An estimate of aggregate supply response in South African agriculture

Abstract

Agricultural supply has traditionally been assumed to be relatively inelastic. Time series estimates have generally supported this hypothesis. Estimates based on cross‐sectional observations have generally yielded higher elasticities. It has been argued that cross‐sectional analyses are more appropriate than time series analyses for estimating long‐run elasticities. A cross‐sectional analysis was done on South African data. Quantity supplied was shown to be a function of output/input price ratios, land quality, average rainfall and time. The long‐run supply elasticity appears to be approximately 0,92. This has important implications for agricultural price policy. Policies based on the assumption of very low supply elasticities are likely to distort markets and production.

Notes

Department of Agricultural Economics. Extension and Rural Development. University of Pretoria. The authors wish to thank the Institute of Research Development (IRD) of the Human Sciences Research Council (HSRC) for financial assistance. Opinions expressed in this article are those of the authors and should not be ascribed to the IRD or HSRC.