DETERMINATION OF PRICE BY DEMAND AND SUPPLY

DETERMINATION OF PRICE BY DEMAND AND SUPPLY

In a market, there are buyers and sellers. The buyers bring their money to the market to buy the goods (demand) while the sellers bring the goods to the market for sale (supply). Market equilibrium is determined by the interaction of the forces of demand and supply which is influenced by price. Equilibrium price is that price at which the quantity demanded is equal to the quantity of goods supplied. The point where the demand curve meets the supply curve is called equilibrium position or equilibrium point. Under this condition, both producers (suppliers) and consumers (buyers) can be satisfied and there will be no pressure on prices. Market equilibrium can be explained better by a schedule and a graph.

 

The above table can be represented by a graph as shown in:

 

From the graph and the table, it is seen that at N15.00, 60kg of rice was demanded and supplied. N15.00 is the equilibrium price while 60kg is the equilibrium quantity and the point of intersection between supply curve and demand curve is called equilibrium point.

 

IMPLICATIONS OF DEMAND AND SUPPLY ON AGRICULTURAL PRODUCTION

Demand and supply have lots of implications on agricultural production. These include:

  1. When the demand for an agricultural product is lower than the supply, the price for such product will fall and farmers will be discouraged r from further production.
  2. When the demand for agricultural product exceeds supply, price would tend to rise and consumers will demand for more of the product and the farmers will be stimulated to produce more of such goods.
  3. Higher supply of agricultural products by producers may lead to reduction in price and demand.
  4. High cost of yam may lead to low demand for yam and high demand for garri which is a close substitute for yam.
  5. The high taste of agricultural products by consumers will lead to high demand for such products.
  6. Increase in the income of consumers may lead to increase in the demand of agricultural products and vice versa.
  7. High cost of production may lead to low supply and high prices of products and vice versa.
  8. High cost and lack of farm input may lead to low supply and high cost of farm products and vice versa.
  9. Supply of farm produce will be high when climate or weather for production of crops are favourable and vice versa.
  10. An increase in the number of farmers will lead to higher supply and reduction in price of food and vice versa.

 

PRICE SUPPORT, PRICE CONTROL AND SUBSIDY PROGRAMME

Price Support: Price support is a deliberate government policy aimed at encouraging farmers by supporting the selling prices of their products at a level that farmers can make their profit.

The essence of price support by government through its agencies is to make sure that farmers to not suffer losses as a result of poor prices of their products. What government agency does is to stabilize market prices. The government agency buy farm products at the support price, store it and releases it back into the market if the market price rises to a prescribed trigger level of say, 140 percent of the support price. In this manner, the policy protects the farmers against the risk of low prices but also protect the consumers against unusually high prices.

 

WAYS GOVERNMENT AGENCIES GIVE PRICE SUPPORT TO FARMERS

a) Issuance of quotas to farmer: Government sometimes try to raise price artificially by limiting production. Each farmer may be issued a quota that stipulates how much he can sell in a given year. limiting supply can raise market prices as long as government inspectors monitor the market to ensure that no production beyond the quota is sold for a lower price. While this policy raises prices, the only people who benefit are the individual farmers who receive the guotas when they are initially allocated. Because of their scarcity, the quotas immediately take on value. All future entrants must buy a quota to gain the right to sell the product.

That raises the investment required to become a farmer and the cost of production. Once the original quotas are sold to new farmers, those farmers become a strong lobbying force against ever giving up quotas.

 

b) Paying farmers to take land out of production: More common than issuing quotas is the practice of requiring (or paying) farmers to take land out of production. This “set-aside” approach rarely is very effective at supporting agricultural prices. Farmers are not stupid, they set aside their least productive land first furthermore, a policy that creates artificial scarcity of land induces farmers to intensity their production practices on each are that remains in production, raising its yield by the application of heavy doses of fertilizers and agricultural chemicals which tends to increase farm yield.

 

c) Price Legislation: Price legislation, also known as price control’ policy, refers to how the government or its agency fixes the price of essential commodities. Price control was carried out in Nigeria by the Price Control Board.

 

Types of price control policy

  1. Minimum price control policy: The minimum prices are the lowest prices by law, below which the specified goods and services cannot be sold or bought. Minimum prices may be fixed on commodities if the aim is to protect producers (especially agricultural producers) from the income fluctuation brought about by poor harvests.
  2. Maximum price control policy: A maximum price control is the highest price level above which goods and services cannot be sold. Under this condition, nobody is allowed to sell goods and services above the maximum price but selling below it is allowed.

 

Objectives of price control policy

The objectives of price control policy, both minimum and maximum, are:

  1. To prevent the exploitation of consumers by producers.
  2. To avoid or control inflation.
  3. To help low income earners, e.g. minimum wage earners.
  4. To control the profits of companies (especially monopolists).
  5. To prevent fluctuation of prices of some products, e.g. agricultural procedure.
  6. To stabilise the income of some producers, e.g. farmers.
  7. To make possible planning for future output.

 

Effects of price control policy

  1. It stimulates excess demand, which cannot be statisfied, i.e. shortage in the market.
  2. It encourages boarding of commodities by wholesalers and retailers.
  3. It leads to the creation of “black markets” or undercounter sales and its attendant high prices.
  4. It encourages conditional sales of products.
  5. It discourages shortages, which might result in queues and racketeering.

 

d) Subsidy Programme: Agricultural subsidy refers to a non-refundable aid granted to a farmer. The agricultural subsidy programme feature is a deliberate government policy aimed at supporting farmers to ensure adequate supply of farm inputs at reduced prices. Examples are reduction in the prices of farm inputs such as fertilizers, improved seeds, machines and implements and agrochemicals.

Features of Agricultural Subsidy

  1. Agricultural subsidy is a nonrefundable aids to farmers.
  2. Subsidy may be in cash or in kind.
  3. It includes reduction in prices of inputs like chemicals, seeds and fertilizers.
  4. It is given and never to be returned.
  5. Government bears part of the burden of a subsidy.

 

Effect of subsidy withdrawal by government

The withdrawal of subsidy by government can

have lots of negative effects on agricultural production. Some of such effects are:

  1. Lower production: The withdrawal of subsidy by government will generally lead to low production because farmers cannot afford to buy farm inputs which are now very high.
  2. High cost of farm produce: Farm products which are now produced by farmers one going to be associated with high cost because of high cost of production.
  3. Reduction in the number of farmers: When subsidy is removed, many farmers may withdraw from the business because they cannot afford to buy farm inputs which are now very costly.
  4. Inaccessibility to improved farm input: Improved farm inputs like seeds and other planting materials may now turn out to be inaccessible to the farmers. This will prompt them to start using local and unimproved planting materials that will lead to lower yield.
  5. Discouragement in agriculture: There will be general discouragement in agriculture as many farmers will now find it difficult to cope with the purchase of farm inputs at higher prices.

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