Slide Show #2 AGEC 430 Macroeconomics of Agriculture Spring 2010

General Domestic Economy Domestic Macro Policy Global Macro Policy and Growth Food Processing And Fiber Manufacturing Sectors Farm Input Supply Sectors Wholesale And Retail Trade Sectors Farms and Ranches Farms and Ranches Farm Policy Environmental Policy Farm Credit Markets Farm and Non-farm Labor Markets Domestic Wheat Market Domestic Wheat Market Handout #1

Handout #2

US Corn Market Client nations Client nations Competitor nations Competitor nations Food demand Food demand Other demand Other demand Feed demand Feed demand Stock demand Stock demand Export demand Export demand US Corn Market Linkages US production US production Beginning stock Beginning stock Imports into US Imports into US Global market - Components of Supply - - 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 DemandSupply PEPE QEQE

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 = ∑MC i. Remember, the supply curve is the summation of marginal cost curves of firms in the market, or S = ∑MC i.

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 Quantity D S PEPE QEQE D ≡ S

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 Q 2. consumers on the other hand pay this year’s price determined by Q 2. Producers use last year’s price as their expected price for year 2 in deciding to produce quantity Q 2. consumers on the other hand pay this year’s price determined by Q 2.

Year 3 Reactions P2P2 P3P3 Producers now decide to cut back production to quantity Q 2 given last year’s price P2. This lower quantity pushes price consumers must pay up to P 3 in year 3. Producers now decide to cut back production to quantity Q 2 given last year’s price P2. This lower quantity pushes price consumers must pay up to P 3 in year 3.

Cobweb Pattern Over Time Market equilibrium Market equilibrium The market converges to market equilibrium where demand intersects supply at price P E. In some markets, this adjustment period may only be months or even weeks rather than years assumed here. The market converges to market equilibrium where demand intersects supply at price P E. 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 Q D > Q S

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.

Handout #3

Signs are important

Substitute demand and supply equations into the equilibrium and solve for price (P OWN )

Revenue falls Revenue rises

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