CHAP2_Presentation - Foundations of Price Analysis: Supply...

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1 Chapter 2 Foundations of Price Analysis: Supply and Demand Theory Economics is the painful elaboration of the obvious P Q P Q Foundations of Price Analysis: Supply and Demand Theory Objectives: 1. Present economic theory of supply 2. Present economic theory of demand 3. Provide examples from food industry P Q P Q Concepts 1. Maximize : to increase to a maximum 2. Optimize : to make as perfect, effective, or functional as possible Maximize objective by optimizing choice variable, subject to some constraint –e.g., students maximize GPA by optimizing time allocation. Constraint is? –drivers maximize the mpg of car by optimizing driving behavior. Constraint is? –producers maximize profits by optimizing production. Constraint is? Utility: a measure of the relative satisfaction (well-being) from consumption of goods –consumers maximize utility by optimizing consumption. Constraint is?
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2 Chapter 2 Producer Theory Demand Theory Producers maximize profit by optimizing production, subj. to tech. constraint Consumers maximize utility by optimizing consumption, subj. to budget constraint Derivation of producer supply curve Derivation of consumer demand curve Summation of all producer supplies = mkt supply Summation of all consumer demand = mkt demand Prices determined by interaction of market demand & market supply Individual’s supply function Relationship between price and quantity sold (from price to quantity), holding everything else constant over time Qs = f(P | other supply determinants) Law of supply - firms devote more inputs to producing a good when price increases It is conventional for price to be shown on the vertical axis and for quantity to be shown on the horizontal axis of graphs of supply functions Important distinction: Change in quantity supplied - movement along supply curve due to price change Change in supply - shift in supply curve due to change in other supply determinant What are some supply determinants?
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3 Chapter 2 Individual supply determinants (shifters): A shift in the supply curve to the right (an increase in supply) means that a larger quantity will be offered at a given price 1. Input (factor) prices (-) –gas and oil, pork and corn 2. Profitability (prices) of competing goods (-) –corn price and soybean production 3. Prices of joint products (+) –sheep breeding flock affected by prices of lamb and wool 4. Risk and uncertainty (-) the greater risk, the less farmers are likely to produce at a given price. Risk (price and yield) is usually measured by the variance –outbreak of BSE, news coverage of food contamination 5. Technology (+) –principal source of long-term shifts in ag supply functions, upward trends in yields –development of high-yielding varieties of crops and breeds of stocks, better methods of disease control, RBST hormone used in milk production, GM foods 6. Weather (+) 7. Government policy (+ and -) –acreage allotments, incentive payments to keep land idle, commodity payments, zoning, land-use and environmental regulations, marketing order rules, and bases and quotas for output
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CHAP2_Presentation - Foundations of Price Analysis: Supply...

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