Price Mechanism

The market system is the mechanism for allocating scarce resources and thereby encouraging a positive investment climate. The problem of scarcity is common in all economic structures. The economic system of a particular country is the way in which its people, businesses and government make choices. Demand is the amount of a product consumers are willing and able to purchase at any given time. However, supply is the amount of a product that is available at any given time. The following diagram shows the relationship that demand has with supply:

The above diagram shows that where the demand and supply intersects, indicates the quantity which suppliers wish to market equals the quantity which buyers are willing to take. There are many factors that have determined the general increase in global food prices over the last four years. One factor is in late 2006 the unseasonable droughts in many grain-producing countries. The top three wheat producers in the world are, China, India, and the United States respectively. The consequences of drought include diminished crop growth, and the ability to rare livestock.

Also, it causes erosion, which further affects plantations and soil consistency. Without water there can be no irrigation. Irrigation is an artificial application of water to the soil for assisting of the proper, healthy growth of crops. Wildfires are also caused by droughts because of the lack of moisture in the air; they consume all agriculture once formed. Biofuels, a fuel substitute that is derived not from fossil fuels but from biological material maybe another cause of rising food prices. Bio fuels are commonly used in place of gas to power vehicles, to heat houses and even to cook on your stove.

The factor that affects the price of crops here is that Biofuels use crops high in sugar and starch, then fermentation of these crops causes the it to produce ethanol. Ethanol is the substance, which is used for power. So as our world is becoming more eco friendly and aware, our food prices will rise. Oil prices over the last four years have been steadily rising, causing food transport and other agriculture related machinery and treatments to rise also. From the mid 1980s to September 2003, the inflation-adjusted price of a barrel of crude oil on NYMEX (New York Mercantile Exchange) was on average under US$25/barrel.

Then in 2003 it finally rose to US$30/barrel and gradually went up to US$60/barrel in 2005, and skyrocketed to US$147/barrel in 2008. These drastic increases in oil prices have taken their toll on food prices over the past four years. Wheat and grain are said to be relatively inelastic, meaning there is not much range for substituting. So where there is a large change in price there is little or no change in the quantity demanded of that particular good. The elasticity of a product can be measured by the following formula: PED = % change in Quantity Demanded of product change in price of that product World population growth is the latest in factors to affect food prices. The world population has grown from 1. 6 billion in 1900 to an estimated 6. 6 billion today. The increase in population size has mainly been pointed to the developed countries where food prices are subsidized. In these countries, the government subsidize crops, and absorb the extra cost of food so the cost does not affect the consumer. So in reality, the developing and the third world countries are the only ones to suffer from our current food shortage.

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