INTRO TO AG ECON
INTRO TO AG ECON ARE 012
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ltgt Price Elasticity of Demand Lecture 2 a 2 Move Down the Demand curve TOTAL REVENUE first increases reaches a maximum orpeak an then decreases Qd ther Curve Ball Folks All downward sloping linear demand curves can be divided into 3 distinct sections that differ in elasticity IEd I gt 1 Elastic Section IEd I 1 Unitary Elastic Section IEd I lt 1 Inelastic 4 Section Qdut Qdut4 Changes If a price change causes TR to move in the opposite direction from the price change we are in the elastic portion of the demand curve Changes Therefore if T P gt l TR 01 if lPgtTTR Elastic Section of Demand Curve Changes If a price change causes TR to move in the same direction as the price change we are in the inelastic portion of the demand curve Changes Therefore if T P gt T TR 01 iflPgtlTR Inelastic Section of Demand Curve ember P Relatively inelastic Relativ ely elastic The two demand curves have the 3 sections of elasticity We use the terms relatively inelastic or elastic here as a means of saying that over the whole range 3 sections the average elasticity of demand is either inelastic or elastic 10 ember P P 110 Relaflvely elashc 550 Relatively 95 inelastic 15 Q Avg 625 Avg 3225 ltgt39 When IEdI gt 1 gt elastic demand gt TRT withaPL IEd I 1 gt unitary demand gt TR is maximized IEdI lt 1 gt inelastic demand gt TR 1 withP lo 12 tical Use Would a producer facing a negatively sloped demand curve for the commodity heshe sells ever want to operate in the inelastic range of the demand curve Generally NO 13 P J I Qdut TR TR m W24 Q0 and Q1 yield the same total revenue Now Some Common Sense Don39t you think the total cost TCof producing Q0 is lt the TC of producing Q1 15 1 1 J I Qdut TR TR m TC W26 t to Maximize Pro ts 1t TRTC 10 TR0 TC0 11 TR1 TC1 1rogt1v1 17 tical Use Ag Production Relatively inelastic demand to begin with why would producers ever want to produce in the inelastic portion of a relatively inelastic market demand curve Demand for Ag Commodities Q 18 But many agricultural commodities are produced in the inelastic section of an inelastic market demand curve 19 A Qdut PROFIT LOSS Qd Eo Acreage reduction Programs set aside soil bank CRP WRP quotas allotments One of the main reasons we have had acreage control programs and price supports in the past was to encourage producers to collectively reduce production 22 Based on a Supreme Court ruling in 1943 our Constitution does allow direct government control of agriculture However recognizing that direct government control may not be politically palatable to the citizenry agricultural producers are essentially bribed by government to cut production Government offers producers guaranteed prices for their commodities and direct treasury subsidies in return for cooperation 23 In Wickard v Filburn decided upon by the Supreme Court November 9 1942 with one justice dissenting ruled that the government did have a Constitutional light to control agricultural production by virtue of the Commerce Clause ofthe Constitution quotThe general scheme of the Agricultural Adjustment Act of 1938 as related to wheat is to control the volume moving in interstate and foreign commerce in order to avoid surpluses and shortages and the consequent abnormally low or high wheat prices and obstructions to commercequot The present Chief Justice has said in summary of the present state of the law The commerce power is not con ned in its exercise to the regulation of commerce among the states It extends to those activities intrastate which so affect interstate commerce or the exertion of the power of Congress over it as to make regulation of them appropriate means to the attainment of a legitimate end the effective execution of Based on a Supreme Court ruling in 1943 our Constitution does allow direct government control of agriculture However recognizing that direct government control may not be politically palatable to the citizenry agricultural producers are essentially bribed by government to cut production Government offers producers guaranteed prices for their commodities and direct treasury subsidies in return for cooperation 24 the granted power to regulate interstate commerce The power of Congress over interstate commerce is plenary and complete in itself may be exercised to its utmost extent and acknowledges no limitations other than are prescribed in the Constitution It follows that no form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress Hence the reach of that power extends to those intrastate activities which in a substantial way interfere with or obstruct the exercise of the granted power It is well established by decisions of this Court that the power to regulate commerce includes the power to regulate the pIices at which commodities in that commerce are dealt in and practices affecting such prices 28 One of the primary purposes of the Act in question was to increase the market pIice of wheat and to that end to limit the volume thereof that could affect the market It can hardly be denied that a factor of such volume and variability as home consumed wheat would have a substantial in uence on pIice and market conditions This may arise Based on a Supreme Court ruling in 1943 our Constitution does allow direct government control of agriculture However recognizing that direct government control may not be politically palatable to the citizenry agricultural producers are essentially bribed by government to cut production Government offers producers guaranteed prices for their commodities and direct treasury subsidies in return for cooperation 25 because being in marketable condition such wheat overhangs the market and if induced by