Ag Policy, Lecture 1 Knutson 6th Edition, Chapter 2

1
Ag Policy, Lecture 1Knutson 6th Edition, Chapter
2

• House Keeping
• Roster
• Seating Chart
• Pictures
• Tell me about you
• Name
• Major
• Hometown
• Where to eat in your hometown
• Career Plans
• Today
• Review of Economics
• Demand Theories Concepts
• Supply Theories Concepts

2
Economics Review

• Economics allocation of scarce resources to the
  unlimited wants of people
• Demand is a schedule of the maximum quantity
  consumed at alternative prices

D
Q/yr
3
Demand (Continued)

• Change in Demand
• What changes (shifts) demand?
• Income (1-3 growth annually)
• Population (1-2 growth annually)
• Prices of other goods
• Tastes preferences

D 2
D 0
D1
Q/yr
4
Demand

• Change in quantity demanded
• Change in quantity demanded occurs due to change
  in own price

P
0
P
1
1
P
2
D
q
q
Q/yr
q
0
2
1
5
Demand

• Elasticity of Demand
• Own price elasticity of demand
• Change in Q Y / Change in P Y
• E ?QY / ?PY
• How do you interpret E -0.25
• What is Inelastic (Insulin)
• What is Elastic (Vacation Cruises)
• Factors that influence Elasticity
• Necessity
• Availability of Substitutes

6
Demand

• Elasticity of Demand
• Domestic demand
• Export demand
• Why more elastic?

7
Demand

• Other Elasticity Measures
• Cross price elasticity of demand
• ?QY / ?PX
• Substitutes
• Complements
• Income elasticity of demand
• ?QY / ?I
• Normal Goods
• Inferior Goods

8
Demand

• Why are measures of elasticity important
• Predict Policy Impact
• Revenue impact

Px
Px
-1.25 ?QY / ?PY -1.25 ?QY / -0.10 12.5
?QY 8 1.125 9.0
-0.25 ?QY / ?PY -0.25 ?QY / -0.10 2.5
?QY 8 1.025 8.2
9
Supply

• 3 stages of production
• Produce in Stage II

II
III
Output
I
TPP
X
input
Output
1
MPP
APP
X
input
1
10
Supply

• 3 stages of production
• Multiply MPP and APP by Price of the output

11
Supply

• Where the supply curve comes from
• Marginal cost curve MC Px / MPPx
• Average variable cost AVC Px / APPx

MC
AVC
Q/yr
12
Supply

• Supply curve is the MC above the AVC for each
  firm
• Supply is a schedule of quantities of output that
  will be offered for sale at alternative prices
• Shutdown price

MC
AVC
Q/yr
13
Supply

• Firm Supply and Industry Supply

S
Firm 1 QY
Industry QY
Firm 2 QY

• Factors change Industry Supply for Output Y
• Technology
• Costs of inputs to produce Y
• Ag. Policy

S0
S1
S2
P
QtY
14
Supply

• Factors that change Supply Function for firm
• Price of Input
• Productivity of X to produce Quantity of Y
• Increased productivity Shifts MC to right
• Analyze impacts on supply for the industry by
  starting with the firm

MC1
MC2
AVC1
AVC2
Q/yr
15
Supply

• New Technology BST PST Roundup Ready crops
• Increase TPP gtgt Higher MPP gtgt Lower MC
• Supply shifts to the right

Y
TPP1
Y
TPP0
MPP1
X
X
MPP0

MC0
AVC0
S0

S1
AVC1
MC1
Q Y /yr
Q Y /yr
The Industry
The Firm
16
Supply

• Inflation in Input Prices and Supply
• Price input increases Px
• MC Px / MPPx
• AVC Px / APPx

S1
S0

Q/yr

MC2
MC1
AVC2
AVC1
Q/yr
17
Supply

• Elasticity of Supply
• Es ?QY / ?PY
• Es 0.20
• Es 0.20 ?QY / ?PY
• 0.20 ?QY / 25
• 5 ?QY
• New Quantity 2600 1.05 2730

PY
S
2.5
2
2,600
?
QY
18
Supply

• Cross elasticity of supply
• Elasticity with respect to the price of another
  crop
• Es(QY, PX) ?QY / ?PX
• Es(QY, Px) -0.15

PX
2.5
S of Y wrt PX
2.25
?
2,600
QY
19
Supply and Demand

• Equilibrium price is where Demand equals Supply

S1

S2
P
1
P
2
D
Q/yr
q
q
2
1
20
Supply and Demand

• Equilibrium price is where Demand equals Supply
• After the crop has been harvested the supply
  becomes perfectly inelastic
• Supply in the marketing year is S1 or S2

S1
S2

P
1
P
2
D
Q/yr
q
q
2
1
21
Elasticity

• The limits of Elasticity Measures
• Difficult to measure demand
• Difficult to sort out cause/effect

22
Ag Policy, Lecture 1

• Supply Demand Review
• You should be able to calculate any of the
  missing pieces using the formula for elasticity
• Can you define the different measures of
  elasticity?
• Can you logically describe/identify the
  interactions of supply and demand?
• Can you logically describe/identify the make-up
  and underlying concepts of a market supply and
  demand? How do various factors change supply or
  demand?
• Next Class
• More Economics Review and the Role of Economics
  in Policy