The Inelastic Price Demand For Wheat Economics Essay

From a case study South Africa’s price of an agricultural commodity wheat fall because their suppliers United States had a boosted productivity of wheat caused by snowfall weather conditions. It is therefore concluded that the supply of wheat is elastic as the production of wheat can vary from year to year due to competition on market and whether conditions .The demand of wheat is inelastic because the consumer responsiveness is small when there is a decrease in the price of wheat .Wheat can also be viewed as normal good.

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South Africa’s wheat price fall for the first time after the price of the grain in the US dropped as snowfall in US boosted harvest.

This increase in productivity of wheat in United States has an impact on South Africa’s wheat price because South Africa is a net importer of wheat. “The nation is the region’s biggest importer after Nigeria and Sudan, according to US Department of Agricultural data “(Bloomberg News, 2013, 1).The snowfall resulted in more productivity of wheat therefore creating a high competitive market between the suppliers and consumers since wheat has a number of daily products .The price of wheat is therefore forced by market competition to decrease to P0 also creating a new market equilibrium E1.

P S0 S1

P1 E0

P0- E1

D

Quantity

0 q1 q2 q3

Therefore this production increases according to Parkin et el” An increase in supply brings a shift of the supply curve to the right”, (Parkin et al, 2010:104). Therefore the quantity of wheat supplied by United States will results in the supply curve S0 shifting to the as shown by the bold arrow .In this article the wheat production was boosted by snowballs falling on wheat farms, making the weather more favourable to produce more of wheat. This is an example of natural cause of production as there was no any human input to increase production. On the other natural causes can also have negative impacts for example if wheat is attacked by some kind of disease or pest the production will be very low. Other factors that increases the quantity supplied are, technology according to Econport “production technology is involved in the process part. Increases in the level of production technology can make that process more efficient”, (Econport, 2013).Technological advancements for example if a new wheat harvester machine is introduced the results are more wheat productivity and more surplus. This production is also affected by the number of suppliers in wheat market which when there are many they create a competitive market whereby the suppliers will not determine prices

Supply for wheat is elastic since the supply of wheat varies every year which is caused by weather, in this case snowfalls and also the market competition as shown by the supply curve S0 which are less steeper and elasticity is greater than 1.Therefore a small change in the price of wheat will result will result in a larger change of quantity demanded for example if the price of wheat increases 2% quantity demanded will change by 7%. The determinants causing shifts in supply are, proportion of income for example consumers prefer commodities they can afford, the amount of the commodity demanded for example if the demand is high the suppliers are most likely to raise the commodity’s price, price of related goods consumers usual prefer cheaper commodities, substitute goods related for example if the price of coffee increases the demand for tea will be high. In this case wheat is a normal good which is inelastic as consumers are less responsive to change in price.

Change in demand for wheat in this article will be a small increase in amount (q1-q0).In this article the small increase is caused by price fall and in this situation consumers are more willing to buy more of wheat. The responsiveness of consumers is very small. If the price was increasing the consumers will buy less and more likely to substitute wheat with the next available alternative. Other factors include level of income if the price increases it makes a negative effect to consumers’ income therefore they will buy less. Consumers’ choice and wiliness to buy. The size of the population a larger population consumes more wheat than a smaller one and government policies for example if the government sets its minimum price above the equilibrium point the quantity demanded is reduced.

Price movements are shown on the vertical axis .before the price of wheat fall the price was p1 and equal to the market equilibrium E0 where the supply and demand curves intersect. When the supply curve moved to the right the equilibrium also moved to our new equilibrium E1.As wheat price decreased our supply curve shifted to supply curve S1.This results in the shift of the market equilibrium to E1.The quantity change is (q1-q0).Looking at the demand curve we can see that it is steep therefore it has a elasticity value closer to 0 .This means wheat is relatively inelastic that is elasticity ranges between 0 and 1. This implies that change in price of wheat is greater than the change in quantity .This classifies wheat as normal goods. Thus according to Tutor2u “Inferior goods have a negative income elasticity of demand, demand falls as income rises”(Tutor2u,2013).For example at ceteris paribus if the price of wheat increases by 8% the quantity demanded will changes with a small percentage like 1%.Other types of goods are normal, luxury goods.

Wheat is an agricultural commodity that is needed to produce products like bread and pastas therefore it is normal commodity and in this case consumer responsiveness to change in price is small therefore wheat is income inelastic. As wheat farmers produce more there will create a competitive market which gives us a new lower price and a new market equilibrium point E1.The supply of wheat is elastic which means a small change in price will result in a large change in quantity demanded.