rising prices tends to ow into the market and check price increases But if we assume that it is never marketed it supplies a need ofthe man who grew it which would otherwise be re ected by purchases in the open market Homegrown wheat in this sense competes with wheat in commerce The stimulation of commerce is a use of the regulatory function quite as de nitely as prohibitions or restrictions thereon This record leaves us in no doubt that Congress 317 US 111 129 may properly have considered that wheat consumed on the farm where grown if wholly outside the scheme of regulation would have a substantial effect in defeating and obstructing its purpose to stimulate trade therein at increased prices The government said OK farmers if you want these guaranteed government prices and deficiency payments you have to sign a contract agreeing to cut your production by how much the govt says to cut production 26 It is important to recognize that this level of economic regulation comes from the people and particularly farmers and is not something that some one in government thought would be simply a good thing to do Farmers have demanded price support and have lobbied for it through their farm organizations Farmers have over the years consistently punished politicians who sought free markets by voting them out of office Farmers of course would be happy to receive price support without any restrictions on production however this would push government costs beyond a level the the rest of the taXpaying public would be willing to support Even with production controls direct Federal payments in FY 1999 to farmers amounted to 28 billion or half of all net farm income The Roosevelt administration represented a major increase in Federal economic regulation of agricultural but it is best seen in the light of history The Federal government has been involved in agriculture from its very beginning It distributed land without charge to settlers willing to till it it created a massive military establishment to protect that land from hostile native nations that claimed it as their own it funded research on how to better produce crops and livestock it chartered and subsidized canal companies and later railroads to provide means for transporting the commodities produced by farmers to foreign markets it limited the tariffs The government said OK farmers if you want these guaranteed government prices and deficiency payments you have to sign a contract agreeing to cut your production by how much the govt says to cut production 27 that railroads could charge for the transportation of commodities through antitrust it limited the market power of those who did business with farmers and it provided Federal officers for the tracking capture and repatriation of escaped slaves most of whom were employed in producing agricultural commodities Thus has the Federal government and the farmer been entwined since the beginning of our nation If Federal involvement in agriculture is tyranny then it is to use the words of Jefferson a quottyranny of the majority or at least a majority of farmers Ted Feitshans Lecturer Department of Agricultural and Resource Economics North Carolina State University March 3 2001 rmimm is of Demand sticity Relatively inelastic demand a Very few acceptable substitutes b Shorter adjustment period c Good is a small proportion of budget 28 rmimm is of Demand sticity Relatively elastic demand a Many close substitutes b Longer adjustment period c Good is a large proportion of budget 29 eme Cases Perfectly Elastic Demand D MR Mkt Price Edoo Qdut 30 ctly Elastic Demand This is the demand curve that a Pricetaker confronts A Pricetaker is a producer that has no pricing power They receive the price that is determined by market demand and market supply 31 imizirl g Pro ts Price Takers Conan Market Cotton Producer MC Market Supply D M Market emand Qdut Qdut profit maximizingoutput level forproducer 32 o 39mizing Profits Price Searchers P Q MR Qd t Ed0 ctly Inelastic Demand P Demand Qdut ember 1 If a price change causes TR to move in the same direction as the price change demand is inelastic 2Demand is more elastic in the long run than in the short run 35 lt gt xample Relatively P Relativ ely P elaS C inelastic D Qd week Qd month 36 e Elasticity of Demand EI00AQd00Ald Measures the sensitivity of DEMAND to changes in disposable income 37 1 Curve Shows the relationship between quantity demanded and disposable income given a constant price 38 1 Curve Normal Good Disposable Income Engel Curve for a Normal Good EI gt 0 Qdut 39 ry Goods Luxury Goods are Normal Goods but they have an EI gt 1 Quantity demanded is very senistive to changes in disposable income 40 essities Necessities are Normal Goods but 0ltEIlt 1 Quantity demand is not very sensitive to changes in disposable income 41 1 Curve Inferior Good Disposable Income Engel Curve for an Inferior Good EI lt 0 leat 42 ltgt ozoNormal Goods EI gt0 Luxury Goods EI gt 1 Necessitites 0 lt EI lt 1 ozolnferior Goods EI lt 0 43 6 Income Elasticities Beef Pork Chicken Milk All foods Non foods 29 13 18 20 18 125 sPrice Elasticity Measures how sensitive DEMAND for a commodity is to changes in the price of a substitute or compliment commodity 45 sPrice Elasticity Ecp of xy 00 A QxOo A FY 46 sPrice Elasticity ECp gt 0 2 Substitute ECp lt 0 2 Compliment ECp 0 2 Independent 47 ple The CrossPrice Elasticity of Beef and Pork would be calculated as Ecp Beef Pork 00 A QBeef 00 A PPork 48 ple The CrossPrice Elasticity of Pork and Beef would be calculated as Ecp Pork Beef 00 A QPork 00 A PBeef 49 pretation If the 65 Ecp Pork Beef Then for every 1 increase in the price of beef the Qd of pork would increase 65 We also would know that pork and beef are substitutes 50