The world population has been growing, and incomes have increased. This has led to an increase in the demand for agricultural products. However, improved seeds, fertilizers, irrigation practices, and cultivation methods have also increased the supply of agricultural products. As a result, the equilibrium price of agricultural products has fallen over the last 30 years.
The graph shows the new demand line (D1) and supply line (S1) that explain this situation. The equilibrium price and quantity have increased, but the increase in supply has been greater than the increase in demand, so the equilibrium price has fallen overall.
The original demand line (D) shows the relationship between the quantity of agricultural products demanded and the price, assuming that all other factors are held constant. The new demand line (D1) shows that the demand for agricultural products has increased due to the growing population and rising incomes. This is because people have more money to spend on food and other agricultural products as their incomes increase.
The original supply line (S) shows the relationship between the quantity of agricultural products supplied and the price, assuming that all other factors are held constant. The new supply line (S1) shows that the supply of agricultural products has also increased due to improved seeds, fertilizers, irrigation practices, and cultivation methods. This has made it possible for farmers to produce more agricultural products at a lower cost.
As a result of the increase in demand and supply, the equilibrium price and quantity of agricultural products have increased. However, the increase in supply has been greater than the increase in demand, so the equilibrium price has fallen overall.
To explain the situation described above, we can add a new demand line (D1) and a new supply line (S1) to the graph as follows: