|
The agricultural sector is a very unique sector because it is characterized by demand
for and supply of the goods. The principal characteristics of demand are that it is both
income and price inelastic, and it is highly dependent on population and their tastes
and preferences, which cause demand to be static in both the short and long run. On the
other hand, supply is highly volatile in the short run due to extraneous factors because
supply is a biological process, though in the long run due to technological advances we tend
to observe an increasing trend. Also, because agricultural products are perishable and
their production time is long, supply will be inelastic, and so producers will have to supply
in the short run even at very low prices. Another characteristic of supply is its
atomistic structure and asset fixity. These basically imply that there are a large number of
insignificant producers and most agricultural assets are fixed. These have various implications
for prices which are very unstable in the short run and in the long run show a declining
trend. Similarly, farm incomes tend to be unstable in the short run and converge in the long
run, though it must be noted that this is also due to extensive government subsidization
of agriculture.
In the short run, demand in the agricultural industry is affected by the fact that it
is income inelastic because of Engel's law that basically states that as income rises,
the proportion of income spent on food falls. In other words, the income elasticity of
demand for food lies between 0 and 1. At this point it must be noted that consumption is
different from expenditure unless all goods have the same price. In other words, the money
a consumer spends on food (i.e., expenditure) may increase, remain stable or even
decrease, but his consumption will decrease. |
