AAEC 2305 Fundamentals of Ag Economics

1. AAEC 2305Fundamentals of Ag Economics Chapter 5 - Continued

2. Factors that Shift the Demand Curve • Population • The more buyers, ceterus paribus, the greater is demand. • Tastes - • Age, environment, and other geographic & cultural factors can change tastes. • New information about the health characteristics of a product • Advertising & changes in fashion • Technological change

3. (continued) • Income - • Normal good - increase in income shifts demand curve outward (& vice versa) • Inferior good - increase in income shifts demand curve inward (& vice versa)

4. (continued) • Price of Related Goods - • Substitutes - increase in the price of a substitute, the demand curve for the related good shifts outward (& vice versa) • Complements - increase in the price of a complement, the demand curve for the related good shifts inward (& vice versa)

5. (continued) • Expectations- • Expectations about future prices, product availability, and income can affect demand.

6. Factors that Shift the Supply Curve • Resource Prices- • Increase in input prices results in an inward shift of the supply curve • Technology • Technological improvements allow producers to produce more of a good with the same amount of inputs

7. (continued) • Taxes & Subsidies- • Taxes are treated as costs - increase in taxes results in an inward shift of the supply curve. • Subsidies - reduce costs and cause outward shift in supply curve • Prices of other Goods- • Increase in the price of a another good would result in an inward shift of the supply curve of the related good

8. (continued) • Expectations- • Expectations about future prices can affect supply today. • Number of sellers- • The supply curve shifts outward as new firms enter an industry (& vice versa)

9. 4 Types of Markets • Pure Competition • Monopolistic Competition • Oligopoly • Monopoly • In this chapter, we are going to focus on perfectly competitive markets.

10. Pure Competition • Up to this point, we have assumed perfect competition and will discuss perfect competition in more detail in this chapter. We begin with perfect competition because it is basic to understanding of the economic system and a benchmark against which other market forms may be compared.

11. Characteristics of Pure Competition • Many Buyers & Sellers • Homogenous Product • Freedom of Entry & Exit (i.e. there are no barriers to entry) • Perfect Information

12. Long-Run Costs of Production • In the short-run, market price determines the quantity of production as firms make decisions on the basis of output price (MR) and MC. In the long run the opposite occurs. • The long-run cost of production determines the price of a product or service.