Figure E.1 illustrates quantity and price relations in the maize market in Malawi. But,
 it is only an illustration, because the exact form and parameters of the demand functions of
 different groups in the population are not known. A more precise analysis of the extent to which
 production instability translates into price instability in Malawi maize can be made only with
 better empirical estimates of the correlations between maize production, income and demand.

 The right panel in Figure E. 1 represents the supply of and demand for maize in Malawi.
 The Demand in a normal year is shown as line DT and normal production is shown by the vertical
 line ST. Price in a normal year is given by the intersection of ST and DT at price P. In a country
 where the production of the commodity would not affect its demand, production instability would
 be traced along the demand line DT. For instance, if production drops to 'ST, the price would
 rise to "P and and an equal rise in production would drop the price to P'. The extent to which
 instability in production translates into instability in price depends only on the shape of the
 demand curve, particularly its slope. Expressed more generally, the translation of instability in
 production into instability of price is a function of the demand elasticity of the commodity. The
 more inelastic the demand, the higher the price instability for a given instability in production.

 To illustrate the more realistic structure of the maize market in Malawi, the market for
total maize, represented in the right panel of Figure E.1 is segmented into two component
markets: Market 1, the market for maize of the maize deficit rural population, and Market 2, the
market for maize of the maize surplus, rural and urban population. The total supply in a normal
year is the sum of production (horizontal summation)in the first and second market, ST= S1 +S2.
Total demand DT, in a normal year is similarly the sum of D1 and D2.

 Consumption in market 1 consists mostly of the maize produced in Market 1, the
production by maize deficit farming households, but also comes in part from purchases. Market
2 produces in excess of its demand. For the illustration, production in Markets 1 and 2 equals
consumption in Markets 1 an 2 (self-sufficiency).

 The purpose of segmenting market is to note what happens in the two markets when
production declines (or increases) and the implications for the total market.

 In Market 1, demand of maize deficit households (without relief aid) is assumed to decline
to the full extent of the change in their own production, i.e. from D1 to 'D1 as production
declines in a drought year from S1-'S1. Actually this is an optimistic assumption, because the
demand for purchased maize by the households of this market is likely to decline too, as
opportunities for earning cash income (from the sale of other crops and/or their labor) also decline
for the same reason that maize production has declined.

 In Market 2 demand is assumed to remain unchanged as production decreases from S2 to
'S2. While many of the urban households and certainly some of the maize surplus producers may
also realize a decline in income when maize production declines, it is assumed that their demand
for maize will not decline significantly.


D2