In this blog, we are going to be studying the Basic Economic Principles of demand and supply in agriculture:
Table Of Contents
- Demand, the law of demand,
- Factors affecting demand.
- Elasticity of demand.
- Supply: The law of supply.
Factors affecting supply.
Elasticity of supply, demand and supply in Agricultural production and importance.
Law Of diminishing returns and importance.
To know how market economy works and how resources are located in an economic system, it is very important to understand what determines the basic Economic Principles of demand and supply of goods and services. When it comes to agricultural products and goods.
Here are the Basic economic Principles of Demand and Supply
A. MEANING OF DEMAND
Definition: Demand can be defined as the amount of quantity of goods or services which the consumer is willing and able to buy at a given price and at a particular time. When the consumers demand is back up by the necessary ability and willingness to pay, it is said to be effective demand. But if the consumer does not have the money to buy the goods, it’s means he merely wants or desire the goods or services. This is the first basic economic principles of demand and supply
LAW OF DEMAND: The law of demand states that the higher the price, the lower the quantity of goods that will be demanded or the lower the price, the higher the quantity of goods that will be demanded.
Example of The law of demand: The law simply explain that when the price of maize, for example is high in the market, very few quantities of it will be demanded by the consumer and vice versa.
The law of demand holds under This Assumptions
- That there will be no change in taste and preference of the consumer.
- The consumers income remains constant.
- The habit of consumer remains unchange.
- That no very close substitute of the commodity exists.
- There is no change in the quality of products.
FACTORS AFFECTING DEMAND
Factors which affect the law of demand for any goods include the followings:
1. PRICE: The higher the price of any goods, the lower the quantity that will be demanded in the market.
2. PRICE OF OTHER COMMODITIES: This applies to commodities that have close substitutes. If the price of some commodity is high, the consumer may demand for the close substitute that’s available.
3. INCOME OF THE CONSUMER: The higher the income of a consumer, the higher the quantity of commodities that will be demanded also.
4. CHANGE IN TASTE OF CONSUMER: If consumers change their taste for a particular commodity, the demand for that commodity will also change.
5. POPULATION: Increase in population will lead to high demand for goods in the market.
6. PERIOD OF FESTIVAL: People demand for more of specific commodities during certain festivals.
7. EXPECTATION OF CHANGES IN PRICES: If people expect that there will be high prices of commodities in the future, demand will increase and vice versa.
8. TAXATION: An increase in taxation means a reduction in purchasing power which may result in decrease in the demand for certain goods and services.
Elasticity Of Demand
Elasticity of demand is defined as the degree of responsiveness of demand to little changes in price.
Price Elasticity Of Demand
Price elasticity of demand refers to the degree of responsiveness of demand to little changes in prices of goods and services.
Types Of Price Elasticity Of Demand
- Unity Elasticity of demand: elasticity of demand is said to be at unity if a change in price leads to equal change in demand. Elasticity is equal to one, e.i, E= 1
- Inelastic Demand: when the change in price of commodities leads to little or no changes in demand, demand is said to be inelastic. Elasticity is less than one, that’s, E< 1
- Zero Elasticity of Demand: demand in this case remains unchanged no matter the changes in prices of commodities. Demand in this case is also perfectly or completely inelastic.
- Perfect Elasticity or Infinite Elasticity of Demand: The consumers react sharply to changes in price. The sharp response could be for an increase or decrease in price.
B. MEANING OF SUPPLY In basic economic principles of demand and supply
Definition: Supply is the second basic Economic principles of demand and supply: This can be define as a quantity of commodities of goods which a producer is willing and able to offer for sale at a given price over a particular period of time. The quantity of commodities offer for sale in the market is called effective supply. For example, if a farmer produces 300 tubers of yam and offers 200 for sale, The producer’s effective supply are those 200 tubers he offered in the market.
LAW OF SUPPLY: The law of supply states that the higher the price, the higher the quantity of produce that will be supplied or the lower the price the lower the quantity of produce that will be offered for sale in the market.
Example of the law of Supply: This law explains that when the price of rice for example is high in the market, large quantities of the rice will be offered for sale because the producer wants to make more profit and vice versa.
FACTORS AFFECTING SUPPLY
Factors which affect the law of supply for goods include the followings:
- The price of the commodity.
- The price of other goods and services.
- changes in the cause of production.
- changes in climate and weather.
- aims and objectives of the Farmers.
- technological advancement.
- changes in the number of producers.
- prices of factors of production.
Elasticity Of Supply
Elasticity of supply is defined as a degree of responsiveness of supply to little changes in price of goods.
Types Of Elasticity Of Supply
Just like elasticity of demand, there exist the same types of elasticity of supply. Their explanation and graph are basically the same.
- Unity Elasticity Of Supply: E = 1
- Inelastic supply: E< 1
- Elastic supply: E > 1
- Zero Elasticity Of Supply
- Infinite elasticity of supply
Elasticity of supply explanations is the same with elasticity of demand.
Determination Of Price By Demand And Supply
There are buyers and sellers in the market. The buyers bring their money to the market to buy the goods while the sellers bring the goods to the market for sale. Market equilibrium is determined by the interaction of the forces of demand and supply which is influenced by price. Equilibrium price is that price at which the quantity demanded is equal to the quantity of good supply. The point where the demand curve meets the supply curve is called equilibrium position or the equilibrium point. Under this condition, both producers and consumers can be satisfied and there will be no pressure on pricees.
Implications of Demand and Supply on Agricultural Production
The demand and supply have lots of implications on agricultural production. This include:
- When the demand for an agricultural product is lower than the supply, the price of such product will fall and the Farmers will be discouraged from further production.
- when the demand for agricultural product exceed supply, price will tend to rise and consumers will demand for more of product and the Farmers will be simulated to produce more of such goods.
- High cost of yam may lead to low demand of yam and high demand of rice which is a closed substitute for yam.
- Higher supply of agricultural products by producers may lead to reduction in price and demand.
- Increase in the income for consumers may lead to increase in the demand of agricultural products and vice versa.
- High cost and lack of Farm input may lead to low supply and high cost of Farm products and vice versa.
- Supply of Farm produce will be high when climate or weather for production of crops are favorable and vice versa.
- An increase in the number of farmers will lead to higher supply and reduction in price of food.
- The high taste of agricultural products by consumers will lead to high demand for such products.
- High cost of production may lead to low supply and high prices of products and services.
THE LAW OF DIMINISHING RETURNS IN DEMAND AND SUPPLY
The law of diminishing returns states that as more and more units of a variable factors of production are added to fixed Factor, after a certain point, the marginal product diminishes or declines.
The law of diminishing returns is often used in agriculture when the factors of production like land, labor and capital are combined to produce certain goods by the entrepreneur. Land is faced but labour and capital are variable factors. Starting from zero, the effect of increasing the supply of the variables Factor, e.g, labour, is to have the marginal product increasing, but after a certain point, the marginal product will start to decline.
Importance Of Law Of Diminishing Returns In Agriculture
1. It helps the entrepreneur to determine the best proportion to combine the various factors of production.
2. It also enables him to know when to stop adding more input of the variable factors to a fixed factor.
3. It enables the Farmer to determine the wages he will pay to his workers.
4. It enables the Farmer to minimize cost and avoid wastages of resources in order to make gain and more profits