Income elasticity of demand Essay
Income elasticity of demand
World trade for wheat is greater than for all other crops combined and is cultivated in 128 counties. A farming company specializing in wheat and barley production (Silo Pty Ltd), one of many producers in the international market, is greatly affected by storms in the U.S and South America. These storms have reduced the global wheat yield by 50 per cent. Wheat continues to be the most important food grain resource as it is used in a large majority of foods around the world. Its production leads other crops such as rice, maize and potatoes.
Despite wheat’s great importance in the food industry, it would still be regarded as being price ‘elastic’ and have a positive income elasticity, as there are many competitive suppliers around the world, which could possibly lead to fluctuations in prices and prevent large shortages. Price elasticity of demand arises due to the responsiveness of the quantity demanded of a good to change its price, when all other influences on buyers’ plans stay the same. Income elasticity of demand is the responsiveness of demand due to a change in income. Factors that generally affect the supply of goods or services include, the price of factors of production, the prices of related goods produced, expected future prices, the number of suppliers, technology and the state of nature.
Demand is also effected by such factors as, the prices of related goods, expected future prices, income, expected future income and credit, population and preferences. If ever there were a shortage of wheat due to bad weather or storms, such that has happened to Silo Pty Ltd, other crops such as barley or maize could be used as an alternative resource, thus the supply would decrease and eventually the demand would decrease slightly as well as there are alternative resources at possibly cheaper prices. This would result in wheat being considered as a normal good in western society as for which demand increases as income increases.
Graph 1 shows the situation before the storms hit and the effects after the storms. The demand curve is D and the original supply curve is labelled S0. After the storms hit, the supply curve shifted left to S1. This represents the supply decreasing, further increasing the price. Graph 2 shows the effects of the expected future price rise. Demand increases, shifting from D0 to D1, supply decreases shifting the supply curve from S1 to S2.