Supply Response in Pakistan with "Endogenous" Technology

Ather Maqsood Ahmed, Rizwana Siddiqui


Considering the significance of agriculture sector in
Pakistan's economy, one of the major objectives of agricultural policy
has been to raise the level of real income of the farmer by stabilising
the agricultural output through a system of price support programme. In
the recent past, a number of studies have confirmed that Pakistani
farmers respond to changes in output prices.! The prime objective of
these studies was to estimate price, acreage or yield elasticities based
on the Nerlovian Adjustment Model under alternative expectation schemes.
Naqvi and Burney (1992) estimated output supply and input demand
functions based on the profit function approach.2 Surprisingly, the
single-equation supply model has been used extensively for policy
analysis without noticing the fact that such a model does not guarantee
that the harvested share of each crop will always be non-negative and
the sum of shares of all crops will be unity. Similarly, models which
are based on applied duality theory do not take into account the actual
decision-making at the farm level. The sequence of events is such that
farmer first allocates area across crops and then chooses the input
levels conditioned on the allocation of area across crops. Mundlak
(1988) has shown that the optimisation model in this case will have to
be modified to provide for sequential solution for area allocation and
input use. This model clearly distinguishes the changes in optimal input
and output combinations for each crop from changes in the quasi-fixed
inputs across crops.

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