CHAPTER 2
PRICE THEORY AND ANALYSIS FOR EARLY WARNING
2.1 Introduction
This chapter provides the conceptual tools that are required for effective monitoring and
reporting of price and market developments.  First, some simple price and market  analysis
theory is provided.  For the interested reader there are additional references in Appendix A.
Finally, criteria are presented to guide the analyst in selecting markets and commodities for
monitoring.  The concentration of this manual is on the monitoring of commodity prices, but
the techniques could easily be used to monitor prices of livestock products.  Some examples
will use livestock products to illustrate this point.
2.2 Why monitor prices?
Early warning analysts are concerned with all aspects of food security, including food
availability
1
 and food access
2
.  Prices serve as signals of both food availability and food
access.  In summarizing the interactions between supply and demand prices provide a
snapshot of current and expected supply of a commodity.  Prices also affect food access
of both producers and consumers.  The influence on the income of producers is that
prices determine the value of the commodities that farm households sell. The impact of
prices on consumers is that they determine the amount of a commodity a household can
buy.  This is especially true for poorer households that have a substantial portion of their
expenditures used to purchase food.
2.3 Simple price theory
Although price theory can be complex, price  analysis for early warning can be relatively
simple.  This simplicity in  analysis can still provide effective early warning information for
decision makers.  This section provides some simple price analysis theory that will serve as
the foundation for using the rest of this manual.
                                                
1
Food availability
 is the aggregation of national food production, food stocks, and net trade (imports minus
exports).  A country is said to be food security in terms of national food availability if through these means they
can meet national consumption requirements.
2
Food access
 is a aggregation of own production, income (cash or in kind) from other activities, or transfers
(cash or in kind).  A household is said to be food secure in terms of food access if through these means they can
produce enough food or control resources or entitlements to assure sufficient consumption.
4
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