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Abstract
Flue cured tobacco has been an important crop for the
Zimbabwean economy historically in terms of foreign currency
earnings and employment creation. Between 1980 and 2000, there
is a general increase in tobacco output, followed by a sharp
decline from 2001 up to 2008 and then output starts to increase
again. Flue cured tobacco output as measured by the quantity that
is delivered to the auction floors is used to estimate supply
elasticity. The objective is to determine if flue-cured tobacco
supply is price elastic and whether price incentives alone will
boost supply in the short -run. Time series data on flue cured
tobacco output, prices, production costs, prices of major
competing crops, the exchange rates and inflation are analysed to
model the price elasticity of flue cured tobacco between 1980 and
2010. The Augmented Dickey –Fuller unit root test is performed to
test the variables for stationarity. The data generating processes
show these data series to be non-stationary and therefore OLS
estimations would be biased. The data series are differenced and
the Engel-Granger procedure is performed to test for
cointegration. The Error Correction Model approach is used to
estimate flue cured tobacco supply. Flue cured tobacco supply is
found to be price inelastic in the short –run.