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U.S. Commodity Policy (Ch. 7)

U.S. Commodity Policy (Ch. 7). Review of economic concepts used in policy analysis Major components of U.S. commodity policy tools. A Review of Economic Concepts Used in Policy Analysis. What can shift this Curve?. P. S 1. Change in Supply. S 2. D. Q. 0. What can shift this Curve?.

keely-morrison
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U.S. Commodity Policy (Ch. 7)

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  1. U.S. Commodity Policy (Ch. 7) • Review of economic concepts used in policy analysis • Major components of U.S. commodity policy tools

  2. A Review of Economic Concepts Used in Policy Analysis

  3. What can shift this Curve? P S1 Change in Supply S2 D Q 0

  4. What can shift this Curve? Change in Demand P S D2 D1 Q 0

  5. Origins of the Supply Curve MC1 P AC1 AVC1 Fixed Cost Q 0

  6. Technological Change and Supply MC2 AC1 MC1 P AC2 Pe In the short run, a cost reducing new technology will lower cost and early adopters will earn temporary economic profits. Q1 Q2 Q 0

  7. Technological Change and Supply MC2 AC1 MC1 P AC2 P1 But, economic profits will attract new firms and increase supply which drives down equilibrium price to the minimum of the average cost curve. P2 Q1 Q2 Q 0 Q3

  8. Long Run Average Cost Under perfect competition technological change has pushed farm size upward. MC P SRAC LRAC1 LR Pe 0 Q Size1 Size2 Size3

  9. Price Floors PF2 Pe PF1 QE

  10. Price Ceilings PC2 Pe PC1 Qe

  11. Quotas P S1 Pe D1 0 Qe Q Quota

  12. Elastic Versus Inelastic Demand Inelastic Inelastic demand implies a change in price will cause a relatively small change in quantity bought. Elastic P2 Elastic demand implies a change in price will cause a relatively large change in quantity bought. P1 Q2E Q2I Q1

  13. Elastic Versus Inelastic Supply Inelastic Inelastic supply implies a change in price will cause a relatively small change in quantity produced. Elastic P2 Elastic supply implies a change in price will cause a relatively large change in quantity produced. P1 Q1 Q2E Q2I

  14. Elasticity has implications for policy -1 Suppose a tax is added to the cost of a product. Inelastic P2 P1 Inelastic demand implies consumers pay most, but not all of the tax. The tax causes a relatively small change in quantity demanded. Q2 Q1

  15. Elasticity has implications for policy -2 Suppose a tax is added to the cost of a product. Elastic P2 P1 Elastic demand implies consumers pay less of the tax. The tax causes a relatively large change in quantity demanded. Q2 Q1

  16. Risk Farm Income Price Support Time

  17. Investment Analysis NPV = Net Present Value Investment = the initial investment Net Cash flow = Income minus expenses associated with the investment i = interest rate Salvage value = Any remaining value at the end of the valuation period N = length of planning horizon What does this imply for value of land that receives farm program payments?

  18. Major components of U.S. commodity policy tools • Price supports • Production controls • Direct payments • Trade protection • Subsidized crop insurance

  19. Price supports • Consider Fig. A7.2 & corrected A7.3 • Handling of resulting surpluses • Government purchase • Non-recourse loan

  20. Production controls • Acreage allotments, payments for idling land, marketing quotas • Consider corrected Fig. A7.4

  21. Direct payments • Target prices (Fig A7.5) • Marketing loan

  22. Subsidized crop insurance • Commercial crop insurance has not been widely used in major crops • Subsidized crop insurance intended as a replacement for disaster relief

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