Economic Report on Supply and Demand of Organic Products

Introduction

The demand and supply of organic food have been on the rise. According to United States Department of Agriculture Economic Research Service, as from 1990 the quantity consumers are willing and are able to purchase recorded double-digit growth. Because of the growth, US farmers have entered into the market to capitalize on the high demand. The United States Department of Agriculture Economic Research Service has further noted that the growth has seen the products being offered in 3 out of the 4 conventional groceries. One of the motivating factors for the increased supply is the fact that they possess high premium prices compared to conventional food (United States Department of Agriculture Economic Reserach service, 2016). According to the supply law, when the price is high more producer are willing to increase their capacities moreover new firms are willing to join the production of the commodity. Although the demand for organic has been on the rise, more of vegetable and fruit productions have contributed a larger percentage. Department of Agriculture Economic Research Service has noted that the organic food accounts for over 4 percent of the total sale within the United States of America (United States Department of Agriculture Economic Reserach service, 2016).

Factors Influencing Demand and Supply

The government has been crucial in providing an enabling environment for the production of the organic products. Out of the government initiatives farmers have been able to adopt new technologies to increase quality and quantity of production. The government has endeavored to ensure an increment on the number of certified organic productions. The role of government expanding the research has motivated farmers to increase their capacities and also enabled new farmers to join the market. The cost share aid from the government has also increased the productivity of the produce. As from 2002 government has made several initiatives to increase supply through the implementation of standards. In 2011 a conference was held during which discussion on findings what has been instrumental in production (United States Department of Agriculture Economic Reserach service, 2016).

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Scott Faber noted in BAY journal that the demand for organic products is expected to increase in future. The article pointed out that there is sufficient evidence to justify the increment in organic demand. The export – import relationship indicates that the United States is currently importing more organic product than they export. When demand is high, more suppliers both internal and external will be attracted to establish production. This increased supply is yet to match the demand. One of the factors that determine the supply is the future expectation of an increase in demand, and thus explains why the production has been on the rise. If the demand is expected to increase then why is the percentage of organic food only 4 percent of total food? Scholars argue that the cost of transition to organic farming is high, though this cost can equally be recovered from sale once a firm has stabilized. Perhaps the initial risk of starting up the production is impediment. Some farmers also are yet to learn the organic farming practices and this could explain the smallest number of the number of farmers registered (Faber, 2006).

Health-related reasons drive the demand for organic vegetable and fruits. Many consumers believe that organic products are healthy since they avoid using pesticide among others that are unhealthy for humans. So the consumption is outweighing the supply for obvious reasons, more people are willing to change their eating habit and to reduce health-related diseases. As population increases in the United States of America, more of organic is expected to be demanded. As the law of demand stipulates any rise in population increases demand of a commodity. Another determinant of demand is change in taste and preference, more people prefer organic food to conventional food, and that is why the demand is on the rise. It is estimated that between 2013 and 2018 a 14 percent increase in quantity demanded will be experienced (Doering, 2015).

Determination of Price

How then is the price of organic fruits and vegetable determined? The market forces of demand and supply have played a key role in determining prices. The aggregate demand interacts with aggregate supply to establish an equilibrium quantity and price. The increase in price has been due to increase in demand for the commodities. The supply at the moment has not matched the demand indicating that more positive shift in the demand curve has played a role in increasing prices as shown below (Varian, 2006).

Figure 1. Relationship between demand and supply curve.

The figure above shows relationship between demand and supply curve. Initial price is Po when the demand is DDO, and the supply is SSO, The price determined at equilibrium EO where supply curve meets the demand. As the demand for fruits and vegetables, keep on increasing outweighing supply, the demand curve shifts to the left thus causing the equilibrium point to shift from EO to E1 and consequently creating new equilibrium quantity Q1 and price, P1. The trend shift is expected to cause a shift in demand with little effect in on the supply until such a time the supply will match the demand (Chiang & Wainwright, 2005).

Elasticity

Price Elasticity

Vegetables and Fruits are elastic to changes in price. Any increase in price will lead to a decrease in quantity demanded though for a commodity with less supply like organic product is likely to witness a small reduction in demand.

Income elasticity

An increase in income will raise consumption and decrease will also reduce consumption. The organic consumption is likely to report less response to a reduction in income because of limited supply compared to demand (Doering, 2015).

Conclusion

The demand for organic will continue to rise as the supply also increases. The role of government in organic farming will continue to improve the productivity of vegetable and fruits. As population and income increase so is the demand for the product. New technology will continue to increase productivity. The determination of price and quantity will be performed by market forces of demand supply. As people maintain conscious towards healthy leaving the demand will continue to outstrip supply of the organic foods.

 

References

Chiang, S., & Wainwright, H. (2005). Fundamental Methods of Mathematical Economics (4 ed.). New York: McGraw-Hill.

Doering, C. (2015). Organic farmers face growing pains as demand outpaces supply. Retrieved on January 26, 2017 from http://www.usatoday.com/story/money/2015/08/05/organic-farmers-face-growing-pains- demand-outpaces-supply/31116235/

Faber, S. (2006). Demand for organic food growing faster than domestic supply. Bay Journal.

United States Department of Agriculture Economic Reserach service. (2016). Food Consumption & Demand. Retrieved on January 26, 2017 from https://www.ers.usda.gov/topics/food-choices-health/food-consumption-demand/

Varian, H. (2006). Intermediate Microeconomics (7 ed.). London: W.W Norton & Company.