A Guide to Agricultural
Market Analysis and Report Writing
Farm Silhouette. Source: http://www.silhouettesclipart.com/category/general/ (Accessed: 1/6/09)
Prepared By:
Roger M. Brown, PhD
Department of Agricultural Economics
University of Kentucky
2009
2nd Edition
PREFACE: What is Market Analysis?
Market analyses are principled explanations or predictions of how economic trends and conditions
jointly affect the business environment and behavior of individual firms. Market analyses help answer such
questions as:

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



Will the price of corn increase or decrease over the next year?
How much more or less tobacco will be produced next year compared to this year?
If the cost of wheat increases, how much is the price of bread likely to increase?
Should I market my strawberries directly to consumers or sell to wholesalers?
If I advertise my farm products, am I likely to recoup my costs and increase profits?
Given current market conditions, should I expand my operation overseas or merge with another firm?
These questions are eminently practical. This manual directs students not only how to answer these types of
questions, but more importantly how to present their analytical insights in coherent and organized ways.
Market analyses are based on basic economic principles. Students should already have some
familiarity with many of these principles. Consider the following examples of economic principles:
 If consumer incomes increase, demand increases for normal goods, ceteris paribus.
 Advertising expenditures by single firms will not increase those firms’ profits if markets are perfectly
competitive.
 Production cost increases eventually lead to lower output, holding all else constant.
 If demand is inelastic, price increases will lead to higher total revenues, ceteris paribus.
 Increases in market concentration often lead to higher profits for remaining firms.
While students should already be familiar with many of these basic economic principles, this manual is
designed to improve students’ confidence in the application of these principles.
Market analyses generally consider joint impacts of multiple economic trends and conditions. In
economics, the assumption that “all else is held constant” (i.e., ceteris paribus) is not usually realistic. More
typically, multiple factors are changing simultaneously. For example, the demand for corn may increase
(due to its use by more ethanol facilities) at the same time that supply of corn may decrease (due to
increasing costs of fertilizer). Basic economic principles suggest that together these two effects will cause an
increase in the price of corn, but the effects on output levels of corn are inconclusive (i.e., the effects move
output in opposite directions and are not reinforcing as they are for price changes). Will output quantities of
corn increase or decrease overall? The answer depends on the relative significance of the two shift factors.
This manual instructs students how to form logical conclusions that synthesize multiple factors
simultaneously.
Finally, market analyses are arguments formed by thoughtful consideration of disparate information.
Market analyses are attempts to explain observations from the past or present or, more often, to predict future
economic conditions. As such (i.e., as arguments), market analyses are subject to critical evaluation where
all the usual rhetorical techniques of persuasion apply. This manual also makes some suggestions to students
about how to improve their logical thinking and persuasive writing skills.
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TABLE OF CONTENTS
SECTION ONE
“Market Overview”…………………………………………………………………… 4
Learning Objectives:
 Recognize the importance of defining agricultural markets clearly
 Define agricultural markets characteristically in time and space
Basic Description of Assignment
Background
Proposed Outline
Worksheet
SECTION TWO
“Market Equilibria”………………………………………………………………….. 10
Learning Objectives:
 Predict changes in supply and demand
 Evaluate how multiple simultaneous changes in supply and demand affect
equilibrium price and quantity
 Determine how to represent these effects graphically
Basic Description of Assignment
Background
Propose Outline
Worksheet
SECTION THREE
“Price Sensitivity”…………………………………………………………………… 22
Learning Objectives:
 Evaluate which side of the market—supply or demand—is relatively less
elastic given a specific period of time
 Determine, if given increases (or decreases) in production costs, whether
consumers pay (benefit) more in the form of higher (lower) market prices, or
whether producers pay (benefit) more in the form of lower (higher) profits
 Determine how to represent these effects graphically
Basic Description of Assignment
Background
Proposed Outline
Worksheet
SECTION FOUR
“Profit Expectations”………………………………………………………………... 34
Learning Objectives:
 Identify how general market forces and firm-specific choices affect individual
firms’ profits
 Determine how to represent these effects graphically
Basic Description of Assignment
Background
Proposed Outline
Worksheet
APPENDIX A
“Grading Criteria and Grading Score Sheets”………………………………………. 48
APPENDIX B
“Understanding and Avoiding Plagiarism”………….……………………………... 52
APPENDIX C
“Writing Suggestions”…………………………………………..…………………… 53
APPENDIX D
“Creating Figures and Tables”………………………………………………………. 56
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SECTION ONE: “Market Overview”
Definition of Market
BASIC DESCRIPTION
Students must identify an analyzable agriculturally-related market. An analyzable market is one that
is clearly and logically defined characteristically in time and space. Students must specify clearly and
logically the particular characteristics, time, and space that factually differentiate their chosen markets from
other, related markets. In other words, you must write an argument convincing readers 1) that a group of
consumers exists during the time-frame you specify who 2) distinctly value a good or service with the
characteristics you specify, and 3) that the distribution of the good or service naturally encompasses the
space you specify. Students are also required to identify in their market definition the current market price
(i.e., price per unit) and quantity (i.e., number of units produced/sold in your market space over a given
period of time).
This market will be the same market that you analyze and write about for the other three writing
assignments in this class. This assignment (Section One) clarifies for your readers what specifically you will
(and will not) analyze in the other three sections. The task here is to define your market clearly and
logically.
The text of this section should be type-written and all figures should be labeled clearly and digitally
produced. The text (excluding figures) should be about 3 to 5 pages in length, double-spaced with 1”
margins (12 pt. Times New Roman font). Students should consult Appendix A for details about how this
section will be graded. Students should note in particular that any written assignment that has 1) unclear
attribution, 2) incorrectly spelled words, or 3) grammatically incorrect sentence structures will receive zero
points for that assignment.
This section is worth a total of 3 points and is due at the start of class on the due date (consult your
syllabus for due dates). Students must submit a hardcopy of this section in class on the due date along with a
completed Grading Score Sheet for Section One (see Appendix A).
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SECTION ONE: BACKGROUND
Market
A sociopolitical institution that represents a mechanism by which people (buyers and
sellers) interact to make economic decisions about what goods and services to produce and
consume (Schrimper 2001, p7-8).
A group of buyers and sellers organized for the purpose of exchanging goods and services.
Markets must be defined characteristically in time and space (e.g., the current market for
blueberries in the winter in Lexington from 2000 to 2010, or the historical market for
mutton in 16th century England).
Marketing
The performance of all business activities involved in the flow of products and services
from the point of initial production until they are in the hands of consumers (Kohls and
Uhl 1998).
Marketing includes the promotion of products and services through the use of persuasive
advertising (i.e., what many think of when they hear “marketing”).
Marketing is a value-added process (e.g., farm products get transformed or processed into
other products that consumers value more highly.)
Emerging Factors Affecting Agricultural and Food Markets
Mergers/Consolidation/Vertical Integration
Work-Force Composition (women, minorities)
Changing Lifestyles (dual working families)
Incomes
Demographics (age, ethnic pop)
Production Technologies Contracting/Direct Marketing
Globalization
Government Policy and Regulation
Some Unique Characteristics of Agricultural
Commodity and Food Markets
Market Participation: Everyone is an
agricultural consumer
Biological Impacts: Production lags (supply
elasticities tend to be low), perishable goods,
low value per density (transportation issue),
imprecise control of output levels
Nature of Demand: Demand elasticities for food
tend to be low.
