1. Supply Review EconS 451: Lecture #7 Understand the relationship between average and marginal cost curves and supply (both long-run and short-run). Be able to calculate the elasticity of supply and understand what values indicate Inelastic and Elastic supply. Understand the relationship between product price and factor price and the quantity produced of a given product. Be able to understand those factors which shift (or influence) supply……and how. Describe the concept of “Supply Response”. Describe…..in detail how changes in marketing margins impact producers relative to consumers.

2. Producer’s Goal Profit Maximization Occurs: MR = MC Max π s.t. Production Technology

3. Cost Curves and Supply Quantity / Unit Time Marginal Cost Curve Average Total Cost Q1Q1 Average Variable Cost Cost of Revenue / Unit P2P2 Q2Q2 P1P1

4. Cost Curves and Supply Quantity / Unit Time Time Long Run $ Price Short Run

5. Price Elasticity of Supply Percentage change in Quantity Supplied in response to a 1 percent change in price, all other factors held constant. E s = 0 Perfectly Inelastic 0 < E s < 1 Inelastic Supply E s > 1 Elastic Supply

6. Changes in Supply Elasticity Quantity / Unit Time $ Price

7. Factors influencing Supply Input prices Technology Change in returns from products that compete for productive resources. Joint products Soybean / Soybean Meal Lambs / Wool Price and Yield Risk Government Intervention

8. Cost Curves and Supply Quantity / Unit Time Original Input Price $ Price S 2 S 1 Lower Input Price P1P1 Q1Q1 P2P2

9. Product – Factor Price Relationship Optimum factor use (of input x) will change when relative factor input / product prices change. Producer Optimizes Factor Use:

10. Input Prices and Supply Quantity Input X D2D2 Factor Price S x P1P1 P2P2 X1X1 X2X2 D1D1

11. Input Prices and Supply Quantity Input X D2D2 Factor Price S x P1P1 P2P2 X1X1 X2X2 D1D1

12. Supply Changes Shift Parallel shifts from changes such as input costs. Structural Change Changes in the parameters or functional form (technology, government programs).

13. Supply Response Path Quantity / Unit Time Price Increase Response $ Price S 2 S 1 Price Decrease Response P2P2 P3P3 Q3Q3 P1P1 Q2Q2 Q1Q1

14. Historical Supply Shifts Historically, changes in aggregate output have been associated with supply shifts rather than movements along the supply curve. $ Price D 1 S 1 P1P1 Q1Q1 Q2Q2 P2P2 Quantity S 2

15. Marketing Margin Changes Quantity / Unit Time Derived Supply 2 (Retail) $ Price Q 2 Derived Demand 2 (Farm) RP 2 FP 1 Primary Demand (Retail) Derived Demand 1 (Farm) Primary Supply (Farm) Derived Supply 1 (Retail) FP 2 RP 1 M1M1 Q 1 M2M2

16. Methods for Reducing MM Operational Changes Reduce # of middlemen. Reduce risk. Modify marketing structure / organization. Change laws for unfair trading practices. Improve Efficiency Technological advancements. # and location of firms. Economies of size.

17. Short Run Supply Elasticities CropsElasticityLivestockElasticity Potatoes.8Eggs1.2 Soybeans.5Poultry Meat.9 Feed Grains.4Hogs.6 Cotton.4Beef.5 Tobacco.4Milk.3 Wheat.3 Fruits.2

18. Summary Questions Are agricultural products such as wheat and feed grains generally have inelastic or elastic supply elasticities? In describing the “supply response”, are the elasticities of supply equal for price increases and decreases? Why? If output prices drop by 20% and input prices drop by 20%, how much will output change? At low levels of output, is aggregate (or individual) supply more elastic or inelastic? Why?