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Ag Policy, Lecture 1 Knutson 6 th Edition, Chapter 2

Ag Policy, Lecture 1 Knutson 6 th Edition, Chapter 2. House Keeping Roster Seating Chart Pictures Tell me about you Name Major Hometown Where to eat in your hometown Career Plans Today Review of Economics Demand Theories & Concepts Supply Theories & Concepts. Economics Review.

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Ag Policy, Lecture 1 Knutson 6 th Edition, Chapter 2

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  1. Ag Policy, Lecture 1Knutson 6th Edition, Chapter 2 • House Keeping • Roster • Seating Chart • Pictures • Tell me about you • Name • Major • Hometown • Where to eat in your hometown • Career Plans • Today • Review of Economics • Demand Theories & Concepts • Supply Theories & Concepts

  2. Economics Review • Economics – allocation of scarce resources to the unlimited wants of people • Demand is a schedule of the maximum quantity consumed at alternative prices $ D Q/yr

  3. Demand (Continued) • Change in Demand • What changes (shifts) demand? • Income (1-3% growth annually) • Population (1-2% growth annually) • Prices of other goods • Tastes & preferences $ D 2 D 0 D1 Q/yr

  4. Demand • Change in quantity demanded • Change in quantity demanded occurs due to change in own price $ P 0 P 1 1 P 2 D q q Q/yr q 0 2 1

  5. Demand • Elasticity of Demand • Own price elasticity of demand • %Change in Q Y / %Change in P Y • E = %ΔQY / % ΔPY • How do you interpret E = -0.25 • What is Inelastic (Insulin) • What is Elastic (Vacation Cruises) • Factors that influence Elasticity • Necessity • Availability of Substitutes

  6. $ -.60 -1.14 TD DD Q/yr. Demand • Elasticity of Demand • Domestic demand • Export demand • Why more elastic?

  7. Demand • Other Elasticity Measures • Cross price elasticity of demand %ΔQY / % ΔPX • Substitutes • Complements • Income elasticity of demand %ΔQY / % ΔI • Normal Goods • Inferior Goods

  8. Ed = -0.25 Ed = -1.25 5 5 D 4.5 4.5 D Qx 8.0 Qx ? 8.0 ? Demand • Why are measures of elasticity important • Predict Policy Impact • Revenue impact Px Px -1.25 = %∆QY / %∆PY -1.25 = %∆QY / -0.10 12.5 = %∆QY 8 * 1.125 = 9.0 -0.25 = %∆QY / %∆PY -0.25 = %∆QY / -0.10 2.5 = %∆QY 8 * 1.025 = 8.2

  9. Supply • 3 stages of production • Produce in Stage II II III Output I TPP X input Output 1 MPP APP X input 1

  10. $/Output y* TVP = TPP * Py * X input $ X 1 1 MVP = P MPP y X1 MFC X1 * X X input 1 1 Supply • 3 stages of production • Multiply MPP and APP by Price of the output

  11. Supply • Where the supply curve comes from • Marginal cost curve MC = Px / MPPx • Average variable cost AVC = Px / APPx $ MC AVC Q/yr

  12. Supply • Supply curve is the MC above the AVC for each firm • Supply is a schedule of quantities of output that will be offered for sale at alternative prices • Shutdown price $ MC AVC Q/yr

  13. Supply • Firm Supply and Industry Supply $ $ $ $ $ $ S Firm 1 QY Industry QY Firm 2 QY • Factors change Industry Supply for Output Y • Technology • Costs of inputs to produce Y • Ag. Policy S0 S1 S2 P QtY

  14. Supply • Factors that change Supply Function for firm • Price of Input • Productivity of X to produce Quantity of Y • Increased productivity Shifts MC to right • Analyze impacts on supply for the industry by starting with the firm $ MC1 MC2 AVC1 AVC2 Q/yr

  15. Supply • New Technology – BST PST Roundup Ready crops • Increase TPP >> Higher MPP >> Lower MC • Supply shifts to the right Y TPP1 Y TPP0 MPP1 X X MPP0 $ MC0 AVC0 S0 $ S1 MC1 AVC1 Q Y /yr Q Y /yr The Industry The Firm

  16. Supply • Inflation in Input Prices and Supply Price input increases Px MC = Px / MPPx AVC = Px / APPx S1 S0 $ Q/yr $ MC2 MC1 AVC2 AVC1 Q/yr

  17. Supply • Elasticity of Supply • Es = %ΔQY / %ΔPY • Es = 0.20 Es = 0.20 = %ΔQY / %ΔPY 0.20 = %ΔQY / 25% 5% = %ΔQY New Quantity = 2600 * 1.05 = 2730 PY S 2.5 2 2,600 ? QY

  18. Supply • Cross elasticity of supply • Elasticity with respect to the price of another crop Es(QY, PX) = %ΔQY / %ΔPX Es(QY, Px) = -0.15 PX 2.5 S of Y wrt PX 2.25 ? 2,600 QY

  19. Supply and Demand • Equilibrium price is where Demand equals Supply S1 $ S2 P 1 P 2 D q Q/yr q 2 1

  20. Supply and Demand • Equilibrium price is where Demand equals Supply • After the crop has been harvested the supply becomes perfectly inelastic • Supply in the marketing year is S1 or S2 S1 S2 $ P 1 P 2 D q Q/yr q 2 1

  21. Elasticity • The limits of Elasticity Measures • Difficult to measure demand • Difficult to sort out cause/effect

  22. Ag Policy, Lecture 1 Supply & Demand Review • You should be able to calculate any of the missing pieces using the formula for elasticity • Can you define the different measures of elasticity? • Can you logically describe/identify the interactions of supply and demand? • Can you logically describe/identify the make-up and underlying concepts of a market supply and demand? How do various factors change supply or demand? • Next Class • More Economics Review and the Role of Economics in Policy

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