1. Consumer Demand u Various quantities of a commodity that an individual is willing and able to buy as the price of the commodity varies holding all other factors constant.

2. Consumer Demand u Demand begins with individual consumer u Inverse relationship between quantity and price Two dimensional, Price and QuantityTwo dimensional, Price and Quantity

3. Downward sloping demand u Begin with individual’s utility function and a budget constraint u Substitution effect consumers buy what’s cheaperconsumers buy what’s cheaper u Income effect “income” increases if prices fall“income” increases if prices fall

4. Per Capita Consumption in Pounds

6. Market or Aggregate Demand u Add individual demand curves u Horizontally across consumers u http://www.aaec.vt.edu/rilp/Demand% 20Changes-2000.pdf (Pages 1-10) http://www.aaec.vt.edu/rilp/Demand% 20Changes-2000.pdf http://www.aaec.vt.edu/rilp/Demand% 20Changes-2000.pdf

8. Demand is a function of u Price of substitutes u Price of complements u Consumer income u Taste and preferences u IS NOT FUNCTION OF THE GOOD’S OWN PRICE

9. Change in Demand or in Quantity Demanded Px Qx D1 D2 A B Moving from A to B due to a price decline is a change in quantity demand. A shift of the demand curve from D1 to D2 is a change in demand. C

10. Factors effecting aggregate demand for a product u Exports u New product development u Advertising u New information u Product differentiation

11. Income effect on food demand u Food is normal good Income demand Income demand Particularly important for meatsParticularly important for meats Emerging economiesEmerging economies u Services are a normal good Income services Income services

12. Inverse Demand u Price is a function of quantity P = f(Q)P = f(Q) u Important in agriculture Short run supplies are relatively fixedShort run supplies are relatively fixed Prices change to clear the marketPrices change to clear the market

13. Supply u The amount of a given commodity that will be offered for sale per unit time as the price varies, other factors held constant.

14. Supply u Derived from cost function Production functionProduction function Input - output relationshipInput - output relationship u Assume that firms seek to Maximize profitsMaximize profits Minimize costsMinimize costs u Supply starts will individual firm

15. Production Function Total Product Input Output Increasing returns to the input Decreasing returns to the input

16. Opportunity cost u The opportunity cost of commodity A is income forgone by not producing commodity B. u Measures of opportunity cost Market value of inputMarket value of input Expected return over other cost of not producing commodity B.Expected return over other cost of not producing commodity B.

17. Cost Curves u Average variable cost = AVC Total variable cost / QTotal variable cost / Q Variable costs change with QVariable costs change with Q u Average fixed cost = AFC Total fixed cost / QTotal fixed cost / Q Fixed costs do not change with QFixed costs do not change with Q u Average total cost = ATC = AVC+AFC

18. Cost Curves u Marginal cost = MC Change in total cost by producing 1 more Change in total cost by producing 1 more TC / Q TC / Q

19. Cost curves Cost Q MC ATC AVC

20. Supply curve u MC curve above AVC curve u Upward sloping curve Optimal output @ MC = MROptimal output @ MC = MR MR = Price => Optimal at MC=PriceMR = Price => Optimal at MC=Price The last unit of input just pays for itselfThe last unit of input just pays for itself

21. Profit u Profit = total revenue - total cost TR= P x QTR= P x Q TC = ATC x QTC = ATC x Q u Profit per unit = Profit/Q = TR/Q - TC/Q= TR/Q - TC/Q = P - ATC= P - ATC u Profit maximizing Q MC=MR=PMC=MR=P Profit/Q = P-ATC at optimal QProfit/Q = P-ATC at optimal Q

22. Optimal Q at P=MC MC ATC AVC P1P1 P2P2 Cost QQ1Q1 Q2Q2

23. Market or Aggregate Supply u Combination of individual supply schedules Add horizontally across firmsAdd horizontally across firms u Flattens with time More time to adjust supplyMore time to adjust supply

24. Market supply curves Qx Px S Short run S Long run

25. Cost curves and supply u Shut down if P < AVC Lose on every unit producedLose on every unit produced P>AVC make some payment to fixed costP>AVC make some payment to fixed cost u In the long run everything is variable Short run defined by having fixed costShort run defined by having fixed cost u Long run supply curve for individual Low point on ATC curveLow point on ATC curve

26. Market supply curves Qx Px S1S1 S2S2 A B C Move from A to B is a change in quantity supplied due to a price decline. Move from B to C is a shift in supply.

27. Supply Shifts from Change u in input prices u in returns for competing enterprises u in technology on yields or costs u in price of joint products u in yield and/or price risk u institutional constraints

28. Additional references u Reading room Agricultural Product Prices, Tomek & Robinson Chpts 2 and 4.