Agriculture, Economics and Nature

Week 1
Agricultural production and prices, and agriculture’s reliance
on natural resources

Segment 4
Agricultural products’ demand
Winthrop Professor David Pannell
University of Western Australia (Heath 2001) (CC BY)
 AGRICULTURE, ECONOMICS AND
NATURE WEEK 1
AGRICULTURAL PRODUCTION AND PRICES, AND AGRICULTURE’S RELIANCE ON
NATURAL RESOURCES

SEGMENT 4
AGRICULTURAL PRODUCTS: DEMAND
 Demand
• How much of a product
consumers choose to buy at
a particular price
• Depends on benefits from
consumption
 Total Benefit
$
Total Benefit
(utility)

Quantity
Total benefit: increases at a decreasing rate (flatter slope) as
quantity increases
Slope = marginal benefit
 Marginal Benefit
$

Marginal Benefit

Quantity

Marginal benefit: how much consumers are willing to pay for one
more unit of the product
Marginal benefit curve
= Demand curve
• Maximising benefit: consumers
should purchase quantity of good
at which marginal benefit equals
purchase price of the good
• MB curve indicates the amount
demanded at a given price
• MB curve corresponds to the
Demand curve
 Demand
$

Demand

Quantity

The higher the price, the less product consumers choose to buy
 Market Equilibrium
$
Demand Supply

Pe

Qe Quantity

The point where the supply and demand curves intersect is

the market equilibrium, with an associated equilibrium price
(Pe) and equilibrium quantity (Qe)
Movement around the Equilibrium
• Market prices fluctuate around
the equilibrium level, but not too
far for long
• If quantity produced is too high,
price falls (due to demand curve)
• So farmers cut production (due to
the supply curve).
• If the quantity produced is too
low, price rises, so farmers
increase production.
 Global Wheat Prices
800
700
Wheat Price 600
500
400
300
200
100
0
1850 1900 1950 2000
Source: Harvey et al., 2010
Explaining the trend
• Demand has increased
– Population growth
– Economic growth
• Supply has increased
– Increasing agricultural land
area
– Productivity gains
• Supply has increased more
rapidly than demand
 S1
$

D1

Quantity
$

S2

⚫
D2

Quantity
 S1

S2
⚫

⚫
D1 D2

Quantity
$

P1 ⚫

P2 ⚫

Quantity
• In the reading for this week is an article about the
supply and demand for Australian wool
• It highlights what can go wrong if people making
decisions about how to set prices for agricultural
products don’t understand supply and demand
• You now know enough about supply and demand
not to make the disastrous mistakes that were
made in Australia’s wool market in the 1980s and
1990s.
(UWA Institute of Agriculture 2004)
 Summary
• Marginal benefit = slope of total
benefit curve – decreases with
quantity
• Marginal benefits corresponds to
demand
• Demand curve is downward-sloping
• Market equilibrium price is where
supply and demand are equal
• Supply and demand models explain
many changes in agriculture