Demand for agricultural commodities

Evaluation of demand behaviour of economic agents enables us to comprehend how consumers are likely to respond to supply of agricultural commodities. The theory of consumer behaviour will help us understand the concept of demand. Demand involves two variables –price and quantity. For example the demand for maize is defined as the different amount of maize that you would be willing and able to buy within a reasonable range of prices. Key considerations in the evaluation of demand of agricultural commodities are elasticities of demand and factors affecting demand. There are various elasticities of demand with the commonly considered ones being price and income elasticities of demand.

Price elasticity of demand

Price elasticity of demand refers to responsiveness in the quantity demanded for a commodity to changes in the given price. It indicates whether the demand curve slopes steeply or whether it lies flat. It is common knowledge that when price increases less will be bought. The concept of elasticity is concerned with how much less. When percent change in quantity demanded is greater than the percent change in price, demand is presumed to be elastic. When demand is elastic the total expenditure by consumers will increase as you go down the demand curve. Demand for luxurious commodities or commodities that are not necessities are elastic. When percent change in quantity demanded is less than the percent change in price, demand is presumed to be inelastic. When demand is inelastic total expenditure by consumers will decrease as you go down the demand curve. For example when the price of salt decreases people will not increase the amount of salt they consume hence total revenue generated declines. A commodity can also have unitary price elasticity of demand where relatively equal changes occur both in price and quantity. The steeper the demand curve the less elastic the demand while the flatter the demand curve the more elastic the demand(fig. 1) Price elasticity of demand can be categorised into own price elasticity of demand and cross price elasticity of demand.

Factors affecting demand
The general factors affecting demand of agricultural commodities include: disposable income, population, consumer tastes and preferences, substitutes and other products. Disposable income refers to the income left for spending on goods and services or for savings after taxes have been deducted. For superior goods such as stake there is a direct relationship between income and demand of the good. For inferior goods such as beans there is an inverse relationship between income and demand for the good. A rapidly expanding population will directly increase demand, contributing to general economic prosperity. However, per capita income levels must be maintained or raised. A change in consumer preferences and tastes affects the demand of individual commodities more than it affects aggregate demand. The introduction of completely new products also tends to shift demand levels among commodities. Goat meat is a substitute for beef and its low price makes it attractive. Additionally, environmental and cultural factors also affect demand levels of agricultural commodities.

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This module was developed by Moi University, Department of Economics and Agricultural Resource Management with support from OER Africa and Bill & Mellinda Gates Foundation