Annex I


 zero is unrealistic and little is known about the shape of the production/supply function at
 a market price close to zero, the lower end of the production/supply curve is shown here as
 a dotted line and discarded in our further model analysis. It should, however, be kept in
 mind that the production/supply curves (and the demand curves as well) used in the model
 include subsistence production which contributes to overall food supplies. See also "Note
 on subsistence production" in Section 4 below).

* Supply curve: The supply curve shows total food supplies at varying market prices. It
 incorporates food production (see above), modified by stock changes and food
 imports/exports. In a closed economy (without food imports or exports) and if no stock
 changes are assumed, the supply curve is identical with the production curve, as shown in
 Figure A-1. In an open economy as presented in Figure A-2, the supply curve is identical
 with the production curve only up to the point where the internal market prices reach the
 level of world market prices (up to point C in Figure A-2, see also below). Beyond this
 point, the supply curve is completely elastic if, as assumed, the country is a price-taker on
 the world market.

* Demand curve: The demand curve shows the volume of total food demand (effective
 market demand plus home consumption from subsistence production). The typical shape
 of the demand curve results from the real income effect of food price changes (see Section
 4 below): at decreasing food prices, an increasing number of low-income households
 (those who depend on the market as source of food supply) are able to express their food
 needs as effective demand.

* Food requirements: An approximate expression of the aggregate food requirements are
 the calorie or staple food requirements of a country, calculated on the basis of food
 balance sheets (see Chapter 2 of the Manual), including allowances for variations in
 distribution. (When food is unequally distributed which is the normal case then the
 volume of aggregate food requirements is higher and the requirements line is further to the
 right than it would be if food were equally distributed).

* Market prices: A major factor determining the volume of food production, supply and
 demand are the prevailing market prices. The market price may be fixed (in a regulated
 economy) or the result of supply and demand (in a market economy). In a closed economy
 with a non-regulated competitive food market, the market price tends towards the
 equilibrium level po, where the volume A is produced and absorbed (Figure A-1). In an
 open economy without trade restrictions and interventions in the food market (Figure A-
 2), the internal market prices are determined by the world market prices (cif. world market
 price or "import parity price", i.e. the world market price plus international transport and
 handling costs in the case of imports, see discussion in Annexes 2A and 2B). In Figure A-
 2 it is assumed that the cif. world market price, hence the prevailing internal market price
 (Pm) is below the hypothetical internal equilibrium price (po). (If the world market price
 were above the internal equilibrium price, there would be food exports.).

The combination of the five elements described above, as done in the Figures A-l and A-2,
leads to the emergence of different types of food deficits. Depending on the volume of the
food requirements, the shape and the position of the aggregate production, supply and


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