Wheat Agricultural Industry

Wheat Agricultural Industry

Introduction

The agricultural sector is a very unique one in economics because it displays characteristics in terms of the demand for and the supply of its goods not seen in any other sector. The main principal characteristics of demand are that it is both income and price inelastic and all the characteristics of perfect competition market apply on it. Demand has high dependency on population and tastes which cause it static in both the short and the long run. On the other hand supply in agriculture sector is very volatile in the short run due to extraneous factors such as weather, floats and other reasons which are not controllable. Supply is a biological process though in the long run due to technological advances it is tend to observe an increasing trend in the productivity. Also, because agricultural products are commodity products that cannot be last for long time and need special and costly condition to be stored, that is why supply will be inelastic and producers will have to supply in the short run even at very low prices. These have various implications for prices which are very unstable in the short run and in the long run present a declining trend. In this paper we will discuss in detail Demand and Supply functions in the agriculture sector and we will study deeply the case of wheat as a strategic product which has a dramatic changes happened in supply, demand and price in the current year.

Discussion

Demand Function in Agriculture Sector

Demand in the short run

In the short run demand in the agricultural industry is affected by the fact that it is income inelastic because of Engel's law which basically states that “with successive increases in income food consumption as a proportion of income declines” (Hancock 2004 23-65).

The above holds because the law of diminishing marginal utility for agricultural goods kicks in at a much earlier stage compared to other goods considering the fact that most agricultural goods have been found empirically to be inferior. This is because a person can only consume a specific amount of food so even if they switch to more expensive alternatives they will still represent a lower percentage of their income than before the increase.

Apart from being income inelastic demand is also relatively price inelastic. This is because after consumers have bought the goods they need no matter how much producers lower the prices they won't consume more because excess consumption would lead to lower or even negative marginal utility. Also, the lack of substitutes and the fact that food occupies a low budget share will mean consumers are even less sensitive to price changes causing prices in agricultural prices to be very volatile in the short run without having a great effect in demand.

Demand in the long run

As a result demand for goods in the agriculture industry is fairly stable mainly because of low price and income elasticity. Even though income and price elasticity are essential stepping stones upon which to determine ...