Siddhartha Bose Mr. Steponic Economics P.

4 5th November 2013

Supply and Demand The Global Hunger Index states that the primary causes for the surges in food prices are climate change and the growing demand for biofuels. As of today, 26 countries face hunger crises because farmers are more willing to grow crops for the more desirable biofuel industry rather than the food industry. What is the relationship between the growing demand in the biofuel market and the rising prices in the food market? The demand, the quantity consumers are willing and able to purchase at varying prices, in a certain time period, ceteris paribus, for biofuels is ever growing, and as of today enough corn to feed 412 million people for a year is used per year to produce ethanol (UN Foundation). As demand is based on the idea of preferences, and consumers and governments alike want a safe and healthy earth, biofuel is created as an environmentally friendly substitute for crude oil. Now substitutes are goods, for which an increase in price of one good increases the demand for the other good as both goods provide the consumer with a similar utility, or satisfaction, from using the product. As shown in the figure (a), the demand curve of biofuels shifts towards the right as governments push for more eco-friendly oil alternatives. The equilibrium price increases as well as the equilibrium quantity. This leads to an increase in the total revenue so the producers (farmers) are able to reap a higher marginal benefit.

Siddhartha Bose Mr. Steponic Economics P.4 5th November 2013

The increase in demand of biofuels affects many stakeholders, such as farmers. As the demand and price increase, the law of supply states that producers are more willing and able to produce at different prices in a given time period, ceteris paribus. Farmers become more inclined to produce their crops for biofuel production as they can maximize their total utility and total revenue as well. This means that the resources meant for food crops are largely reallocated to the biofuel market. This reallocation of resources means that a smaller quantity of food crops can be cultivated. The cause for the reallocation of resources is that biofuels and food crops are in competitive supply meaning that as the price of one good increases the supply of the other good decreases.

Siddhartha Bose Mr. Steponic Economics P.4 5th November 2013

Therefore as the supply of food crops (such as corn) decrease, the equilibrium price of the good increases as is shown in figure (b). The decrease in supply of food crops has two stages. Firstly, the shift from S1 to S2 is due to the reallocation of resources of farmers to the biofuels market. Secondly, the shift from S2 to S3 is due to supply shocks, events that suddenly increase or decrease supply, such as droughts and floods. Both droughts and floods ruin harvests, and lower the quantity of crops in the market, therefore increasing the price. Along with the decrease in food supply, over the last decade, the worlds population has increased by almost 800 million people (10% growth) according to the US Census Bureau. Everyday over 360,000 children are born. The increase in population shifts the demand curve to the right. The combination of the decrease in supply of food crops, and the increase in demand of food due to the population boom has led to the equilibrium price of the food crop market to skyrocket. This is revealed in figure (c) as the demand curve shifts right, and the supply curve shifts left, thus increasing the equilibrium price.

Siddhartha Bose Mr. Steponic Economics P.4 5th November 2013

In third world nations situated in Africa, and the Indian subcontinent, many spend most of their earnings on food, and as prices rise, the percentage of income spent on food only increases. The downside to such a phenomenon is that families become unable to pay for other necessities of life such as shelter or education. The opportunity cost, what is given up in order to gain something else, of food keeps increasing so neither shelter nor education is tended to. Without sustenance, humans cannot unlock the true potential of a good education nor can they live well in a house. The fact that farmers grow crops that never make it to the dinner table is the main issue at hand. Given this, governments offer farmers a small incentive to grow food crops. This way a balanced number of farmers can devote their time to either growing food crops or crops for biofuels therefore leading to accessible food prices and crops for biofuel production.