Introduction
• Interregional competition is an important part of agriculture
• How can they afford to ship those potatoes all the way from Idaho? Can’t we compete with our potatoes?
• If energy prices rise, will our peach industry be more competitive?
• Why isn’t Pennsylvania more self-sufficient in food production?
Basic situation
• Two regions – west & east
• Each has a supply, each has a demand
• With no trade, each would be self-sufficient in this crop – potatoes
• With trade, part of the eastern market is served by western potatoes.
Some Intuition
• Potato price in west without trade is $5/cwt.
• Potato price in east without trade is $11/cwt.
• Costs $1 per cwt to ship potatoes across country – either way.
• Could you buy potatoes in east and sell them in west?
Intuition (cont.)
• How much would you make?
• Could you buy potatoes in west and sell them in the east?
• How much would you make?
• If you did, what would happen to the price in the east?
• What would happen to the price in the west?
Intuition (cont.)
• At what point would you quit shipping potatoes?
• Why?
• America now has one big potato market
• P east = P west + freight
• Total Quantity Demanded = Total Quantity Supplied
Things to Notice
• Market 1 has a higher price than market 2
• The price difference is greater than the transport price, which is $2
• So, someone could buy in market 2 at $5, ship to market 1 at a cost of $2, and sell it for $12 and make money
With Trade (cont.)
3 2 2 4 62 2( )P P
5 4 02P P P2 18 1 0 ,
S D S D1 1 2 28 1 4 9 3 , , ,
Q D S S DT 1 1 2 2 6
Steps for solving
• Solve without trade
• Find high-priced market (h) and low priced market (l)
• Ph = Pl + Pt
• Sh + Sl = Dh + Dl
• Substitute in values and solve for Prices and quantities
How to do graphs
• You need three graphs: market 1, market 2, and trade
• Put the supply and demand curves on market 1 & 2 graphs
• Put excess demand on the graph for the high priced market
• Put excess supply on the graph for the low priced market
• Put excess demand and excess supply on the trade graph
• Add the transportation cost to the excess supply curve
• Where this line crossed excess demand determines the price in the high priced market with trade and the quantity traded
• At that quantity, the price in the low priced market is where it crosses excess supply
• Plot the with trade prices on each market’s graph and identify quantity supplied, quantity demanded and quantity traded