Consumer Demand
u
Various quantities of a commodity
that an individual is willing and
able to buy as the price of the
commodity varies holding all
other factors constant.
Consumer Demand
Demand begins with individual
consumer
u Inverse relationship between
quantity and price
u
• Two dimensional, Price and Quantity
Downward sloping demand
Begin with individual’s utility
function and a budget constraint
u Substitution effect
u
• consumers buy what’s cheaper
u
Income effect
• “income” increases if prices fall
Retail Poultry Deflated Price and Consumption
$1.80
73
$1.70
$1.60
$1.50
74
75
$1.40
70
76
78
71
$1.30
72
77
79
$1.20
80
84
86
88
81
$1.10
82
89
83
85
87
90
91
92
93
94 97
$1.00
95
96
98
$0.90
35
45
55
65
Per Capita Consumption in Pounds
75
Pork Deflated Price and Consumption, Retail
$2.00
82
$1.90
83
$1.80
81
80
87
$1.70
86
90
91
$1.60
88
84
85
89
97
$1.50
00
96
98
93
$1.40
92
99
94
95
$1.30
$1.20
$1.10
$1.00
48
50
52
54
56
Per Capita Consumption in Pounds
58
Market or Aggregate Demand
Add individual demand curves
u Horizontally across consumers
u
u
http://www.aaec.vt.edu/rilp/Demand%
20Changes-2000.pdf (Pages 1-10)
Beef and Pork Demand Index, 1997 Base
250
200
150
100
50
Beef
Pork
0
1980
1985
1990
Source: Research Institute on Livestock Pricing
1995
2000
Demand is a function of
Price of substitutes
u Price of complements
u Consumer income
u Taste and preferences
u IS NOT FUNCTION OF THE
GOOD’S OWN PRICE
u
Change in Demand or
in Quantity Demanded
Moving from A to B due to a
price decline is a change in
quantity demand.
Px
A
A shift of the demand
curve from D1 to D2 is
a change in demand.
B
C
D1
D2
Qx
Factors effecting aggregate
demand for a product
Exports
u New product development
u Advertising
u New information
u Product differentiation
u
Income effect on food demand
u
Food is normal good
•
Income
demand
• Particularly important for meats
• Emerging economies
u
Services are a normal good
•
Income
services
Inverse Demand
u
Price is a function of quantity
• P = f(Q)
u
Important in agriculture
• Short run supplies are relatively fixed
• Prices change to clear the market
Supply
u
The amount of a given commodity
that will be offered for sale per
unit time as the price varies, other
factors held constant.
Supply
u
Derived from cost function
• Production function
• Input - output relationship
u
Assume that firms seek to
• Maximize profits
• Minimize costs
u
Supply starts will individual firm
Production Function
Output
Total Product
Decreasing returns to the input
Increasing returns to the input
Input
Opportunity cost
The opportunity cost of commodity
A is income forgone by not
producing commodity B.
u Measures of opportunity cost
u
• Market value of input
• Expected return over other cost of not
producing commodity B.
Cost Curves
u
Average variable cost = AVC
• Total variable cost / Q
• Variable costs change with Q
u
Average fixed cost = AFC
• Total fixed cost / Q
• Fixed costs do not change with Q
u
Average total cost = ATC
= AVC+AFC
Cost Curves
u
Marginal cost = MC
• Change in total cost by producing 1 more
•
TC / Q
Cost curves
Cost
MC
ATC
AVC
Q
Supply curve
MC curve above AVC curve
u Upward sloping curve
u
• Optimal output @ MC = MR
• MR = Price => Optimal at MC=Price
• The last unit of input just pays for itself
Profit
u
Profit = total revenue - total cost
• TR= P x Q
• TC = ATC x Q
u
Profit per unit = Profit/Q
• = TR/Q - TC/Q
• = P - ATC
u
Profit maximizing Q
• MC=MR=P
• Profit/Q = P-ATC at optimal Q
Optimal Q at P=MC
Cost
MC
P2
ATC
AVC
P1
Q1
Q2
Q
Market or Aggregate Supply
u
Combination of individual supply
schedules
• Add horizontally across firms
u
Flattens with time
• More time to adjust supply
Market supply curves
Px
SShort run
SLong run
Qx
Cost curves and supply
u
Shut down if P < AVC
• Lose on every unit produced
• P>AVC make some payment to fixed cost
u
In the long run everything is variable
• Short run defined by having fixed cost
u
Long run supply curve for individual
• Low point on ATC curve
Market supply curves
S1
Px
A
S2
Move from A to B is a
change in quantity
supplied due to a price
decline.
B
C
Move from B to C is a
shift in supply.
Qx
Supply Shifts from Change
in input prices
u in returns for competing enterprises
u in technology on yields or costs
u in price of joint products
u in yield and/or price risk
u institutional constraints
u
Additional references
u
Reading room
Agricultural Product Prices, Tomek &
Robinson Chpts 2 and 4.