Market Structure: Various market structure
models apply (perfect competition, imperfect
competition, firms with monopolistic power.)
Political Influence: Government subsidies for
agricultural are relatively high in most
countries, food security is part of national
security
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Health, Food Safety
Chgn. Cons. Preferences
Importance of Agricultural Markets
“Every person in the world is affected, on a daily basis, by the way agricultural markets provide alternative quantities and
qualities of food for consumption” (Schrimper 2001, p5). How many people are in the world?
“The incomes of nearly half the world’s population are determined principally by the prices received for agricultural
commodities” (Tomek and Robinson 1990, p1).
Agricultural Marketing…
 …is complex. It involves coordinating production, processing, and distribution of thousands of products from
millions of farmers to thousands of agribusiness firms to hundreds of countries to billions of people.
 …is multi-stage. It involves input suppliers, farm production, brokering, transporting, processing, storage,
wholesaling, and retailing.
 …adaptable. Agricultural goods and services may be transferred from producers to consumer via different
market mechanisms including auctions, futures markets, contracts, marketing boards, coooparatives, or direct
negotiations.
 …is global. It involves hundreds of countries with vastly different social and cultural preferences about not
only what foods to eat, but where and how they should be grown, how they should be processed, and how they
should be distributed.
Agricultural Marketing Chains
An agricultural marketing chain describes the organization of separate production stages (often different firms) that are
involved in getting a particular agricultural product from the farm level to consumers. Not all agricultural products go
through the same marketing chains, and even similar agricultural products may go through one of many different marketing
chains. For example, wine grapes are sometimes marketed directly to consumers by individual farms as part of a “wine
experience”, while other wine grape growers work through brokers who, in turn send the grapes to processors, wholesalers,
and retailers.
Input Suppliers
Marketing Chain Components / Sectors

Input Suppliers. Firms in this sector typically provide those items that are
necessary to the successful operation of firms in other sectors. Inputs for
farming include fertilizers, pesticides, and young animals. Inputs for brokers
include legal and accounting services. Inputs for wholesalers include trucking
and warehouse services. Inputs for consumers include FDA regulatory and
information services.

Farmers. Firms in this sector typically grow crops or raise live animals.

Broker/Agents. Firms in this sector offer valuable networking and transaction
services that may make transfers of farm products more efficient.

Processors. Firms in this sector transform raw agricultural products into other
forms by adding desirable or removing undesirable characteristics. Processors
transform wheat into bread and corn into corn syrup, for example.

Wholesalers. Firms in this sector organize and coordinate acquisition activities
among numerous individual producers (e.g., various farmers or processors) and
sort, store, and distribute products to the next marketing stage (e.g., to
processors or retail outlets).

Retailers. Firms in this sector organize and distribute final goods to individual
consumers. Retailers include grocery stores (e.g., Kroger and Walmart) and
also restaurants, nursing homes, and cruise ships.

Consumers. Consumers are individual buyers.
Farmers
Processors
Wholesalers
Retailers
Consumers
Broker/
Agents
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SECTION ONE: BACKGROUND
Students might wonder, “What is a market?” A market is a group of buyers and sellers organized for
the purpose of exchanging goods or services. There are many other similar definitions. The global food and
agriculture industry is comprised of many individual markets. These individual markets are sometimes
organized into what are called “marketing chains”. Marketing chains (in agriculture) may include input
suppliers, farmers, brokers/agents, processors, wholesalers, retailers, and consumers.
Market analysts define markets in order to clarify for readers 1) what particular market they are
analyzing, and 2) what other, related markets they are not analyzing. Most economic predictions (along with
their underlying analyses) turn out to be wrong in various ways. Analysts want to be able to defend easily
their work against illegitimate critics. Suppose you analyze the current off-season retail market for locallygrown fresh organic vegetables in Central Kentucky. If a detractor says, “You predicted that the equilibrium
market price for fresh vegetables would increase, but it didn’t.” You can respond, “Look, some of my
predictions about locally-grown organic vegetables in Central Kentucky may be incorrect, but I never made
any predictions about the market for fresh vegetables generally.” This is one of the reasons why you need to
define markets clearly and logically.
The next question is how to define markets clearly and logically. Markets should be defined
characteristically in time and space. The product or service characteristics used to define a particular market
should be characteristics that consumers of the good or service recognize (i.e., value differently). For
example, until recently no evident market existed for white thoroughbreds because consumers of
thoroughbreds typically bought them to race without consideration of color. In other words, no market
existed because consumers of thoroughbreds did not value differently colored thoroughbreds more or less as
long as they ran fast. More recently however, white thoroughbreds have been highly sought after by show
horse consumers. Likewise, markets for locally produced foods have surged recently because many more
consumers now recognize these products as distinct and are willing to pay a premium for them.
One important characteristic to define in agricultural analyses is the stage in the marketing chain. For
example, the words “retail” or “wholesale” define two different markets for Kentucky-grown wine grapes
depending on who the consumers are. If the consumers are restaurants, supermarkets, and produce vendors,
the market will be defined best as a wholesale market. If the consumers are individuals and families and
visitors to restaurants, the market should be defined as a retail market. Other markets may be defined as
“farm level” markets. Note that choices are not unlimited. It would be illogical to talk about the farm level
market for commodities that require off-site processing (e.g., tomato paste or beef). You might instead talk
about the farm level market for tomatoes (cattle) or the wholesale or retail market for tomato juice (beef).
Note too that consumers and producers change as the stage in the marketing chain changes. At the wholesale
level, consumers of tomato juice may be supermarkets and restaurants, but at the retail level these institutions
become producers and individuals and families become consumers.
The geographic space across which individual producers compete for customers or across which
goods travel to reach individual consumers best delineates the natural market boundaries. In this way, the
geographic space across which the exchange process occurs is generally related to the choice of product
characteristics. The market for locally produced vegetables will involve local producers and local
consumers. So, it would be illogical to talk about the global market for locally produced vegetables. The
market for many highly-valued specialty agricultural products (e.g., coffee, chocolate / cocoa, cocaine / coca,
most spices, etc.) involves producers in one part of the world and consumers in another part of the world.
The market space for these goods and similar services is typically global.
Markets conditions change over time. For example, the international market for wheat is different
today (i.e., currently) than it was in the 16th century. Analysts must define what time period they will
examine. The “time” period most often examined is the “current” time period. Any author examining a
“current” market must also specify how far into the future the analysis extends (e.g., over the next year, two
years, five years, etc.). In most cases, an analysis examining the current market over the next five years is
appropriate. Be sure to state what specific years are included (e.g., 2009 to 2014).
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SECTION ONE: PROPOSED OUTLINE
This is only a proposed outline for Section One. The general goal of this section is to create a
credible case that the market you define is, in fact, an economically distinct market. In other words, you
must convince readers 1) that a group of consumers exists during the time-frame you specify who 2)
distinctly value a good or service with the characteristics you specify and 3) that the distribution of the good
or service naturally encompasses the space you specify generally. These are your premises. If you present a
convincing case for these three premises, readers must accept your conclusion that you have identified an
analyzable market, i.e., a market that you can (and in later sections will) analyze. 1
I.
