2.20 LecNotes

2.20 LecNotes - B. Economics of Agriculture Last time -...

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Unformatted text preview: B. Economics of Agriculture Last time - analyzing price ceiling and floors using supply and demand graphs There's a whole field of economcis dedicated to agriculture and resource management. There are PhD programs - http://are.berkeley.edu/ This time - understand the supply and demand of agriculture goods, and goods with inelastic demand and variable supply. 1. General Characteristics: [Fig. 5] a) Inelastic demand food and clothing are necessities with few substitutes. b) Variable supply weather, pests. Inelastic demand cause greater price changes for any given change in supply Shifting supply increase variability of price fluctuations 1) Price fluctuates greatly due to steep demand and shifting supply. I.e., the equilibrium price is roughly what the supply for farmers earns as revenue. So great fluctuations in price => great fluctuation in income 1) the farmers - generally people hates variability in income. 2) Companies/business/households - that uses agricultural goods for input or consumption I.e., this is a bad thing to 2) Because demand is inelastic, farm incomes also fluctuate and are higher in bad years than good years. c) Consequences and implications. 2. Case Study -- Crop Price Support Programs: We want to do this to reduce fluctuation 0213 More on TOPIC 3 Friday, February 08, 2008 10:40 AM 0219 Page 1 1) If supply rises to S good and P lo < P s , govt adds to demand by buying and storing surplus Q 2 Q*. 2) If supply falls to S bad and P lo > P s , govt adds to supply by selling Q* Q 1 . a) Govt pegs price at support level P s . b) Effect -- P s was usually too high, so govt-owned stocks of crops mounted over the years. This helps 1) farmers and 2) company/households that consumes or uses agricultural inputs Prices are usually set by politicians, and set high to help the farmers. Higher prices induces farmers to produce output regardless of actual market demand. (Demand curve essentially flat.) This hurts 1) tax payers - since government is spending money to buy the extra output. 3. The Cobweb Model: [Fig. 6] Better explanation of the model and why we care: http://en.wikipedia.org/wiki/Cobweb_model We care because this model can be used to explain observed price and 0219 Page 2 fluctuation in the market. a) Lagged supply response. Demand of today (t) is based on the price today. Supply of today (t) is based on the price of yesterday. What the math equation mean: b) Agricultural example. What the picture mean: Start at X* and P*. If a supply shock (shift *SR* supply to the left), farmers have to sell the good at P0 given the demand. For next year, *if the farmer thinks that the prices will again be at P0*, then they will supply X1....
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This note was uploaded on 12/05/2009 for the course ECON 88008 taught by Professor Carollfoster during the Winter '08 term at UCSD.

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2.20 LecNotes - B. Economics of Agriculture Last time -...

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