Food Prices

Governments throughout the world are concerned with the prices of food items given the importance of food to the health, nutrition, and well-being of their citizens. For consumers who spend a lot of their income on food, increases in food prices can have devastating effects (for example, on their nutrition and health).

In 2008 and in 2011 there were large increases in the prices of many food items. Answer the following questions using the economic tools and vocabulary from class and the blog entry by Paul Krugman from 2011, which is reproduced below, as background.

1. The article mentions heat waves that damaged grain crops. What are the effects of the heat wave on the world grain market, particularly the price and quantity of grain?
   Examine this on a time-scale of less than one planting season. Illustrate with a detailed supply and demand diagram and describe in words. How elastic is supply on that timescale?
2. Incomes in China and India, very large and historically poor countries, have been growing a great deal in recent years. When people get wealthier, they generally eat more and eat more meat. Meat requires a lot of grain as input. For example, for every kilogram of animal protein in a steak, a cow had to eat about 6 kilograms of grain protein (or about \(12 \mathrm{~kg}\) of total grain). What effect do China's and India's growing wealth alone have on prices and quantities of grain? Compare the situation with the one from several years earlier when the incomes of people in China and India were not as high. Illustrate with a detailed supply and demand diagram and describe in words.
3. Illustrate the effects of higher incomes in China and India, the heat waves, and growing world population (an additional factor) with a detailed supply and demand diagram and describe in words. (Include all three effects in the same diagram.) What effects do they (combined) have on price and quantity? Compare the situation in \(2010 / 2011\) to the situation in 2008/2009.
4. Krugman provides figures on the price elasticity of demand for grain in the US and on grain shortfall for the world as a whole. Use those figures to estimate the price increase for grain that would be required to deal with the world-wide grain shortfall if the whole world had the US demand elasticity. (In other words, how much would price have to increase in order for quantity to equal production?) What other assumptions must you make?
5. How would you expect price elasticity of demand in the rest of the world to compare to that in the US? Explain.

Price: $16.05

Solution: The downloadable solution consists of 6 pages, 1005 words and 3 charts.
Deliverable: Word Document