Annex 1


Box A-1: Response of Food Production and Supply to Price Variations

The response of output to price changes is measured in price elasticities of production/supply. The price
elasticities (pes) are an expression of the relative change of output in relation to the proportional change of
prices, calculated on the basis of the following formula:
 AS


 p
In measuring the supply response to price changes, and hence the price elasticities of supply, the following
distinctions have to be made:

Supply response to changing input versus output prices: while input price elasticities are usually negative
(production and supply decrease with raising costs of production), output price elasticities are usually positive
(production and market supply increase when relative prices go up). Negative output price elasticities are,
however, also recorded. This happens if, for example, farmers try to compensate for the income loss from price
declines by increased production.

Individual crop versus aggregate agricultural supply response: supply elasticities of individual crops are
generally higher than aggregate price elasticities, as additional resources mobilised to increase the production of
one crop are withdrawn from the production of other crops.

Short-term versus long-term supply response: short-term price elasticities (supply response within one year)
are usually lower than long-term elasticities, as adjustment of production (shift of production resources from
one product to another) needs some time and/or farmers wait for a while to see whether prices remain high
before they decide to change their production pattern.

Own-price versus cross-price elasticities: production/supply of a specific crop is influenced not only by price
changes of the same crop, but also by price changes of other crops competing for the same production
resources. While the own-price elasticity of supply is usually positive, the cross-price elasticity is usually
negative.

Price elasticities at different price and production levels: price elasticities are not constant but vary with
different price and production levels. The shape of the production/supply curve presented in Fig. A-I is based
on the following plausible assumptions concerning price elasticities:

* low but increasing pes at extreme low price and production levels (up to about p'/Sp,). Reason: weak supply
 response, as product prices are too low to cover production costs.
* high pes at medium price and production levels (range between p'/Sp, and p/Sp). Reason: significant supply
 response, as prices cover production costs of the majority and an increasing number of producers.
* low and decreasing pes at price and production levels beyond p/sp. Reason: further expansion of production
 is increasingly inhibited by resource constraints (land, labour).


The effect of price changes on supply have already been discussed above. The following
examples trace the impact of other economic parameters on food production and supply.
Changes in these parameters may be the subject of specific agricultural sector policy
measures or the result of changing macro-economic conditions.

Impact of changing input prices and production cost

The prices of inputs employed in food production determine the costs of production and have
a significant impact on the levels of food production and supply. This refers, for example, to
the cost of agricultural labour, the prices of purchased agricultural inputs, irrigation fees,
rents for land, interest rates for agricultural credits, etc. The prices of the various cost items


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