Download Producer’s Goal Supply Review

EconS 451: Lecture #7
Producer’s Goal
Supply Review
•
Understand the relationship between average and marginal cost curves
and supply (both long-run and short-run).
•
Be able to calculate the elasticity of supply and understand what values
indicate Inelastic and Elastic supply.
•
Understand the relationship between product price and factor price and
the quantity produced of a given product.
•
Be able to understand those factors which shift (or influence)
supply……and how.
•
Describe the concept of “Supply Response”.
•
Describe…..in detail how changes in marketing margins impact producers
relative to consumers.
Max π s.t. Production Technology
Profit Maximization Occurs:
MR = MC
Cost of
Revenue / Unit
Cost Curves and Supply
Cost Curves and Supply
Marginal Cost Curve
$ Price
Short Run
Tim
e
Long Run
P2
Average Total Cost
P1
Average Variable Cost
Q1
Q2
Quantity / Unit Time
Quantity / Unit Time
Changes in Supply Elasticity
Percentage change in Quantity Supplied in
response to a 1 percent change in price, all other
factors held constant.
Es =
Es = 0
0 < Es < 1
Es > 1
∂Q P
∂P Q
$ Price
Price Elasticity of Supply
Perfectly Inelastic
Inelastic Supply
Elastic Supply
Quantity / Unit Time
1
Cost Curves and Supply
Factors influencing Supply
Input prices
•
Technology
S 1 Original Input Price
$ Price
•
Change in returns from products that compete for
productive resources.
•
S2
Lower Input Price
P1
P2
Joint products
•
•
•
Soybean / Soybean Meal
Lambs / Wool
•
Price and Yield Risk
•
Government Intervention
Q1
Product – Factor Price Relationship
M Px =
Input Prices and Supply
Factor Price
Producer Optimizes Factor Use:
•
Pfactor
Pproduct
Quantity / Unit Time
Sx
P1
P2
D2
Optimum factor use (of input x) will change when
relative factor input / product prices change.
•
D1
X1 X2
Input Prices and Supply
Quantity Input X
Supply Changes
Factor Price
• Shift
• Parallel shifts from
changes such as input
costs.
Q = α + β P − γX
Sx
P1
P2
D2
D1
X1
X2
Quantity Input X
• Structural Change
• Changes in the
parameters or
functional form
(technology,
government programs).
Q = α + β P − γX 2
2
Supply Response Path
Historical Supply Shifts
S1
Price Increase
Response
S2
$ Price
$ Price
S2
S1
P2
P1
Price Decrease
Response
P3
P1
P2
Historically, changes in
aggregate output have
been associated with
supply shifts rather than
movements along the
supply curve.
D1
Q1
Q3 Q2
Q1
Quantity / Unit Time
Marketing Margin Changes
$ Price
Quantity
Methods for Reducing MM
Derived Supply 2 (Retail)
RP2
Q2
• Operational Changes
• Reduce # of middlemen.
• Reduce risk.
• Modify marketing structure / organization.
• Change laws for unfair trading practices.
Derived Supply 1 (Retail)
M2
Primary Supply (Farm)
RP1
M1
FP1
FP2
• Improve Efficiency
• Technological advancements.
• # and location of firms.
• Economies of size.
Primary Demand (Retail)
Derived Demand 1 (Farm)
Derived Demand 2 (Farm)
Q2 Q 1
Quantity / Unit Time
Short Run Supply Elasticities
Crops
Elasticity
Livestock
Summary Questions
•
Are agricultural products such as wheat and feed grains
generally have inelastic or elastic supply elasticities?
•
In describing the “supply response”, are the elasticities
of supply equal for price increases and decreases?
Why?
•
If output prices drop by 20% and input prices drop by
20%, how much will output change?
•
At low levels of output, is aggregate (or individual)
supply more elastic or inelastic? Why?
Elasticity
Potatoes
.8
Eggs
1.2
Soybeans
.5
Poultry Meat
.9
Feed Grains
.4
Hogs
.6
Cotton
.4
Beef
.5
Tobacco
.4
Milk
.3
Wheat
.3
Fruits
.2
3