Question

Organic food is grown without synthetic pesticides, chemical fertilizers or genetically modified seeds. In recent decades, the demand for organic products has increased dramatically. The Organic Trade Association reported sales increased from $1 billion in 1990 to $31.5 billion in 2011, more than 90% of which were sales of food products.

Why, then, are organic foods more expensive than their conventional counterparts? The answer could be an application of the supply and demand model. Describe in your own words what factors have affected and will continue to affect the demand and supply for organic foods? Describe any shifts, and make any predictions of what might happen to the prices of organic foods in the future.

Answer 1

Looking from the overall supply and demand lens, the demand for organic food have increased substantially from 1990's but the supply side is still not evolved yet to fulfill this high demand for organic food. There are multiple reasons, primarily because organic farming involves no use of pesticides it uses organic fertilizers which are expensive because in most countries farmers are given subsidies on fertilizers. Therefore the cost of production is lower for conventional per hectare.

Production costs for organic foods are typically higher because of greater labor input and because farmers don't produce enough of a single product to lower the overall cost. Post-harvest handling of relatively small quantities of organic foods results in higher costs because organic and conventional produce must be separated for processing and transportation.

The economies of scale has not been achieved in the case of organic farming, because there are distributed farmers who produce their outputs, and the volumes are relatively small. As demand for organic food increases in future, technological innovations and economies of scale should reduce costs of production, processing, distribution and marketing for organic produce.