Custom «Microeconomics factors to spike of food price» Essay Paper

Since the discovery of petroleum it has contributed to creation of wealth in the world. The importance of oil was for the first time highlighted in 1974 and 1979. In 1974, oil producing countries gathered in one of the cities and decided to use oil as a weapon. They grouped the world countries and how they were going to get oil. It took the intervention of Iraq and US to save the world biggest economies from the agony. The second instance of 1979 showed that the importance of oil cannot be undermined if meaningful development was to be achieved. In this period a group of youths surrounded the US embassy compound which resulted to the rise of price of petroleum which went up to over $100 a barrel which has never reached to date. This affected various sectors of the economy.

Oil prices and food consumption

The law of demand states that the lower the price of something the more of it people will buy. The law assumes that there are no offsetting changes such as lower incomes, lower prices for other goods and so on. This means that the price of a good is inversely related to qualities purchased. The higher the price the less the commodity is purchased. The law of supply states that the higher the price the more the quantities that is supplied in the market. So many sectors use oil as a main source of energy, such sectors include the aviation sector, manufacturing sector, ships, automotive sector, industrial sector, the generation of power and electricity, trains and automobiles. When there is no oil this sectors cannot function and if it does not function there will be no production in the world. The rising prices of oil will be felt in all sectors. Oil is used as a means of transport in the aviation, shipping and road transport. Though transportation of raw materials is taken for production of final products with oil, production can not be achieved.

Other factors

In the industries oil is also used to run machines. In the manufacturing industry, industrial set ups, power generation oil is used to run all this machines. Therefore the rise in the prices of oil affects all necessities that are used in life. The prices of fare, transport, food and services will rise. This is because of the inflationary effect that comes up with delays in prices. We have inherent inflation associated with the change in prices of oil. As inflation goes up consumption will come down investment will be lower as well as savings. Change in oil prices upward has various repercussions to the development of the world. In the recent past there has been a fluctuation in the world economy because of the crisis in the middle east. The organizational of oil producing countries cartel has made it there duty to control oil prices in the world. In the world today food prices is going up and there is a global shortage on food a close the world. The shortage has led to increase in food prices. The price of food that has increased for the last two years has led to the demand of this genetically modified food and other countries such as China have also adapted by technology in producing food. The supply and demand for food products and the changes in prices is now making the world think differently. What the world is experiencing today can be described as using the law of demand and there are very many factors that affect changes in demand of any product of service. But in the case of the world today, allover the world there is an increase of prices of goods and services. In Europe people are willing to use genetically modified product because none genetically modified is in shortage and the prices are going up as compared to before. The increase in prices was due to changes in climatic and whether which has led to the increase of prices for the little food that was available as demand remained the same. The change can also be attributed to change to some factors of production such as; increase in oil prices, and interest rates which were as a result of the subprime crisis. The subprime crisis has led to increase in the cost of capital which is an ingredient in the production of food.

Other factors

that have led to the increase of prices or shortage of food in the world include; - changes in the use of food produce that is diversifying the use crops to make bio-fuel growing prosperity in some countries such as China and India. As there is shortage of food especially grain in some parts of the world there is a substantial amount available in countries such as Argentina, Brazil, Canada and China which is bringing the supply to the world market. When there is high supply in these countries they will take the produce to the market and sell at a higher price. Food being a necessity there demand remains perfectly in elastic that is changes in price has a non responsive change in demand since the elasticity of demand is zero. Although there is demand of a substitute which is genetically modified foods, but the demand will not change. This is why the world is facing protests from inhabitants. The elasticity of food products can be shown by the graph below;

Amount demanded

From the graph above, it shows that the demand for food products remains constant at d1 whether the price changes from p to p1. What is required now is to look for ways of increasing production and this is what the world is doing today.

Conclusion

From the law of supply and demand when the demand of a product is perfectly inelastic what can be done is to look ways to change the supply of the product since the quantity demanded will remain the same. By the world going for genetically modified crops is trying to increase supply not to swift to a substitute as food cannot have a substitute.