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CHAP7(updated)_Presentation

CHAP7(updated)_Presentation - Temporal Variations in Price...

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Temporal Variations in Price Commodity prices are the result of a complex mixture of changes associated with seasonal, cyclical, trend, and random factors. –T&R
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Review What have we learned (hopefully) so far? 1. Basic demand theory 2. Basic supply theory 3. Computing and interpreting elasticities 4. Single market price determination: Perfect competition Imperfect competition 5. Empirical price analysis 6. Commodity advertising economics 1. Multiple market price determination What will we learn from now on? 1. Temporal price variations 2. Futures and options market 3. Spatial price analysis 4. Government price policy 5. Price determination by auctions (Ebay); primary education market; pricing strategy for two-sided markets
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Temporal Variations in Price Objectives: 1. Examine variations in price over time, including: A. Seasonal price variations B. Annual price fluctuations C. Longer term price trends D. Price cycles Explain temporal price movements with S and D models 1. The “agricultural problem” 2. News impact on food prices
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Definitions Static : moment in time Comparative static : comparing two different moments in time Dynamic : time explicitly considered What causes temporal price changes? Shifts in S and D curves Magnitude of price change depends on : 1. magnitude of shift in S and D 2. degree of S and D elasticity
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4 rules on impact of D and S shifts on temporal prices 1. Holding S constant, increase in D increases P* and decrease in D decreases P* 2. Holding D constant, increase in S decreases P* and decrease in S increases P* 3. If D increases more rapidly than S, then P* increases 4. If S increases more rapidly than D, then P* decreases P Q D P Q S D P Q S D S P Q S D
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3 rules on impact of D and S elasticities on temporal prices 1. The more inelastic D and S, the more price fluctuations as S and D change 2. The more elastic D and S, the less price fluctuations as S and D change 1. Even if S is inelastic, if D is elastic, changes in P due to S shifts will be relatively small, but not vice versa P Q S D P Q S D
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A. Seasonal variations in prices Seasonal price behavior : a regular repeating price pattern every 12 months due to seasonality in S, D, or both Principal source of seasonality originates from the S side for most ag commodities –Many crops are harvested once per year are storable. The mkt must allocate the available supply over the year to meet a continuous demand –Livestock and livestock products may have seasonality in production e.g., milk production is continuous but is seasonally large after calving in the spring Seasonality in D related to climate, holidays –e.g., D for turkey largest for Nov and Dec holidays Q: D for which ag product now is at its peak within a year? –e.g., D for ice cream, coke, cut flowers –what about video game console (Xbox, playstation, Wii ) A model of seasonal price behavior needs to take account of production, inventory carrying (storage cost), and demand by season
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Nintendo Promises to Ship More of Wii for Holidays – October 2, 2008
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