PRODUCTION Production function for food FUNCTIONS TURNING INPUTS Output (LAND, LABOR, SEEDS) (food) Production function #2 INTO FOOD DE A => An inefficient point OD Production B => Efficient point on the function #1 production function B C => Increase input use from B to produce more output. Note diminishing returns OA Production function #2 with better technology (better seeds) Inputs: D => Same input as B, but Land, labor, more output due to better tech seeds, fertilizer E => Same inputs as C, but more outputEngel's Law: How income affects how much we spend on food Our World ENGEL'S LAW Richer people tend to spend more on food in absolute (dollar) terms. in Data But food spending as a share of their income is lower. Amount spent on food Absolute amount spent on food ($) As wealth increases, the proportion of income spent on food goes down. The absolute amount spent on food increases with income, but at a decreasing rate The share of income spent on food (%) goes down as income goes up Share of income spent on food (%) Says that food is income inelastic ( less than 1). People spend little on food People spend a lot on food but it's a large share of their income but it's a small share of their income Low income High income Income ($) OurWorldinData.org - Research and data to make progress a inst the world's largest problems. Licensed under CC-BY by the author.SHIFTS TO SUPPLY CURVES TECHNOLOGY MATTERS: - TRADITIONAL AGRICULTURE HAS AN INELASTIC SUPPLY RESPONSE TO PRICE INCREASES A > B A0 L R Y SHIFT OUT AND FLATTEN THE I AR Changes in Supply Curves: how technology matters Quantity Q' Q? Q? FERTILIZER RESPONSE CURVE Maximum yield A production function with one C input: fertilizer Crop On-farm economic Shows how increasing the yield optimum fertilizer rate amount of fertilizer produces increased crop output (yield) Crop yield Note: with no fertilizer - Fertilizer application has diminishing effects - Fertilizer costs money, so you From soil From fertilizer probably would never want to Nutrient supply be at the maximum yield.SHIFTS TO FOOD Changes in Supply Curves DEMAND CURVES Price Supply MOVEMENTS ALONG A SUPPLY CURVE DECREASES IN FOOD SUPPLY - DUE TO DROUGHT, CROP DISEASE LOCUSTS, LOSS OF LABOR, LOSS OF LAND INCREASES IN FOOD SUPPLY Quantity DUE TO: NEW BETTER TECHNOLOGY, BETTER CLIMATIC CONDITIONS, IRRIGATION, MORE LAND OR LABORSHIFTS TO SUPPLY Changes in Supply Curves: how technology matters CURVES Supply Price TECHNOLOGY MATTERS: TRADITIONAL P2 B- -. C AGRICULTURE HAS AN INELASTIC SUPPLY A RESPONSE TO PRICE INCREASES A - B - TECHNICAL CHANGE CAN SHIFT OUT AND FLATTEN THE Q1 Quantity Q3 SUPPLY CURVE A - CWHAT HAS HAPPENED TO OVERALL WORLD FAO Food Price Index in nominal and real terms FOOD PRICES? 2014-2016=100 1961- 2024 160 Real* Nominal 120 Broadly, what 80 does this say about supply 40 and demand 0 in the world? 65 70 75 BO 85 90 95 00 05 10 15 20 24 The real price index is the nominal price index deflated by the World Bank Manufactures Unit Value Index (MUV)INELASTIC DEMAND Supply and Demand Curves WITH A SUPPLY Price Supply DECREASE - BIG INCREASE IN PRICE - SMALL CHANGE IN QUANTITY WHAT ITEMS WOULD HAVE INELASTIC Demand DEMAND? Quantity