Download 311 orientation - McGill University

C6 - Supply/Demand Market Model
Changes in Market Conditions using
Demand and Supply Concepts
Analysis - elasticities
Expanded Market Framework
Derived Demand and Supply
Marketing margin
Simple Market Model
Demand and Supply shifts
Qualitative implications for equilibrium Price and Quantity
Inferences – Is S/D responsible for change in conditions?
Quantitative analysis
using elasticities (own, cross, income)
Simple Market Model - Demand shifts
P
D2
S
D1
Q
P & Q move in same direction
Simple Market Model - Supply shifts
P
D
S1
S2
Q
P & Q move in opposite direction
Unterschultz, J.R., Scott R. Jeffrey and Kwamena K. Quagrainie., Value-Adding 20 Billion
by 2005: Impact at the Alberta Farm Gate., AARI Project #980842., Department of Rural Economy.,
University of Alberta, 2000
Unterschultz, J.R., Scott R. Jeffrey and Kwamena K. Quagrainie., Value-Adding 20 Billion
by 2005: Impact at the Alberta Farm Gate., AARI Project #980842., Department of Rural Economy.,
University of Alberta, 2000
Price Analysis Using Elasticities - Change in Demand
- Appendix A
D  f (P,I )
f
f
D
D
dD  dP  dI 
dP 
dI
P
I
P
I
dD D P dp D I dI




D P D P I D I



D  P   I

From Schrimper: Demand Elasticities for Beef
Price increase = 30%;
(-0.62 and
0.39)
Income
 increase = 1%
Change in demand = (-0.62)(0.30) + (0.39)(0.01) =
- 0.182
(- 18%)
Change in Supply
S  f (P)
f
S
dS 
dP 
dP
P
P
dS S P dP


S P S P
From Schrimper:

Change in supply =


 S  P
Supply Elasticity for Corn (0.34 to 1.59)
Price increase = 30%;
(0.34)(0.30)
=
0.102
(10%)
US expected production 2013 = 14 Billion bu (356 Million tonnes)
12.5 Bbu in 2010
Change in Equilibrium Price
.
Demand Shifter: (change in income)
Equilibrium Condition: (supply = demand)
SD
or

dS dD
 dS  dD and

S
D

S D





S    P =   P   I = D


P(   )    I

P

 I
(   )
NB :   0 ;   0
Exercise: Based on US Soybean Market
Demand and Supply Equ ations
QD  106.263  0.039  I  0.052  PS
QS  79.11  0.052  PS
Where:

Q
I
PS
= quatity (milli ons of tonnes)
= US percapita GDP (23 in 2000) (thousands of $US)
= price of soybeans ($US/tonne)
Setting income at the 2000 level of 23 thousand, the corresponding inverse supply and
demand functions are:
PS  2060.77 19.23  QD
PS  2397.27  30.30  QS
Elasticities: (From Piggot, Wohlgenant, and Zering, NCS University, 2000)

S  0.12
D  0.19
I  0.01
-
Interpret the meaning of the 3 elasticities
Solve for the Market Equili brium (price and quantity) using the inverse
functions
- Use the relationship between a proportional change in income and price to
estim ate the effect on demand of a 10% increase in price and income
1) Use the relationship between income and market price to estim ate the effect on
market price of a 10% change in income
Analysis of the Economic Importance of Changes in Soybean Use. Nicholas E. Piggott, Michael K.
Wohlgenant, and Kelly D. Zering, North Carolina State University January 31, 2000
Expanded Framework
• Multiple levels of marketing system
• Derived demand
– retail (primary) => farm (derived)
– marketing margin
– marketing activities (cost)
• links consumer and producer behaviour
– deduce how retail shifts impact farm demand
Derived Demand
Linear Marketing Margin
P
Dr
Retail (Primary) Demand
Derived (farm) Demand
Df
Q
Assumptions: Linear Marketing Margin
•
Inputs: used in fixed proportions
– Retail Price = farm price + marketing inputs
– constant returns - no economies of scale (marketing activities)
•
Prices (marketing inputs)
– fixed/constant => perfectly elastic supply (competitive markets)
•
Margin
– temporal invariance
Implications
–fixed absolute margin
–Price elasticity - market levels
Elasticity and Derived Demand
P
Dr
(P/Q)r
=1
Df
(P/Q)f
Demand elasticity at retail higher than farm level
dQ P


dP Q
P 
P 
and     
Qr
Q f
 PF 
 F   R   
 PR 
Shifts in demand or margin
• Shift in retail demand – BSE crisis
• Farm level demand shifts down
• Marketing margin constant
P
Dr
Df
Shifts in demand (margin)
• Increase in marketing costs (new regulations)
• Farm demand (derived) shifts downward
P
Dr
Df
Alternative Models
• Margin varies with quantity (proportional markup)
• Decrease in marketing costs – as output expands
P
Dr
Df
=1
Q
Demand elasticity at retail still higher than farm level
Derived Supply
Farm supply (primary)
Retail supply (derived)
Derived Supply and Demand
P
DR
SR
PR
SF
DF
PF
Q*
Quantity
Shift in Demand
DR
P
SR
DF
PR
SF
PF
Q*
Increase in Marketing Margin
P
DR
SR
PR
SF
DF
PF
Q*
Q
An Extension - Appendix B
Some commodities have alternative uses
Soybeans: US output 3.1 Billion bushels (2011) (0.9 Bbu - 1965)
Crush yields (60 lb bu)
47 lb meal (78%)
and 11 lb oil
Demand for beans = F(demand for meal and demand for oil)
Total demand for beans (kinked demand function)
CBOT Soybean Price (2003 – 2011)
$ 13
$6
Deriving Total Demand - Kinked Demand Function
P
S
D1
P*
TD
D2
Q