Slide Show #2 AGEC 430 Macroeconomics of Agriculture Spring 2010
Domestic Macro Policy General Domestic Economy Global Macro Policy and Growth Farm Input Supply Sectors Food Processing And Fiber Manufacturing Sectors Wholesale And Retail Trade Sectors Farm Policy Farms and Ranches Domestic Wheat Market Environmental Policy Farm Credit Markets Farm and Non-farm Labor Markets Handout #1
US Corn Market Linkages - Components of Supply - Beginning stock US production Imports into US Global market Competitor nations US Corn Market Client nations Food demand Other demand Stock demand Feed demand Export demand - Components of Demand -
US Corn Market Structure Demand components: Food use Feed use Other domestic use Total domestic use Ending stocks Exports Total demand Supply components: Beginning stocks Production Imports Total supply Demand Supply PE QE
A monopsonist (single seller) will consider the marginal revenue product curve rather than the market demand curve and set price where MRP=MIC rather than were demand equals supply under perfect competition.
Remember, the supply curve is the summation of marginal cost curves of firms in the market, or S = ∑MCi.
The supply curve for a monopolist (single buyer) is its marginal cost curve. It will operate where MR=MC and price off the demand curve, thus supplying less than that observed under perfect competition.
Merging Demand and Supply Price D S PE D ≡ S Quantity QE
A disequilibrium may occur in a market due to a event affecting demand or supply where the market has not fully reacted to the event. At a specific asking price sought by producers, consumers are not willing to buy (market surplus), or buyers are willing to buy but producers are not willing to sell (market shortage).
Year 2 Reactions Producers use last year’s price as their expected price for year 2 in deciding to produce quantity Q2. consumers on the other hand pay this year’s price determined by Q2.
Year 3 Reactions P3 P2 Producers now decide to cut back production to quantity Q2 given last year’s price P2. This lower quantity pushes price consumers must pay up to P3 in year 3.
Cobweb Pattern Over Time Market equilibrium The market converges to market equilibrium where demand intersects supply at price PE. In some markets, this adjustment period may only be months or even weeks rather than years assumed here.
Given the inelastic demand for raw agricultural products, an increase in supply will result in a decline in revenue to producers.
Effective ceiling creates a shortage where QD > QS Price ceilings set by government never work over the longer run. An example is the ceiling placed by President Nixon on meat back in the 1970s when you could not find meat in the stores. The ceiling was eventually removed.
An increase in the minimum wage generally causes an increase in unemployment of minimum wage earners, resulting in a labor market surplus and higher unemployment rate.
Substitute demand and supply equations into the equilibrium and solve for price (POWN)
Revenue falls Revenue rises