Write an interesting overview of the relevant industry, i.e., the relevant collection of individual
markets. For example, if your market is for locally produced organic beef, you could talk first about the
organic food industry or about the beef industry. (The beef industry is comprised of the market for organic
beef, the market for “regular” beef, the market for locally produced beef, etc.). Your introduction should be
interesting and short (e.g., one paragraph). You may introduce interesting current events, changing
consumer preferences, or emerging environmental concerns that affect the market. You may alternatively
choose simply to provide important general information about the market to orient readers (e.g., describe the
marketing chain from input suppliers to consumers). In this section, you should 1) orient readers to the
broader topic area of which your market is apart, and 2) motivate readers to continue reading (because the
topic area is interesting, important, or relevant to them, and/or because you are a credible analyst of the
subject, etc.).
II.
After this industry overview, include a paragraph that a) states clearly what particular market you will
define and examine, and b) what four or five concepts readers must understand to make economic sense of
this market. For example, you might write:
This report defines and examines the current regional market for hunting leases in Central
Appalachia from 2009 to 2014. In this introduction, I first explain what hunting leases are and the
characteristics that distinguish them from other, related hunting opportunities. Secondly, I
explain the uniqueness of Central Appalachia as a regional hunting area. Thirdly, I describe the
general attributes of consumers and producers in this market. Finally, I examine current market
prices and quantities for hunting leases in the relevant area.
This paragraph defines your market clearly and tells readers specifically what comes next in your paper. In
the remaining paragraphs of your paper, simply follow the outline you have given. You many need to write
more than one paragraph to cover each topic, but closely follow the outline.
III.
The next step is to describe the particular characteristics of the good or service. Identify the
characteristics of the good or service that consumers of the good or service recognize (i.e., value distinctly).
Explain. Give examples. If you are writing about the current global market for Kentucky-bred standardbred
yearling trotters, you might have four short paragraphs in the “characteristics” section. First, you might
explain what standardbred race horses are and how they are different from thoroughbred race horses. Next,
you might explain the difference between trotters and pacers. Third, explain the difference between yearling
trotters and other-aged trotters. Finally, explain that state-based breeding incentives lead consumers to view
KY-bred trotters differently than non-KY-bred trotters.
IV.
Next, describe the market “space”. Here you need to justify the market boundaries. Describe and
justify the geographic space across which individual producers compete for customers or across which your
chosen good or service travels to reach individual consumers. In Central Appalachia, people hunt mainly
deer and small game (e.g., turkey, squirrels, rabbits, etc.) and therefore do not typically travel from states
If you use this outline, you should write a footnote (put it at the end of the first full sentence) that says, “Organization for this
Section was adapted from suggestions provided by Roger Brown” and then reference this guide. See Appendix B for more
information about plagiarism and Appendix C for information about footnotes.
1
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much beyond those in the Central Appalachian area. In areas like Alaska or Africa with larger game (e.g.,
grizzly bear and elephants), the market boundaries are more global since consumers travel from farther away
to bid on and enjoy these leases. You may need to identify (e.g., in a footnote) the specific boundaries of
your market area. For instance, you might add a footnote that reads: “For the purposes of this analysis,
Central Appalachia includes Maryland, West Virginia, the western halves of Virginia and North Carolina,
and the eastern halves of Kentucky and Tennessee.” If your market is a global market, you simply want to
explain why the good or service is not interrupted by national borders. If the market is a national market,
explain what it is about the market that limits its natural scope to national boundaries only (e.g., national
laws, language, tax laws, enforcement, social/political norms, etc.).
V.
Next, describe the relevant consumers and producers of your particular market. Here you identify the
general attributes of typical consumers (e.g., income levels, demographic traits, education levels, ages, etc.)
and typical producers (e.g., firm size, output levels, similarity of product from firm to firm, capital
requirements, etc.). You should also remind readers that consumers and producers change along the
marketing chain (e.g., Walmart is a consumer of food at the wholesale level and a producer of food at the
retail level). Identify where in the marketing chain consumers and producers are in your specific market.
Remember, in some cases, consumers may be firms (e.g., Walmart) and producers may be individuals (e.g.,
farmers). This information will be helpful when (in Assignment Two) you identify demand and supply
shifts.
VI.
Finally, identify the current equilibrium market price (P) and quantity (Q). Market price and market
quantity are, respectively, the selling price (P) of one unit of output and the total amount of output (Q)
produced by all firms in the market during a specified time period. You must be sure to identify the
particular quantity unit (e.g., in the market for hunting leases, the unit may be acres/year, in the standardbred
market, the unit may be trotters/year, and in the organic vegetable market, the unit may be pounds/year).
You should explain (in a footnote perhaps) how (and maybe from whom or from where) you got this
information. This information will be helpful (again, in Assignment Two) when you identify equilibrium
price and quantity.
You may need to estimate price and quantity for your market. If so, be sure to explain (e.g., in a
footnote) the logic you used and any assumptions required to arrive at your estimate. For example, suppose
you need to estimate the quantity of acres leased for hunting in “Central Appalachia”. You might logically
assert (e.g., after talking to folks at the KY Division of Wildlife on the telephone) that hunting leases cover
approximately 5% of all private land owned in this area. Assuming this is a reasonable estimate, sum the
private land (in acres) in MD and WV (states with nearly all their land in Central Appalachia) and add this to
half the sum of private land area located in KY, TN, VA, and NC (states with only half their land in
Appalachia) then multiply this total times 5%. Given time and resource constraints, this is a reasonable
estimate of the land area leased annually for hunting in the market area (i.e., “Central Appalachia”).
9
SECTION ONE: WORKSHEET
Name: _______________________________________
This worksheet will help students 1) understand how to define markets clearly, and 2) identify good
markets to analyze for this class. Students must complete and turn in a copy of this worksheet before they
leave class today. Students should work together in groups of 3 or 4 students to complete this worksheet.
Task 1. Markets should be defined characteristically in time and space. One important market characteristic
often relates to the marketing chain (e.g., farm-level, wholesale, or retail). Read the following well-defined
markets, and with your group identify the general form (A, B, or C) that they take.
A. time + market chain + characteristics + space
B. market chain + characteristics + space + time
C. time + space + characteristics + market chain
_____ Wholesale market for frozen pork-bellies the U.S. from 1960 to 1965
_____ Current global market for chocolate at the wholesale level
_____ Current wholesale market for Kentucky-grown wine grapes in the United States
_____ Current farm-level market for fresh tomatoes in and around Central Kentucky
Task 2. Markets should be defined in ways that make good economic sense. Change the following illdefined markets so that they make more economic sense and give your rationale. Discuss your answers.
Example:
Change:
Rationale:
Current international retail market for thoroughbred brood mare race prospects
Current international retail market for thoroughbred brood mares
Individual thoroughbred horses are not sold for simultaneous use in reproduction (i.e., as
brood mares) and racing. They are for one or the other of these uses, but never for both at the
same time. The combination of characteristics (brood mare and racing) didn’t make sense.
Example:
Current global retail market for Kentucky spring water.
