Slide Show #2 AGEC 430 Macroeconomics of Agriculture Spring 2010

Slide Show #2Slide Show #2AGEC 430

Macroeconomics of Agriculture

Spring 2010

General DomesticEconomy

Domestic MacroPolicy

Global Macro Policy and Growth

Food ProcessingAnd Fiber

Manufacturing Sectors

Farm InputSupplySectors

WholesaleAnd Retail

Trade Sectors

Farms andRanches

Farms andRanches

FarmPolicy

EnvironmentalPolicy

Farm Credit

Markets

Farm and Non-farm

Labor Markets

Domestic Wheat Market

Domestic Wheat Market

Handout #1Handout #1

Handout #2Handout #2

US Corn MarketUS Corn MarketUS Corn MarketUS Corn Market

Client nations

Client nations

Competitor nations

Competitor nations

Food demand

Food demand

Other demand

Other demand

Feed demand

Feed demand

Stock demand

Stock demand

Export demand

Export demand

US Corn Market LinkagesUS Corn Market Linkages

USproduction

USproduction

Beginningstock

Beginningstock

Imports into US

Imports into US

Global market

- Components of Supply -

- Components of Demand -

US Corn Market StructureUS Corn Market StructureDemand components:Food useFeed useOther domestic use Total domestic useEnding stocksExports Total demand

Supply components:Beginning stocksProductionImports Total supply

Demand Supply

PE

QE

A monopsonist (single seller) will consider the marginal revenue product curve rather than the market demand curve and set price where MRP=MIC rather than were demand equals supply under perfect competition.

A monopsonist (single seller) will consider the marginal revenue product curve rather than the market demand curve and set price where MRP=MIC rather than were demand equals supply under perfect competition.

Remember, the supply curve is the summation of marginal costcurves of firms in the market, or S = ∑MCi.

Remember, the supply curve is the summation of marginal costcurves of firms in the market, or S = ∑MCi.

The supply curve for a monopolist (single buyer) is its marginal cost curve. It will operate where MR=MC and price off the demand curve, thus supplying less than that observed under perfect competition.

The supply curve for a monopolist (single buyer) is its marginal cost curve. It will operate where MR=MC and price off the demand curve, thus supplying less than that observed under perfect competition.

Merging Demand and SupplyMerging Demand and Supply

Price

Quantity

D S

PE

QE

D ≡ SD ≡ SD ≡ SD ≡ S

A disequilibrium may occur in a market due to a event affecting demand or supply where the market has not fully reacted to the event. At a specific asking price sought by producers, consumers are not willing to buy (market surplus), or buyers are willing to buy but producers are not willing to sell (market shortage).

A disequilibrium may occur in a market due to a event affecting demand or supply where the market has not fully reacted to the event. At a specific asking price sought by producers, consumers are not willing to buy (market surplus), or buyers are willing to buy but producers are not willing to sell (market shortage).

Year 2 ReactionsYear 2 Reactions

Producers use last year’sprice as their expectedprice for year 2 in deciding toproduce quantity Q2.consumers on the otherhand pay this year’s price determined by Q2.

Producers use last year’sprice as their expectedprice for year 2 in deciding toproduce quantity Q2.consumers on the otherhand pay this year’s price determined by Q2.

Year 3 ReactionsYear 3 Reactions

P2

P3

Producers now decide tocut back production toquantity Q2 given last year’s price P2. This lower quantity pushes price consumers mustpay up to P3 in year 3.

Producers now decide tocut back production toquantity Q2 given last year’s price P2. This lower quantity pushes price consumers mustpay up to P3 in year 3.

Cobweb Pattern Over TimeCobweb Pattern Over Time

Marketequilibrium

Marketequilibrium

The market converges tomarket equilibrium wheredemand intersects supplyat price PE. In some markets, this adjustmentperiod may only be monthsor even weeks rather thanyears assumed here.

The market converges tomarket equilibrium wheredemand intersects supplyat price PE. In some markets, this adjustmentperiod may only be monthsor even weeks rather thanyears assumed here.

Given the inelastic demand for raw agricultural products, an increase in supply will result in a decline in revenue to producers.

Given the inelastic demand for raw agricultural products, an increase in supply will result in a decline in revenue to producers.

Effective ceiling creates a shortage where QD > QS

Effective ceiling creates a shortage where QD > QS

Effective ceiling creates a shortage where QD > QS

Effective ceiling creates a shortage where QD > QS

Price ceilings set by government never work over the longer run. An example is the ceiling placed by President Nixon on meat back in the 1970s when you could not find meat in the stores. The ceiling was eventually removed.

Price ceilings set by government never work over the longer run. An example is the ceiling placed by President Nixon on meat back in the 1970s when you could not find meat in the stores. The ceiling was eventually removed.

An increase in the minimum wage generally causes an increase in unemployment of minimum wage earners, resulting in a labor market surplus and higher unemployment rate.

An increase in the minimum wage generally causes an increase in unemployment of minimum wage earners, resulting in a labor market surplus and higher unemployment rate.

Handout #3Handout #3

Signs are importantSigns are important

Substitute demand and supply equations into the equilibrium and solve for price (POWN)

Substitute demand and supply equations into the equilibrium and solve for price (POWN)

Revenue fallsRevenue falls

Revenue risesRevenue rises

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