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Anyone can be an economist. All you must learn are two words, Supply & Demand
Objectives
Use supply & demand diagrams to locate equilibrium prices & quantities . Explain some producer marketing problems using supply and demand curves. Demonstrate how the law of one price connects all prices in a market.
Role of prices
Price Discovery
Process by which buyers and sellers arrive at a specific price (trial and error)
Two stage process: evaluating supply and demand to estimate a market clearing price Apply estimated price to a specific trade with adjustments for several factors
Law of Demand
The lower the price, the __________ will be purchased. The higher the price, the _________ will be purchased.
Why does it work? Consumers attempt to maximize satisfaction Limited incomes Many product alternatives
Derived Demand
The relationship of a demand schedule at one market level to a schedule at another market level. Farm demand for lamb Consumer demand for lamb chops
Law of Supply
The higher the price, the ________ will be offered for sale The lower the price, the ________ will be offered for sale
Quantity supplied vs. supply available
Demand Shifters 1. Population 2. Income 3. Tastes & preferences 4. Prices of substitutes 5. Expectations of price
Supply Shifters Technology Price of inputs Government policies/constraints Random events Expectations of future prices Costs of production
Price Elasticity
Elasticities of Demand
inelastic demand: increased production decreases price > change in volume revenues decline elastic demand, increased production decreases price < change in volume revenues increase
Inelastic TR
Unitary TR=K
Price Decrease
TR
TR
TR=K
Hamburger
All Beef Q
All Food
All Meat
Elasticity of Supply
agriculture demand and supply are both inelastic This lack of responsiveness has a number of implications:
Prices drop => TR drops Prices rise => TR rises Complicates investment planning
The
shocks can either be from supply or demand sides Supply shocks can involve a grouping of droughts across several regions
Supply Control
Inelastic demand curves give incentive to restrict output. Shift supply left Raise total revenue
Difficult because: Farmers increase production when prices rise Free riders Requires government authority
Price floor legally set price above the equilibrium level Supply surplus Store, dump, sell in non competing markets
Summary
Prices direct & coordinate decisions of producers, consumers, & marketing firms. Prices are the result of supply & demand forces. Supply & demand analysis can help understand pricing forces and predict the effects of market changes on prices. Farm prices tend to return to the equilibrium point when disturbed. In the short-run, farm & food products have an inelastic demand & supply, so farm prices & incomes tend to be highly variable. There are several ways to discover prices.