Change:
___________________________________________________________________________
Rationale:
___________________________________________________________________________
Example:
Current farm-level market for French-style (i.e., long and crusty) bread in Europe.
Change:
___________________________________________________________________________
Rationale:
___________________________________________________________________________
Task 3. Define clearly three economically logical markets from the “mix-n-match” choices given below.
Product/Service
salmon
honey
equine art
Characteristic
locally-produced
high-end
eco-friendly
Time
currently
in 1980s
Space
global
U.S.
Central KY
Market chain
farm-level
wholesale
retail
1. _________________________________________________________________________________
2. _________________________________________________________________________________
3. _________________________________________________________________________________
10
Now that you understand what a clearly defined market looks like, you need to identify a market that
you want to examine for the rest of the
semester. Students seem to do best that
identify a market that 1) sparks their
Personal
personal interests, 2) draws on existing
Find markets
Interests
knowledge or experiences, and/or 3)
where all three
might lead them to high quality career
of these
prospects (Figure 1).
overlap.
Quality
Knowledge
Below is a series of questions
Job
Experience
Prospects
designed to help you and your group
members brainstorm good market
prospects. Consult your group members
Figure 1. Venn Diagram Showing Optimal Market Choice
often for feedback.
OptimalMarketMAnaSelection.
Task 4. Introduce yourself to the other members of your group. Share the following information:
1. Names (list group members): _________________________________________________________
2. Your best experience with agriculture: __________________________________________________
_________________________________________________________________________________
3. Your agricultural dream job: __________________________________________________________
Task 5. Name three agricultural products or services that you find personally interesting.
1._________________________ 2. ___________________________ 3. ___________________________
Consider all areas of agriculture: dark chocolate, frog legs, pay lakes, Lipizzaner stallions, eco-friendly lumber, horse insurance,
tractors pulls, artificial sweeteners, dog food, equine air-taxis, Christmas trees, alligator leather, corn mazes, dry stone fences,
nature photography, butterfly garden consulting, wood shavings (horses), sod, tree surgery, floral arranging, horse logging, etc.
Task 6. Brainstorm with your group several (4) possible market areas/products/services that might suit you
well. These market areas should be agriculturally-related products or services that you are interested in,
know something about, and/or feel might lead to a quality job for you.
1. __________________________________
3. __________________________________
2. __________________________________
4. __________________________________
Task 7. Name the one market that you would choose if you had to choose your market today. Use the
proper language for market definitions that you learned at the beginning of this worksheet.
Market: ________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
11
SECTION TWO: “Market Equilibria”
Analyze Supply / Demand Shifts
BASIC DESCRIPTION
In this assignment (Section Two), students must identify how expected future supply and demand
shifts independently and jointly impact the equilibrium price and quantity. Your chosen market should be
the same one that you analyzed and wrote about for Assignment One. Any change must be approved by the
instructor. For Section Two, students must do the following:
(1) Mention (again) and show graphically the “current” (or starting period) equilibrium price and
equilibrium quantity.
(2) Show graphically and explain in words how six (6) supply and demand factors individually are likely
to affect equilibrium price and quantity over the period of time identified for your analysis (e.g.,
“current period” over the next one, two, five years, etc.). At least two shift factors must relate to the
supply curve and at least two shift factors must relate to the demand curve. (Demand and supply shift
factors are listed in the background notes that follow this description).
(3) Evaluate and explain clearly in a chart and in words what you think is the relative impact/significance
of each of the supply and each of the demand shifts factors (e.g., rank the degree of impact on a scale
from 1 to 5, with 5 being most significant and 1 being least significant; use +/- signs to indicate
direction of change). Please comment also from a longer, historical perspective about the
significance of your chosen set of expected future supply and demand shift factors.
(4) Demonstrate graphically, analyze logically, and explain clearly in words how you think:
(a) the supply curve shift factors jointly affect the supply curve;
(b) the demand curve shift factors jointly affect the demand curve;
(c) the effects of (a) and (b) jointly affect equilibrium price and equilibrium quantity.
The text of Section Two should be type-written and all figures and charts should be labeled clearly
and digitally produced. The text (excluding figures) should be about 6 to 8 pages in length, double-spaced
with 1” margins (12 pt. Times New Roman font). Students should consult Appendix A for details about how
this section will be graded. Students should note in particular that any written assignment that has 1) unclear
attribution, 2) incorrectly spelled words, or 3) grammatically incorrect sentence structures will receive zero
points for that assignment.
This section is worth a total of 3 points and is due at the start of class on the due date (consult your
syllabus for due dates). Students must submit a hardcopy of this section in class on the due date along with a
completed Grading Score Sheet for Section Two (see Appendix A).
12
SECTION TWO: DEMAND CONCEPTS
Individual Demand: Demand (or a demand schedule) reveals the willingness and ability of an individual
consumer to buy and consume a good or service at various prices, ceteris paribus. “Willingness” should
make you recall the roll of utility and indifference curves. “Ability” should make you recall the importance
of the consumer’s budget constraint. For an individual consumer, the optimal consumption level of various
goods (i.e., most satisfying use of one’s scarce resources) is found (as always) using the “decision rule”:
consumers should buy and consume additional units of a good or service until the marginal benefit (i.e.,
additional satisfaction) of buying and consuming the last unit is just equal to the marginal cost of that unit.
Demand Curve: A graphical representation of demand (D).
Price
Demand Function: A mathematical equation that shows the
relationship between quantity demanded (QD) and any number of
explanatory variables. Typically, QD is shown as a function of the
market price of good (e.g., Ppizza), the consumer’s income (Y), the price
of complements (PC), and the price of substitutes (PS). Other demand
side variables may also be included such as a measure of tastes (T).
P1
D1
Q1
Quantity
Now, recall that demand is the willingness and ability of an individual consumer to buy and consume a good
or service at various prices, ceteris paribus. Why do we say, “ceteris paribus”? Well, it means that we are
holding constant all the other demand shift factors (see below) to identify how QD changes if we change P.
Consider a demand function for Pizza:
QD = 40 - 3PP + 2PH – 1.5PB + 0.0002Y
Where: QD = Quantity of pizza demanded
PP = Price of pizza
PH = Price of hamburgers
PB = Price of beer
Y = Income
How
does
this
change
…if
we
change
this…
Movement along the Demand Curve: If we hold everything
else constant and only change the price of the good or service,
QD will change. This change in QD is indicated graphically as
a movement along the demand curve.
…and hold all of these
constant (i.e., no change)?
Price
P2
P1
D1
Price
Q2
P1
D2
D1
Q1
Q2
Q1
Quantity
Shift in the Demand Curve: If we hold the price of the good
constant along with all but one of the demand shift factors
(e.g., income), D will change. This change in D is shown
graphically as a shift in the entire demand curve (left or right).
NOTE: when D changes, QD also changes.
Quantity
13
Demand Shift Factors: There are four primary factors that shift the demand curve: 1) changes in consumer
incomes, 2) changes in prices of related goods, 3) changes in tastes and preferences, and 4) changes in the
number or composition of consumers.
