UI AgEc 302 Ag Economics II

1
UI AgEc 302 Ag Economics
II

• Lecture 2
• Demand and Supply
• Yuliya Bolotova
• yuliyab_at_uidaho.edu

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Demand and Supply
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Demand and Supply (cont.)

• Quantity Demanded
• Qd 500 - 50P
• Quantity Supplied
• Qs -100 100P
• The Market is in Equilibrium when
• Qd Qs
• 500 - 50P -100 100P
• P 4, then
• Qs Qd 500 50(4) 300 units

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Demand

• Demand is the quantity of a product/service that
  consumers
• are willing to purchase AND
• are able to purchase
• Market demand vs. Individual demand
• individual demand is the quantity demanded either
  by an individual or a firm
• market demand is the aggregate of individual
  (personal) demands

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Demand (cont.)

• Direct Demand
• personal (individual) consumption OR final
  consumption
• food for personal consumption
• clothing and cars for personal use
• Derived (Intermediate) demand
• demand for inputs (products, services) that will
  be used to produce other products
• food and feed ingredients
• labor
• machinery

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Demand (cont.)

• Consumption Behavior is driven by
• utility maximization (direct demand)
• profit maximization (derived demand)
• income availability
• Economic concepts explaining derived direct
  demand or individual industry demand are
  similar
• The differences arise when we need to analyze a
  derived or a direct demand using empirical methods

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Determinants of Demand

• Direct Individual Demand for product Y
• Quantity of Y demanded per capita (Dep.V.)
• Determinants of Direct Individual Demand
  (Independent Variables)
• Price of Y (Py)
• Prices of products substitutes (Ps)
• Prices of products complements (Pc)
• Consumer income (I)
• Other factors (consumer preferences, consumer
  characteristics (CC), ADV intensity, etc.)
• Qy f ( Py, Ps, Pc, I, CC, ADV,)

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Determinants of Demand (cont.)

• Intermediate Market Demand for Product Y
• Quantity of Y demanded (Dependent Variable)
• Determinants of Intermediate Market Demand
  (Independent variables)
• Price of Y (Py)
• Prices of products substitutes (Ps)
• Prices of products complements (Pc)
• Direct or/and intermediate demand (DID)
• Other factors (producers characteristics (Pc),
  ADV intensity, etc.)
• Qy f ( Py, Ps, Pc, DID, PC, )

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Determinants of Demand (cont.)

• Example P 3.10, page 87, Text-Book.
• Demand for Eye-de-ho Potatoes
• Qd -1,450 - 25P 12.5Pw 0.2Y
• Qd is the quantity demanded (in mill.of bu.)
• P is the price of potatoes (/bu)
• Pw is the price of wheat (/bu)
• Y is income (GNP in billions)
• ? What type of demand is this?

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Demand Function and Demand Curve

• Demand function represents the relationship
  between
• the quantity demanded (Dependent Variable DV)
  AND
• all variables that determine demand (Independent
  Variables IV)
• Demand curve is a graphical representation of
  demand function
• Qd f(P) or P f(Qd) perfectly competitive
  markets
• P f(Q) perfectly competitive markets and
  imperfectly competitive markets (oligopoly,
  oligopsony, monopoly and monopsony)

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Demand Function and Demand Curve

• A change in the quantity demanded
• a movement along a single demand curve
• due to a change in price
• A shift in demand
• switch from one demand curve to another
• due to a change in one or more of the non-price
  variables
• slopes of the demand curves are the same

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Supply

• Supply is the quantity of a product/service that
  producers
• are willing to sell
• are able to sell
• Market supply vs. Individual firm supply
• individual supply is the quantity supplied by one
  firm
• market supply is the aggregate amount supplied by
  all firms in the market

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Supply (cont.)

• Production behavior is explained by
• profit-maximization objective
• Supply of products increases when
• marginal benefit (revenue) from producing one
  additional unit gt marginal cost associated with
  the production of this unit

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Determinants of Supply

• Quantity of Y supplied (Dependent Variable)
• Determinants of supply (Independent Variables)
• Price of Y (Py)
• Prices of products-substitutes (Ps)
• Prices of products-complements (Pc)
• Technology (T) and Weather (W)
• Prices of input-substitutes (Is)
• Prices of input-complements (Ic)
• Other factors (ADV intensity, changes in consumer
  preferences consumer income, producer
  characteristics)
• Qy f (Py, Ps, Pc, T, W, Is, Ic, )

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Determinants of Supply (cont.)

• Example P3.10, page 87, Text Book
• Supply for Eye-de-ho Potatoes
• Qs -100 75P 25Pw 12.5Pl 10R
• Qs is the quantity supplied (in mill. bu.)
• P is the price of potatoes (/bu)
• Pw is the price of wheat (/bu)
• Pl is the average price of unskilled labor (/h)
• R is the average annual rainfall (inches)

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Supply Function and Supply Curve

• The market supply function is the relationship
  between
• the quantity supplied (DV) AND
• the factors affecting this quantity (IVs)
• Supply curves are graphical representations of
  supply functions
• Qs f(P) OR
• P f(Qs) usually in agriculture

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Supply Function and Supply Curve

• A change in the quantity supplied
• a movement along a single supply curve
• due to changes in price
• A shift in supply
• switch from one supply curve to another
• due to a change in one or more of the non-price
  variables
• slopes of the curves are the same

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Market Equilibrium

• Market Equilibrium is when Qd Qs
• quantity demanded quantity supplied
• Market Surplus is when Qd lt Qs
• quantity demanded lt quantity supplied
• Market Shortage is when Qd gt Qs
• quantity demanded gt quantity supplied