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# ECON ANLY IN AGRIBUS AGEC 3003

LSU

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This 37 page Class Notes was uploaded by Samara Parker on Tuesday October 13, 2015. The Class Notes belongs to AGEC 3003 at Louisiana State University taught by R. Harrison in Fall. Since its upload, it has received 21 views. For similar materials see /class/222711/agec-3003-louisiana-state-university in Agricultural & Resource Econ at Louisiana State University.

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Date Created: 10/13/15

1 Microeconomics FiFTH EDITiON Applyirig the SUPLP39Y39 39 gndDemandM0d 39 39 39 JEFFREY M PERLOFF a jf A 2009 Pearson AddisonWesley All rights reserved Suppose you have a supply and demand curve for ground coffee If the price of coffee beans primary input ground coffee increases which of the following statements is M The price of ground coffee decreases B The price of ground coffee increases c D None of the above are true The demand curve shifts to the left f Suppose you have a supply and demand curve for j ground coffee If the price of tea substitute for ground fi coffee decreases which of the following statements is The price of ground coffee decreases The price of ground coffee increases The demand curve shifts to the left Both A and C are true 99 2009 Pearson AddisonWesley All rights reserved in Topics To Be Covered How the shapes of demand and supply curves matter I Sensitivity of quantity demanded to price Sensitivity of quantity supplied to Price Long run versus short run Effects of a sales tax N 39 I 2009 Pearson AddisonWesley All rights reserved 34 in How shapes of demand and supply matter The shapes of the demand and supply curves determine by how much a shock affects the equilibrium price and quantity Example processed pork same aS Chapter 2 Supply depends on the price of pork and the price of hogs N 39 I 2009 Pearson AddisonWesley All rights reserved 3395 Figure 31 How the Effect of a Supply Shock Depends on the Shape of the Demand Curve 9 a 7 U x 5 Q 19 o 355 330 o 176 215220 0 176 220 Q Million kg t pork per year Q Million kg of perl per year quantlty 2009 Pearson AddisonWesley All rights reserved sensmve to prlce 36 Figure 31 How the Effect of a Supply Shock Depends on the Shape of the Demand Curve Liigi contd c When demand is very a sensitive to price s a shift in the supply 3 curve to 82 a s has no effect on the ez equilibrium price 330 03 9 9 s and a substantial effect 32 1 on the quantity S1 4 5 o 176 205 220 Q Million kg of pork per year 2009 Pearson AddisonWesley All rights reserved 3397 9 Sensitivity of quantity demanded to price Elasticity the percentage change in a variable in response to a given percentage change in another variable Price elasticity of demand a the percentage change in the quantity demanded in response to a given percentage change in the price 2009 Pearson AddisonWesley All rights reserved 3398 Sensitivity of quantity demanded to price cont Formally 0 where A indicates change Example 0 If a 1 increase in price results in a 3 decrease in quantity demanded the elasticity of demand is s 31 3 2009 Pearson AddisonWesley All rights reserved 39 Sensitivity of quantity demanded to price cont Along linear demand curve with a function of 0 Where b is the slope or 0 the elasticity of demand is 2009 Pearson AddisonWesley All rights reserved 310 Q Sensitivity of quantity demanded to price Example The estimated linear demand function for pork is Q 286 20p where Q is the quantity of pork demanded in million kg per year and p is the price of pork in per year At the equilibrium point ofp 330 and Q 220 the elasticity of demand for pork is 2009 Pearson AddisonWesley All rights reserved 33911 Elasticity Along a Demand Curve The elasticity of demand varies along mOSt demand curves Along a downwardsloping linear demand curve the elasticity of demand is a larger negative number the higher the price is 2009 Pearson AddisonWesley All rights reserved 33913 Figure 32 Elasticity Along the Pork Demand Curve Q 286 20p 39 1144 x g b p 20x 4 E2 Perfectly elastic Q 5 72 E ab 14301 I Q w Elastic lt 1 Q 1144 8 8 4 g 20X 2 03 D 220 M2 715 Unitary g 1 Inelastic 0 gt 8 gt 1 330 8 0393 Perfectly inelastic 0 a5 572 a2 143 220 a 286 Q Million kg of pork per year 314 2009 Pearson AddisonWesley All rights reserved According to AgcaoliSombilla 1991 the elasticity of demand for rice is O47 in Austria O8 in China 025 in Japan and O55 in US In which countries is the 391 demand for rice inelastic All countries except China Only in China Only in Japan All countries 99 I 2009 Pearson AddisonWesley All rights reserved Figure 33 Vertical and Horizontal Demand Curves a Perfectly Elastic Demand b Perfectly Inelastic Demand 0 Individual s Demand for Insulin p Price per unit p Price per unit p Price of insulin close Uti Q Units per 62 Q Units per Q Q Insulin time period time period doses per day 2009 Pearson AddisonWesley All rights reserved 33917 Sensitivity of quantity demanded to income Formally 0 where Ystands for income Example 0 If a 1 increase in income results in a 3 increase in consumption of a good the income elasticity of demand is a 31 3 2009 Pearson AddisonWesley All rights reserved 318 Sensitivity of quantity demanded to price Example The estimated demand function for pork is Q 171 20p 2019b 3pc 2Y 0 wherep is the price of pork pb is the price of beef pc is the price of chicken and Yis the income in thousands of dollars 0 Question what would be the income elasticity of demand for Pork if Q 220 and Y 125 0 Answer Since AQ 2 then I 39 2009 Pearson AddisonWesley All rights reserved 33919 f If the income elasticity for a good is positive