Direction of Demand Curve Shifts: A change in demand is a shift of the entire curve either left (down) or
right (up). Consider four examples:
A Change in Consumer Incomes
If consumers have more income, they can afford to allocate more money toward those goods for which
they have stronger preferences, ceteris paribus. However, the effect of income is not always the same.
Normal Good: those goods for which a rise (fall) in consumer incomes leads to an increase (decrease) in
quantity demanded. Most goods are normal goods. Examples: gasoline, housing, and steak.
Inferior Good: those goods for which a rise (fall) in consumer incomes leads to a decrease (increase) in
quantity demanded. Examples: Ramen noodles and generic toilet paper.
A Change in the Price of Related Goods
If the price changes for a good that is related to the good under consideration, demand for the good in
question will also change. Related goods include those goods that consumers typically either consume
together (complements) or those that consumers typically view as similar (substitutes).
Complements: Two goods are complements if consumers typically consumed them at the same time.
Examples: Peanut butter and jelly. Rum and Coke.
Substitutes: Two goods are substitutes if consumers tend to substitute one good for the other good as
prices change. Examples: Coke and Pepsi. Chicken and pork (“the other white meat”).
A Change in Tastes
If consumers change their tastes and preferences for a good or service (e.g., due to advertising or in
response to new research), the demand for the good or service in question will change.
A Change in the Number of Consumers
If the number of consumers increases, the total market demand will increase, ceteris paribus and vice
versa.
Market Demand is the aggregate quantity of a good or service that all individual consumers are jointly
willing and able to buy and consume at various prices, ceteris paribus. The market demand curve is shown
as the horizontal summation of all individual demand curves.
From John B. Penson,
Jr., Oral Capps, Jr., C.
Parr Rosson III, and
Richard T. Woodward.
2006. Introduction to
Agricultural Economics.
4th edition. Pearson
Prentice Hall.
14
SECTION TWO: SUPPLY CONCEPTS
Individual Supply: Supply (or a supply schedule) reveals the willingness and ability of an individual firm to
produce and sell a good or service at various prices, ceteris paribus. For an individual perfectly competitive
firm (like many firms producing agricultural commodities), the optimal (i.e., profit maximizing) output level
(Q*) is found (as always) using the “decision rule”: produce and sell up to the point where the marginal
benefit (i.e., marginal revenue, MR) of producing the last unit of output is just equal to the marginal cost
(MC) of producing and selling that unit.
Also, in the short-run (i.e., when at least one cost is fixed) the supply curve for an individual perfectly
competitive firm is equivalent to that firm’s MC curve above the average variable cost minimum (AVCmin).
Likewise, in the long-run (i.e., when all costs are variable) the supply curve for an individual perfectly
competitive firm is equivalent to that firm’s MC curve above the average total cost minimum (AVCmin).
Price
Supply Curve: A graphical representation of supply (S).
Supply Function: A mathematical equation that shows the
relationship between quantity supplied (QS) and any number of
explanatory variables. Typically, QS is shown as a function of the
market price of good (e.g., Ppizza) and the price (or cost) of the various
inputs needed to produce that good (e.g., Pwheat, Ptomatoes, Pcheese, Plabor).
Another important input cost (not included in this example) is the cost
of capital (e.g., building rental, stoves, delivery cars).
S1
P1
Quantity
Q1
Now, recall that supply is the willingness and ability of an individual firm to produce and sell a good or
service at various prices, ceteris paribus. Why do we say, “ceteris paribus”? Well, it means that we are
holding constant all the other supply shift factors (see below) to identify how QS changes if we change P.
Consider a supply function for Pizza:
QS = 40 + 5PP – 2PL – 0.2PW – 0.1PT – 0.5PC
Where: QS = Quantity of pizza supplied
PP = Price of pizza
PL = Price of labor
PW = Price of wheat
PT = Price of tomatoes
PC = Price of cheese
How
does
this
change
…if
we
change
this…
Movement along the Supply Curve: If we hold everything
else constant and only change the price of the good or service,
QS will change. This change in QS is indicated graphically as
a movement along the supply curve.
Price
S1
S2
Q2
Price
S1
P2
P1
Q1
P1
Q1
…and hold all of these
constant (i.e., no change)?
Quantity
Q2
Quantity
Shift in the Supply Curve: If we hold the price of the good
constant along with all but just one of the input costs, S will
change. This change in S is shown graphically as a shift in
the entire supply curve (left or right). NOTE: when S
changes, QS also changes.
15
Supply Shift Factors: There are three primary factors that shift the supply curve: 1) a change in the price of
related outputs, 2) a change in the cost of production, and 3) a change in the number of suppliers. There are
also other factors that are sometimes identified as separate supply shift factors: 4) change in technology, 5)
change in opportunity costs like development and off-farm income, 6) random events like weather or disease,
and 7) government policies.
You should think about how a change in any of these supply factors will affect supply. What happens to
supply if production costs increase? If production technology improves? If the government subsidizes
fertilizer costs? If there is a soybean rust epidemic? If a new automobile factory opens in town?
Direction of Supply Curve Shifts: A change in supply is a shift of the entire curve either left or right.
Consider the three primary supply shift factors:
A Change in the Price of Related Outputs
Outputs may be either substitutes in production (e.g., corn and soybeans), complements in production
(beef and leather), or unrelated. Substitutes in production exist when farmers have choices about what to
produce. If the market price of corn increases while the market price of soybeans remains constant, some
farmers will shift from producing soybeans to producing corn, ceteris paribus. Substitutes in production
occur when a producer (e.g., a farmer) can produce two or more products by re-organizing or reengineering his or her production methods. Complements in production exist when any by-products of
production have their own market. An increase in the market price of beef will (eventually) increase beef
production (ceteris paribus) which, in turn, will increase in the supply of leather, a related output.
A Change in the Costs of Production
If the costs of production (e.g., input costs) change, the MC curve (along with the ATC and AVC curves)
will all shift up, resulting in a decline in the affected farmer’s supply (i.e., the profit maximizing output
level is lowered).
A Change in the Number of Producers
If the number of producers increases, ceteris paribus, the total market output and thus the market supply
curve will increase. The most influential factor affecting the number of producers in markets is the
strength of profit opportunities (higher profit opportunities increase number of producers).
Market Supply is the aggregate quantity of a good or service that all individual suppliers are jointly willing
and able to produce and sell at various prices, ceteris paribus. The market supply curve is shown as the
horizontal summation of all individual supply curves.
From John B. Penson,
Jr., Oral Capps, Jr., C.
Parr Rosson III, and
Richard T. Woodward.
2006. Introduction to
Agricultural Economics.
4th edition. Pearson
Prentice Hall.
16
SECTION TWO: MARKET EQUILIBRIUM
Market equilibrium is a unique price-quantity combination such that 1) producers produce and sell
only the number of units they are willing and able to produce, and 2) consumers buy and consume only the
number of units they are willing and able to consume. The number of units in both cases is the same.
Graphically, this is where the supply and demand curves intersect.
P
Figure 1. Market
Equilibrium
S
P1
D
Q1
P
Q
P
S
P2
P1
S
P1
P2
D2
D1
D1
Q1 Q2
D2
Q
Q2 Q1
Figure 2. An increase in demand.
P
Q
Figure 3. A decrease in demand.
