Scenario 1: Assume that demand increases as projected by the FAO. This would lea

Question

Scenario 1: Assume that demand increases as projected by the FAO. This would lead to a 60% increase in demand from 2010 to 2050. Another conventional assumption is that land area used for crops will increase by roughly 11% during the period and yields will increase by 1.25% per year leading to a 64% total increase in yields. In total, this implies an 82% increase in supply from 2010 to 2050. According to a survey of AGEC 315 students, the elasticity of demand is -0.23 and the elasticity of supply is 0.44. Using these parameters, what is the percent change in the price of food from 2010 to 2050? Note: Enter your answer in percentage form rounding to 1 decimal place and use positive numbers to indicate an increase in price and negative numbers to indicate a decrease in price. For example, if price decreases by 5.137%, then enter -5.1 as your answer.

Explanation / Answer

Price elasticity of demand and that of supply are given by

ed = % change in Qd/% change in P   es = % change in Qs/% change in P

-0.23 = 60%/% change in P 0.44 = 82%/% change in P

This gives % change in P from demand side = -260.9% and from the supply side = 186.4%.

The net result is a decrease in the price by -260.9% - 186.4% = -74.5

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