Question

Like any “good” parent, I employ guilt as a way to encourage our children to eat richer, healthier and more complete diets. This past Friday, I wanted to have the kids try some quinoa with their dinner:

My son was having none of it. So, before raising my voice with him, I cried out, “quinoa has become very popular and for good reason – it has lots of protein and is good for you, but its popularity has caused Peruvians who used to rely on this staple grain, to go hungry!” That comment came to mind because a few years ago the use of non‐traditional (in the US) grain varieties really took off due to many factors – and that increased use led to some controversy. The controversy was that, sure, increased Western demand for quinoa probably helped some quinoa farmers around the world, the impact on price surely did not help quinoa consumers – who were generally very poor, and relied on inexpensive quinoa as a major source of protein and calories.

The fun part of issues like these, to an economist, is that they are eminently open to empirical investigation, and that is what Marc Bellemare, Johanna Fajardo‐Gonzalez, and Seth Gitter did.

In the paper, they examined the well‐being of farmers and consumers in Peru from 2006 to 2013 when quinoa prices nearly tripled.

A) Depict an example of what the quinoa supply and demand curve looked like in Peru before and after the influx of international buyers. Be sure to label, clearly, the original and new equilibrium.

B) What should have happened to the welfare of Peruvian consumers (and producers) of quinoa as a result of the new foreign demand? Explain, and illustrate. In class I draw triangles/shapes and also make a table. We don’t have a preference for what you present so long as it is actually the correct measure of welfare to all parties.

C) The results of the paper were startling. Of course, the empirical findings showed that Peruvian farmers were much better off. But incredibly the authors also found that poor Peruvian consumers of quinoa, though the price was higher, were actually better off. They found that every 10% increase in quinoa prices led to a 0.7% increase in household welfare. In fact, their paper showed that quinoa eaters were better off than nonconsumers. Does this mean that the demand for quinoa in Peru is upward sloping? Come up with a possible explanation for the result aside from ones that violate the law of demand.

Answer 1

The demand for good is an inverse relationship between price and quantity. The graphical relationship between price and quantity demanded is depicted by the demand curve. Any point on the demand curve shows the quantity consumer demands for any particular price.

The supply for good is the direct relationship between price and quantity. The graphical relationship between price and quantity supplied is depicted by the supply curve. Any point on the supply curve shows the quantity producers supply for any particular price.

The equilibrium is the point at which the quantity demanded by the consumer equals the quantity supplied by the producers at a particular price. It is the point of intersection between demand and supply curve.

The  influx of international buyers increases the demand for quinoa. As demand increases the market moved along the supply curve and the price and quantity in new equilibrium increases.

The figure below gives the market for quinoa

P2 E2 P1 E1 Q1 Q2 Quantity

Initially, the economy was at equilibrium E₁ with demand D₁ and supply S_1. The equilibrium quantity of quinoa was Q₁ and equilibrium price was P₁. The influx of foreign demand caused the demand for quinoa to increase. The demand curve shifted up to D₂. The new equilibrium occurs at E₂. The increase in demand increases the equilibrium quantity and price to Q₂ and P₂ respectively. Therefore, the increase in demand increases the equilibrium price and equilibrium quantity of quinoa.

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The welfare of the consumer can be measured by the consumer surplus at the equilibrium. The consumer surplus is the difference between market price and the price the consumer wants to pay. The price the consumer wants to pay for any particular unit is determined through the demand curve. The difference between the price the consumer wants to pay and the equilibrium price is given by the area enclosed by the demand curve and equilibrium price line.

Then at initial equilibrium with price P1 and demand D1, the consumer surplus was a+b. As price increases the demand shifts to D2 and the price rises to P2, the consumr surplus becomes a+c.

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c)

The change in the surplus of the consumer is given as [(a+c)-(a+b)]=c-b. Thus, the increase in demand and price can lead to increase in welfare of the consumer if and only if c-b>0 or c>b. Other wise the consumer is worseoff due to rise in demand in quinoa market.