S2
1
P
S1
S2
S1
P2
P1
P1
P2
D
Q1 Q2
D
Q
Q2 Q1
Figure 4. An increase in supply.
Q
Figure 5. A decrease in supply.
17
Identify the market
in question.
What side of the
market is affected?
Remember:
Change in quantity demanded (Qd) = movement along demand curve.
Change in demand (curve) = shift of demand curve left or right.
DEMAND SIDE
Has the price (P) of
this good changed?
Yes
Result: Change in
quantity demanded
Have consumer
incomes (I) changed?
Yes
Result: Change in
demand (curve)
Have prices (P) of
related goods changed?
Yes
Have tastes (T)
changed?
Yes
If P ↑, Qd ↓
If P ↓, Qd ↑
No
No
Result: Change in
demand (curve)
No
Normal good
If I ↑, shift D right
If I ↓, shift D left
Inferior good
If I ↑, shift D left
If I ↓, shift D right
Complements (c)
If Pc ↑, shift D left
If Pc ↓, shift D right
Substitutes (s)
If Ps ↑, shift D right
If Ps ↓, shift D left
Result: Change in
demand (curve)
If T ↑, shift D right
If T ↓, shift D left
Result: Change in
demand (curve)
If Nc ↑, shift D right
If Nc ↓, shift D left
No
Has the number of
consumers (Nc) changed?
Yes
Remember:
Change in quantity supplied (Qs) = movement along supply curve.
Change in supply (curve) = shift of supply curve left or right.
SUPPLY SIDE
Has the price (P) of
this good changed?
Yes
Result: Change in
quantity supplied
Have prices (P) of
related outputs changed?
Yes
Result: Change in
supply (curve)
If P ↑, Qs ↑
If P ↓, Qs ↓
No
No
Complements (c)
If Pc ↑, shift S right
If Pc ↓, shift S left
Have production
costs (C) changed?
Yes
Result: Change in
supply (curve)
If C ↑, shift S left
If C ↓, shift S right
Has the number of
suppliers (Ns) changed?
Yes
Result: Change in
suppply (curve)
If Ns ↑, shift S right
If Ns ↓, shift S left
No
18
Substitutes (s)
If Ps ↑, shift S left
If Ps ↓, shift S right
SECTION TWO: DERIVED DEMAND AND DERIVED SUPPLY
The four primary demand shift factors are not the only demand shift factors for some markets.
Likewise, the three primary supply shift factors are not the only supply shift factors. This section examines
derived demand and derived supply shift factors.
The demand for some goods and services are clearly linked to the demand for other goods and
services. The same is true of supply. For example, the demand for corn maize design and construction
services by farmers for agro-tourism is clearly linked to the demand for corn mazes and other hands-on farm
experiences by (mostly) city folks. Likewise, the supply of two-year-old thoroughbred horses “in-training”
offered at auction is clearly related to the supply of yearlings available at auction the previous year.
This observation shows that the range of demand and supply shift factors affecting any particular
market is much broader than only those primary factors previously discussed. Secondary and even tertiary
factors may filter back (in the case of demand) or forward (in the case of supply) through the marketing
chain and affect demand or supply. Economists call these secondary factors “derived demand factors” and
“derived supply factors”.
Consider an example. Suppose we wanted to identify factors affecting the demand for corn in the
U.S. In some cases, corn is demanded by retail consumers directly. Families and individuals buy and
consume “corn-on-the-cob” or frozen corn, for instance. In other cases, corn is demanded by processors for
the production of hogs, cattle, horses, and ethanol. The derivatives of these products—pork, beef, racing,
and low-cost gasoline blends—are later consumed by retail consumers. The demand for corn-on-the-cob and
frozen corn represents the primary demand for corn by retail consumers. The demand for corn by processors
is a form of derived demand for corn by retail consumers. That is, the demand for corn is in part derived
from the demand for pork, beef, racing, etc. If the demand for pork increases, for example, economists will
expect that the demand for corn will also increase.
Derived supply works similarly. Suppose we wanted to identify factors affecting the supply of
pineapple juice in the U.S. We know that the supply of pineapple juice will decrease if pineapple juice
producers face increasing costs of production (e.g., higher costs for tin or plastic used to package the juice),
ceteris paribus. But what if the pineapple growers face higher production costs (e.g., higher fertilizer costs)?
These higher farm-level costs would likely cause pineapple growers to decrease supply, causing in turn an
increase in pineapple prices, ceteris paribus. If so, these higher farm-level pineapple prices increase the
production costs for pineapple juice processors and, in turn, should lead to a decrease in the supply of juice
(again, holding all else constant). Those forces that primarily affect only the supplier of the good or service
in question are called primary supply shift factors. Those factors that primarily affect suppliers further back
in the marketing chain are called derived supply shift factors.
19
SECTION TWO: PROPOSED OUTLINE
The following is a suggested outline including some particular language that may help you write
Section Two.2 First, you might want to tell the reader what you intend to write in this section of your market
report. The main heading for this section should be “Market Equilibria”. The two market equilibria are
“market equilibrium price” and “market equilibrium quantity”. You may want to tell (remind) the reader
how these two equilibria are derived. One possible format might be:
Basic economic principles show that market price and market quantity are determined by the
interaction of supply and demand. Section two of this report examines supply and demand
interactions in the current market for _____________. First, I present graphically the supply and
demand framework for the market’s current price and quantity. Secondly, I identify and examine
several individual demand and supply shift factors that are expected to soon be relevant to this
market. Next, I evaluate the relative significance of each individual market shift factor. Finally, I
consider how these individual supply and demand shifts are expected jointly to impact market price
and quantity given their relative significance. This analysis provides the rationale for conclusions
about the likely future movement, if any, of equilibrium price and quantity.
The logical next step would be to follow the paragraph outline (or one like it if you develop your own
wording/organization). The first step would be to present graphically a basic supply and demand framework
and show graphically how the supply and demand curves interact to yield equilibrium price and quantity. In
other words, write about what you believe is the current (or baseline) equilibrium price and quantity as you
did in Section One. Remember, output (Q) should be expressed using some particular quantity unit (e.g., lbs,
bushels, etc.) and a specific time period (e.g., per year, per month); price units should be dollars ($). Realize
that you do not need to have a single, exact price and quantity. If you determine that the current equilibrium
price falls within a particular range, you might just show graphically the equilibrium price at the midpoint of
this range and then explain in the text what you have done. The same is true of equilibrium quantity.
Next, you should identify and describe those supply and demand shift factors (6 total) that most affect
your market. Be sure to consider derived shift factors. You should explain in the text that you are assuming
that all else is held constant. For each individual supply or demand shift, you should:
(a) show graphically (label figures with number and description) what is happening to either supply
or demand (i.e., show the curve shifting either left or right; don’t try to show here the relative
magnitude of each shift; shift curves equally);
(b) show how each curve shift impacts equilibrium price and equilibrium quantity (i.e., use P1 and P2
and Q1 and Q2 to indicate movements); and
(c) describe in words (in a paragraph in your text) what you have presented graphically.
For example, I might write:
As shown in Figure 2, the expected lower market price of do-dads (a substitute in production for
widgets) is likely to motivate a significant number of suppliers to switch production from do-dads to
widgets over the next five years, leading to an increase in the supply of widgets, ceteris paribus.
