Cambridge International as and a level Economics Ebook

Figure 2.20 
Producer surplus
SUMMARY
64
Cambridge International AS Level Economics

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SELF-ASSESSMENT TASK 
2.24
Rising global food prices
In 2009, the World Bank reported that global food prices 
had almost doubled since 2005 and were forecast to 
continue to increase. The price of wheat especially had 
increased at an alarming rate of around 200% from 2008 
to the end of 2009. The prices of maize (corn) and rice had 
also escalated.
In November 2009, the Indian government reported 
that annual food price inflation was over 21%; the price 
of pulses had risen by over 30%, as had sugar prices. In 
Pakistan, food prices had also increased at a record rate 
amid claims of hoarding by grain processors and retailers.
Normally, price changes for cereals can be attributed 
to short-term variations in supply caused by disruptive 
weather conditions. This was not so for the latest set 
of price increases, which were caused largely by 
demand-side factors that included:
■ 
the rising demand for meat in the booming 
economies of China and India; large quantities of 
grain are needed to feed animals, driving up prices
■ 
a fall in domestic food production by increasingly 
aff luent families in these countries.
■ 
the increased demand for biofuels, especially in 
the USA and parts of Europe, which has resulted in 
harvests being diverted from food processing to fuel 
processing factories, particularly for sugar cane and 
maize.
Supply side factors have exaggerated price increases and 
include:
■ 
extreme weather conditions in 2008 and 2009, such 
as prolonged drought in parts of India, Australia and 
southern Africa and unexpected frosts in parts of 
China, which had resulted in poor harvests; Europe’s 
grain harvest was also aff ected by poor weather
■ 
global stockpiles of grains were at a record low level, 
meaning that supplies could not be released onto the 
market to reduce price volatility.
In India, the problems of small farmers have been 
aggravated by the government’s attempts to control 
prices. When domestic prices are rising, the government 
restricts export sales; when prices fall, farmers are paid 
subsidies. These actions seek to protect the interests of 
consumers and farmers alike. Because of uncertainty, 
many small sugar farmers abandoned sugar in 2008 
when prices fell by 40%. In 2009 and early 2010, sugar 
prices surged. The obvious response would be for 
farmers to revert to sugar in the hope that high prices 
will persist.
Rising food prices have had a heavy impact on the poor in 
countries such as Bangladesh, India, Pakistan and those 
in sub-Saharan Africa. For people who have to live on less 
than $1 a day, the rising price of food is devastating and 
can aff ect rural as well as urban communities. There have 
been riots in West Bengal in protest against subsidised 
food being sold on the informal market. In Senegal, 
Mauritania and in other parts of Africa, there have also 
been protests over rising food prices.
The World Bank has identified 36 countries where there 
are grave concerns over food security; 21 are in Africa, 
including Sierra Leone, which lacks access to food from 
local markets due to its low level of income and the high 
prices of imported food.
Th
e following feature demonstrates how knowledge of demand, supply and the price mechanism can be applied in 
order to explain the global problem of rising food prices, particularly in the world’s poorest economies in Africa and 
Asia. Read the feature and then answer the questions that follow.