costs, to maximise profits 

Due to costs increasing at different rates as production grows, producers aim to optimise production. 

Costs 

Producers incur different types of costs 

Fixed costs: Don’t change as output changes. 

Variable costs: Increase as output increases (raw materials, labour etc.)/ 

Law of diminishing returns 

The relationship between the level of output of a good and the level of inputs used. 

The marginal output from each marginal input decreases progressively until it is negative