Next, you want to distinguish which supply and demand shifts (of the six described earlier) are more
(and less) significant. You could show the relative shifts graphically. Instead, I would like for you to
2
If you use this outline, you should write a footnote (put it at the end of the first full sentence) that says, “Organization, graphs,
and some wording for this Section were adapted from suggestions provided by Roger Brown” and then reference this guide.
Students should note that reference of this guide in this way is a special exception to the normal demands of clear attribution (see
Appendix B). Attribution of any other work (e.g., former students’ papers, wording proposed by others, etc.) used for your writing
assignments in this class requires much clearer attribution than this (i.e., distinguishing clearly your work from others’ work).
20
produce a table that shows your assessment of the relative magnitude of each shift. You might want to
produce a chart like the following (assuming three supply and three demand shifts):
Table 1. Relative significance of emerging supply and demand shift factors in the agricultural market for
widgets. Higher absolute values (range: 1-5) indicate greater significance; signs indicate direction of
change.
SHIFT FACTOR
Supply:
1. Change in cost of production
(cost of labor used to produce widgets is expected to
increase)
2. Change in price of related output (substitute)
(market price of do-dads is expected to decrease
because….)
3. Change in number of producers
(number of widget producers expected to increase)
Demand:
1. Change in consumer incomes (normal good)
(income rise expected given positive stock market
performance outlook)
2. Change in tastes
(popularity of widgets expected to decline due to
media coverage of widget breakdowns)
3. Change in number of consumers
(expected increase in number of retirees)
Joint Effects
Supply
Significance
Demand
Significance
-3
NA
+5
NA
+2
NA
NA
+5
NA
-4
NA
+4
+1
+2
In addition to providing a summary table of your analysis, you should also be sure to explain in the
body of your text what is presented in the table. For example, I might write:
As shown in Table 1, two supply shift factors are expected to increase the supply of
widgets and one supply factor is expected to decrease supply. Of the three supply shift factors,
supply is expected to be most affected by future declines in the price of a related substitute output,
do-dads. On the demand side, ...
You will want to explain in your text also what you mean by “joint effects” and how these were obtained
(i.e., explain that you sum the significance ranking of all the individual effects for both sides of the market).
In your final paragraph (or near the end) of Section
Two, you will want to provide a single market equilibrium
graph that shows approximately the relative shifts of the
supply curve and demand curve (e.g., Figure 8). In the
case of the widget market above, you would want to show
the supply curve shifting about two times further to the
right than the amount you show the demand curve shifting
(since +4 is two times greater than +2). As before, you
should explain in the text clearly and completely what you
are showing in your graphs; do not assume that your reader
will understand what you have done. Finally, explain the
effects of these shifts on equilibrium price and quantity.
21
P
S1
+2
S2
P1
P2
+4
Q1
Q2
D2
D1
Q
Figure 8. Joint effects of supply and demand shifts
on equilibrium price and quantity in widget market
SECTION TWO: WORKSHEET
Name: _______________________________________
This worksheet will help students 1) identify important supply and demand shift factors, and 2)
determine their joint impact. Students must complete and turn in a copy of this worksheet before they leave
class today. Students should work together in groups of 3 or 4 students to complete this worksheet.
Task 1. In one sentence, write down the market you are analyzing. Remember to identify your market
characteristically in time and space.
Task 2. Share with your other group members the market you are analyzing. Address any points of
clarification, if needed.
□ done
Task 3. With help from your group, discuss economic trends in the U.S. today. Are the following increasing
(↑), decreasing (↓), or staying about the same (--)?
______ incomes for rich people
______ incomes for poor people
______ population
______ number of retirees
______ cost of college education
______ unemployment rate
______ food prices
______ stock market values
______ house prices
______ gas prices
______ state tax revenues
______ quality of college education
______ internet accessibility
______ earning potential of college grad
______ interest rates
Task 4. With help from your group, identify three (3) of the changes above that would affect demand in the
current market for undergraduate education at UK. Identify three (3) changes that would affect supply in this
market. Tell whether these changes cause demand / supply to increase or decrease.
1. ______________________________________________ causes demand to □ increase or □ decrease
2. ______________________________________________ causes demand to □ increase or □ decrease
3. ______________________________________________ causes demand to □ increase or □ decrease
1. _______________________________________________ causes supply to □ increase or □ decrease
2. _______________________________________________ causes supply to □ increase or □ decrease
3. _______________________________________________ causes supply to □ increase or □ decrease
Task 5. With the help of your group, answer the following questions about your good or service:
1. Is your good or service an □ inferior or □ normal good for most consumers?
2. Name the best substitute for your good or service: _________________________________________
3. Name one complement for your good or service: __________________________________________
4. Are prices of substitutes (or complements) □ increasing, □ decreasing, or □ staying about the same?
5. Is the number of consumers of your good □ increasing, □ decreasing, or □ staying about the same?
6. Are consumer incomes (for your good) □ increasing, □ decreasing, or □ staying about the same?
7. Are tastes and preferences for your good □ increasing, □ decreasing, or □ staying about the same?
8. What, if any, is a related output for your good? ___________________________________________
9. How are prices of related outputs changing? □ increasing, □ decreasing, □ staying about the same?
10. What are the major input costs for your good? ____________________________________________
11. Are input prices □ increasing, □ decreasing, or □ staying about the same?
12. Is the number of producers of your good □ increasing, □ decreasing, or □ staying about the same?
22
Task 6. With help from your group, identify two (2) demand and two (2) supply shift factors for your
market. Name not only the shift factor, but also the underlying supportive details. E.g., “Rising gas prices
will likely increase the cost of attending commuter schools. Commuter schools are substitutes for UK (a
residential institution). Consequently, demand for UK undergraduate education will likely increase.”
Demand:
1.
2.
Supply
1.
2.
Task 7. Rank the significance of each supply and demand shift factor above using a 1 to 5 (+/-) scale where
higher significance values indicate greater significance, and plus and minus signs indicate increases and
decreases, respectively.
Demand
Significance (1-5, +/-)
Supply
Factor 1
Factor 1
Factor 2
Factor 2
Sum
Sum
Significance (1-5, +/-)
Task 8. With the help of your group, answer the following questions:
1.
2.
3.
4.
5.
Did demand □ increase or □ decrease overall (i.e., when both factors were considered together)?
Did supply □ increase or □ decrease overall (i.e., when both factors were considered together)?
Relatively, which curve shifted most? □ demand □ supply □ both shifted equal amounts
Overall, equilibrium quantity will □ increase □ decrease or □ stay the same.
Overall, equilibrium price will □ increase □ decrease or □ stay the same.
Task 9. Show graphically in the space below the joint impacts of both demand and both supply shift factors
together. Be sure to label your graph completely (e.g., D1, D2, S1, S2, P1, P2, Q1, and Q2).
23
SECTION THREE: “Price Sensitivity”
Analysis of Price Elasticities
BASIC DESCRIPTION
In this section, students will analyze how sensitive market prices are to a relevant input cost increase
or decrease. This section examines two related questions (students will select one):
1. If producers in your market (e.g., farmers, processors, retailers, etc.) faced higher costs due to a tax
increase, industry fee increase, or input price increase, which group—producers or consumers—
would bear the greater burden of this cost?