then which of the following statements is true A The good is an inferior good B The good is a normal good C Increases in consumer incomes result in an increase in consumption of the good D Both B an C are true 2009 Pearson AddisonWesley All rights reserved 33920 Sensitivity of quantity demanded to the price of a related good Formally 0 where P0 stands for price of another good Example 0 If a 1 increase in the price of a related good results in a 2 decrease in consumption of a good the crossprice elasticity of demand is 21 2 2009 Pearson AddisonWesley All rights reserved 33921 Sensitivity of quantity demanded to the price of a related good If the crossprice elasticity is positive the goods are substitutes Question can you think of any examples of two goods that are substitutes Roses and carnations If the crossprice elasticity is negative the goods are complements Question can you think of any examples of two goods that are complements Peanut butter and jelly 2009 Pearson AddisonWesley All rights reserved 33922 f If the cross price elasticity for goods A and B is quot negative then which of the following statements is true A The goods are complements B The goods are substitutes C An increase in the price of good B causes the demand curve for good A to shift to the left D Both A and C are true 2009 Pearson AddisonWesley All rights reserved q Sensitivity of quantity demanded to price Example Again the estimated demand function for pork is Q 171 20p 2019 3pc 2Y Question what would be the crossprice elasticity between the price of beef and the quantity of pork if Q 220 and pb 4 Answer Since g 20 then 2009 Pearson AddisonWesley All rights reserved 33924 Sensitivity of quantity supplied to price Formally 0 where Q indicates quantity supplied Example 0 If a 1 increase in price results in a 3 increase in quantity supplied the elasticity of supplied is n 31 3 2009 Pearson AddisonWesley All rights reserved 33925 a Sensitivity of quantity supplied to price cont Along linear supply curve with a function of 0 Where h is the slope or 0 the elasticity of demand is 2009 Pearson AddisonWesley All rights reserved 33926 Sensitivity of quantity demanded to price Example The estimated linear supply function for pork is Q 88 40p where Q is the quantity of pork supplied in million kg per year and p is the price of pork in per year At the equilibrium wherep 330 and Q 220 the elasticity of supplied is I 39 2009 Pearson AddisonWesley All rights reserved 33927 Figure 34 Elasticity Along the Pork Supply Curve p per kg 0 I176 220 260 300 0 Million kg of pork per year 328 I quot 2009 Pearson AddisonWesley All rights reserved Demand Elasticities Over Time Elasticities tend to be larger in the long run Can you think why In the case of demand Substitution and storage opportunities In the case of supply Converting fixed inputs into variable inputs 2009 Pearson AddisonWesley All rights reserved 33929 Effects of a Sales Tax 1 What effect does a sales tax have on equilibrium prices and quantity 2 Is it true as many people claim that taxes assessed on producers are passed along to consumers 3 Do the equilibrium price and quantity depend on whether the tax is assessed on consumers or on producers 2009 Pearson AddisonWesley All rights reserved 33932 Two Types of Sales Taxes Ad valorem tax for every dollar the consumer spends the government keeps a fraction or which is the ad valorem tax rate Unit tax where a specified dollar amount 1 is collected per unit of output N 39 I 2009 Pearson AddisonWesley All rights reserved 33933 Figure 35 Effect of a 105 Specific Tax on the Pork Market Collected from Producers 32 A tax on producers shifts the supply curve upward by the amount of the tax e2 T105 S1 T105 400 s which causes the market 6 price to increase 53pperkg p3330 39 139p2 1295 After the tax buyers are worse off by 070 400 330 sellers are worse off by 035 330 295 and the overnment collects 2163 in revenue T 2163 million D o quot176 02 206 01 220 Q Million kg of pork per year 2009 Pearson AddisonWesley All rights reserved 33934 3quot N 39 I 2009 Pearson AddisonWesley All rights reserved How Specific Tax Effects Depend on Elasticities The government raises the tax from zero to 1 so the change in the tax is AT 1 O T s The price buyers pay increases by Ap 77 AT 77 8 Ife O3 and n 06 a change of a tax of AI 105 causes the price buyers pay to rise by Ap 77 jAT 77 8 06 06 03 x 105 070 335 Solved Problem 32 If the supply curve is perfectly elastic and demand is linear and downward sloping what is the effect of a 1 specific tax collected from producers on equilibrium price and quantity and what is the incidence on consumers Why 2009 Pearson AddisonWesley All rights reserved 33936 Solved Problem 32 32 pZp11 f 82 I1 1 I 81 p Price per unit p1 02 I1 0 Quantity per time period 2009 Pearson AddisonWesley All rights reserved 33937 9 Figure 36 Effect of a 105 Specific Tax on Pork Collected from Consumers 9 6 Q 99 Q up 39ers p400 Reg Wedger105 s p330 T216m e2 295 r1o5 i D1 D2 1 Ilkpil o 176 Q2206 Q1220 Q Million kg of pork per year 2009 Pearson AddisonWesley All rights reserved 33938 0 176 02 206 01 220 0 Million kg of pork per year 2009 Pearson AddisonWesley All rights reserved 33939 Solved Problem 33 If the shortrun supply curve for fresh fruit is perfectly inelastic and the demand curve is a downwardsloping straight line what is the effect of an ad valorem tax on equilibrium price and quantity and what is the incidence on consumers Why 2009 Pearson AddisonWesley All rights reserved 33940 Solved Problem 33 p Price per unit orpquot 1 any e2 0 0 Quantity per time period 2009 Pearson AddisonWesley All rights reserved 33941

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