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Connecting supply and demand

This training session, held in Warsaw from June 26-30, 2006, focuses on the CAPRI (Common Agricultural Policy Regional Impact) model. It emphasizes the connection between supply and demand in agricultural economics, utilizing multi-commodity spatial market models and regional optimization strategies. Key discussions include the iterative nature of CAPRI, strategies for promoting convergence, and the role of elasticity in supply-demand dynamics. The session aims to enhance understanding of agricultural policy's regional effects and improve economic modeling techniques.

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Connecting supply and demand

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  1. Torbjörn Jansson* CAPRICommon Agricultural Policy Regional Impact Connecting supply and demand CAPRI Training Session in Warzaw, June 26-30, 2006 *Corresponding author +49-228-732323www.agp.uni-bonn.de Department for Economic and Agricultural Policy Bonn University Nussallee 21 53115 Bonn, Germany

  2. Reminder – General Model Layout Quantities Prices Iterations Comparative Static Equilibrium SupplyRegionaloptimisationmodelsPerennialsub-module MarketsMulti-commodityspatial market model

  3. p s p0 p0 d q On convergence p s s d q

  4. Conclusions • If “demand elasticity” > “supply elasticity”, it will converge, otherwise not • CAPRI has to be solved iteratively • Elasticities are chosen bases on economic criteria not to obtain convergence  We will likely need some mechanism promote convergence in CAPRI

  5. Different ways of promoting convergence • Adjustment cost: Additional production cost for deviating from the supply in the previous step • Price expectation: Supply uses weighted average of prices in several previous step. Used in CAPRI • Partial adjustment: Supply only moves a fraction of the way towards the optimum in each step • Approximate supply functions used in market instead of fixed supply. Used in CAPRI

  6. Approximation of supply functions • The implicit supply function is unknown • Difficult to derive for CAPRI • Has non-differential points (corners)  difficult to solve together with market model • Assume “any” simple supply function that approximates the supply model • Calibrate the parameters in each step so that the supply response of last step is reproduced

  7. Assume the “explosive situation”… p0 Approximating supply p s s d q

  8. Supply function is unknown (supply is a black box) Assume any supply function Starting with some price, compute supply Calibrate the assumed supply function to that point Solve supply + demand simultaneously for new price Iterate… s’ s’ p0 q0 Approximating supply p s s d q

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