2. If producers in your market (e.g., farmers, processors, retailers, etc.) faced lower costs due to a tax
cut or subsidy, industry fee cut, or input price decrease, which group—producers or consumers—
would enjoy the greater benefit of this subsidy or cost savings?
In other words, how much of the cost increases can producers in your market pass onto consumers (in the
form of higher market prices) and how much would the producers have to pay (in the form of lower profits)?
Or, how much of the cost decreases can producers in your market keep (in the form of higher profits) and
how much do they have to pass on to consumers (in the form of lower market prices)?
For Section Three, students should attempt the following:
(1) Identify one significant and plausible production cost change (increase or decrease) due to a
government tax, industry fee, government subsidy, or change in input/production costs.
(2) Evaluate and estimate the relative magnitude of the demand and supply elasticities.
(a) Identify one side of the market (i.e., consumer or producers) as “relatively more elastic” and
the other side of the market as “relatively more inelastic”.
(b) Draw a market diagram with straight-line supply and demand curves showing the relative
juxtaposition of these two curves (i.e., draw the more elastic curve more horizontally and the
less elastic curve more vertically).
(3) Explain which side of the market—consumer side or producer side—is likely to bear the greater
burden (or enjoy the greater benefit) if the change in production cost occurred and draw a market
diagram that shows:
(a) the portion of the tax or input cost increase that consumers pay (in the form of higher market
prices) and the portion that producers pay (in the form of lower profits); or
(b) the portion of the subsidy or input cost decrease that consumers benefit from (in the form of
lower market prices) and that producers benefit from (in the form of higher profits).
(4) Explain the impact on market firms and market consumers if the proposed government policy or
input cost change occurred.
The text of Section Three should be type-written and all figures and charts should be labeled clearly
and digitally produced. The text (excluding figures) should be about 6 to 8 pages in length, double-spaced
with 1” margins (12 pt. Times New Roman font). Students should consult Appendix A for details about how
this section will be graded. Students should note in particular that any written assignment that has 1) unclear
attribution, 2) incorrectly spelled words, or 3) grammatically incorrect sentence structures will receive zero
points for that assignment.
This section is worth a total of 3 points and is due at the start of class on the due date (consult your
syllabus for due dates). Students must submit a hardcopy of this section in class on the due date along with a
completed Grading Score Sheet for Section Three (see Appendix A).
24
SECTION THREE: BACKGROUND
Production cost changes (e.g., increases) may occur for a variety of reasons.
1) Governments may levy taxes on particular industry groups (e.g., KY legislators have proposed a
$0.50 per pack tax on the retail sale of cigarettes).
2) Industry producers may agree to voluntary, industry-wide fees on all producers (e.g., “check off”
commodity promotion program for milk or beef that funds generic advertising campaigns such as
“Got milk?” and “Beef, it’s what’s for dinner”.)
3) Basic production costs may also increase due to trade-related taxes (e.g., tariffs) on inputs or
simply due to market forces (i.e., supply and/or demand shifts) within the input market.
There are numerous examples of cost decreases as well. These may include government subsidies (i.e., the
opposite of a tax) or simply reductions in input (i.e., production) costs.
As shown by the examples above, firms face changes in production costs regularly. Generally,
government intervention in markets in the U.S. (i.e., taxes and subsidies) is relatively uncommon.
Production cost changes due to supply and demand shifts in the input markets are much more common.
However, consider several examples of possible or proposed government interventions:
(1) In the state of Kentucky, no sales tax is charged to farmers for feed or equipment as long as those
input expenditures are used to produce food (a subsidy for food producing farmers). For
example, the sale of feed and equipment to be used to produce tobacco or horses is taxed at the
regular 6% rate. So, if a farmer sells hay to someone to feed horses, state sales tax is due.
However, if the farmer sells the same hay to another farmer to feed cattle, no tax is charged.
(2) Since 1969 in the state of Kentucky, agricultural properties are taxed differently than nonagricultural properties. Agricultural lands are assessed property taxes based on the use value of
that property (i.e., income producing ability) rather than on its fair market (i.e., resale) value.
This constitutes a subsidy for agricultural landowners since use value is almost always less than
(or equal to) fair market value. Agricultural land is defined generally as any tract of land 10 acres
or more used for the production of crops, livestock, tobacco or timber.
The economic effects of tax policies and production cost changes can be analyzed most easily by
examining the relative price elasticities of demand and of supply (i.e., which side of the market is less
elastic). The general principle can be worded in two similar forms:
a) “The less elastic side of the market bears the greater incidence of a production cost increase.”
b) “The less elastic side of the market enjoys the greater benefit of a production cost decrease.”
In other words, the side of the market—either the demand side or the supply side—that is least sensitive to
changes in market prices will pay (enjoy) the greater portion of a production cost increase (decrease).
So, what does this mean? The less elastic side of the market bears the greater incidence of a
production cost increase (e.g., a tax). Consider a proposal to increase taxes on the retail sale of cigarettes in
Kentucky. There are two important possibilities:
(1) supply is relatively less elastic than demand (e.g., Figure 1)
(2) demand is relatively less elastic than supply (e.g., Figure 2)
In the former case (1), the producers (e.g., the retail sellers) are less responsive to the production cost
increase than the consumers are, and consequently, the producers (sellers) are less able to “pass along” the
increased cost to consumers (who, in turn, would be relatively more sensitive than the sellers to price
changes). In the latter case (2), the consumers (cigarette buyers) are either less able or less willing to
25
respond very much to higher prices (i.e., relatively less elastic demand) than producers (sellers) and,
consequently, producers are able to pass on most of the expense of a tax to consumers. In reality, which is
the less elastic side of the market in this example? Demanders (cigarette buyers) are likely to be much less
responsive to changes in prices than suppliers (Figure 2). So, the sellers (who actually pay the tax money to
the government) simply pass this expense along to consumers by raising the price of each pack of cigarettes.
Figure 1. Supply is relatively less elastic than demand.
Figure 2. Demand is relatively less elastic than supply.
Students should note that the critical factor is which side of the market is relatively less elastic. Both
supply and demand may be “inelastic” (i.e., have an elasticity value less than 1 in absolute value). The
analysis required for Section Three can still be performed. One side of the market must be relatively less
elastic than the other.
What if both sides of the market are nearly equally inelastic? Then what? In this analysis, students
attempt to explain which side of the market bears (or gains) the greater cost (benefit) of a production cost
increase (decrease). The greater the relative difference in supply and demand elasticities, the greater the
discrepancy between who pays (enjoys) and who does not. For example, if supply is relatively much less
elastic than demand, the suppliers will pay (enjoy) a much greater share of the production cost increase
(decrease). If supply and demand are nearly equally inelastic, each will pay (enjoy) a nearly equal share of
the production cost increase (decrease). Students should be sure to incorporate these nuances into their
Section Three reports. That is, students should predict not only which side of the market pays (enjoys) more
of the cost increase (decrease), but also generally how much more (e.g., “much more”, “more”, or “slightly
more”).
The pages that immediately follow review 1) what elasticity is and how to calculate it, and 2) those
factors that affect demand and supply elasticity. