Explanation of Global Food Price Increases

Explanation of Global Food Price Increases

Article Example

According to the article by Juliet Lapidos, the increase in global food prices over the past several months is the result of increased energy costs, poor weather conditions in parts of the world, and increased standards of living in emerging markets such as India and China. Using basic analysis of supply and demand, this price increase is explained as follows:

Persistent increases in oil prices, increased demand for biofuels, and adverse weather conditions negatively affect the overall global supply of food. First, the persistent increase in oil prices causes the costs of planting, harvesting, and shipping food to rise. This increase in the costs of production for farmers negatively impacts the supply of food as farmers can longer afford to produce as much of various food staples.

Second, the increase in oil prices has generated a greater desire for biofuels, which are made primarily from corn. As the demand for biofuels increases, corn growers provide a greater amount of their corn crops to the production of biofuels thereby reducing the amount of corn provided as food for humans and animals. Consequently, the supply of food is also negatively impacted by the increased demand for biofuels.

Finally, adverse weather conditions in countries such as Australia and Argentina negatively affected the production of milk and other dairy products exported by these countries. As a result, the overall food supply is also negatively affected.

These three factors result in a decrease in overall food supply. As the supply of food decreases, the quantity of food supplied falls below the quantity of food demanded at the current equilibrium price creating a shortage in the market. Accordingly, the shortage causes the price of food to rise to induce firms to provide more food to the market; however, the quantity of food bought and sold is predicted to fall slightly.

The increased standards of living in emerging markets such as India and China and the increased price of corn resulting from increased demand for biofuels positively affect the overall global demand for food. First, increased standards of living in emerging markets result from overall increases in income and wealth of these countries. Therefore, assuming food, in general, is a normal good, as incomes rise in these countries, the overall demand for food rises as people can afford to purchase more of both necessary and luxury food items.

Second, the increased demand for biofuels encourages farmers to purchase cheaper alternatives to corn to feed livestock and encourage consumers to substitute cheaper alternatives to corn. Thus, the use of cheaper alternative foods positively impacts the overall global demand for food.

Therefore, these two factors result in an increase in overall food demand. As the demand for food increases, the quantity of food demanded rises above the quantity of food supplied at the current equilibrium price thereby creating a shortage in the market. Accordingly, the shortage causes the price of food to rise to induce firms to provide more food to the market; however, the quantity of food bought and sold is predicted to rise slightly.

These influential factors on the market for food result in potentially significant increases in global food prices. Because both increases in demand and decreases in supply result in shortages which causes higher prices, the effect of these simultaneous changes in demand and supply create much larger shortages causing more severe price increases. However, the article does not state the impact on the overall quantity of food bought and sold. Therefore, the effect on the equilibrium quantity is ambiguous although it is likely that any change in quantity is minimal since the demand for and supply of food are likely very inelastic.

ECON 202 Principles of Microeconomics

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