1. 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

2. $ D Q/yr 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

3. $ D1D1 Q/yr 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

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

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

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

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

10. Supply 3 stages of production Multiply MPP and APP by Price of the output

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

12. $ Q/yr 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

13. Supply Firm Supply and Industry Supply $ $$ $ $ $ Firm 1 QY Firm 2 QY Industry QY S Factors change Industry Supply for Output Y – –Technology – –Costs of inputs to produce Y – –Ag. Policy P QtY S0S0S0S0 S1S1S1S1 S2S2S2S2

14. $ Q/yr 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 MC 1 AVC 1 MC 2 AVC 2

15. $ Q Y /yr Supply New Technology – BST PST Roundup Ready crops Increase TPP >> Higher MPP >> Lower MC Supply shifts to the right Y X TPP 0 TPP 1 Y X MPP 0 MPP 1 $ Q Y /yr The Firm The Industry S0S0S0S0 S1S1S1S1 AVC 0 AVC 1 MC 0 MC 1

16. $ Q/yr Supply Inflation in Input Prices and Supply Price input increases Px MC = Px / MPPx AVC = Px / APPx MC 2 AVC 2 MC 1 AVC 1 S0S0S0S0 S1S1S1S1 $ Q/yr

17. Supply Elasticity of Supply E s = %ΔQY / %ΔPY E s = 0.20 Es = 0.20 = %ΔQY / %ΔPY 0.20 = %ΔQY / 25% 5% = %ΔQY New Quantity = 2600 * 1.05 = 2730 PYPYPYPY QYQYQYQY S 2 2.5 2,600 ?

18. Supply Cross elasticity of supply Elasticity with respect to the price of another crop Es(Q Y, P X ) = %ΔQ Y / %ΔP X Es(Q Y, P x ) = -0.15 S of Y wrt PX PXPXPXPX QYQYQYQY 2.25 2.5 2,600 ?

19. Supply and Demand Equilibrium price is where Demand equals Supply $ P 1 D q 1 Q/yr S1S1 S2S2 P 2 q 2

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 S 1 or S 2 $ P 1 D q 1 Q/yr P 2 q 2 S1S1S1S1 S2S2S2S2

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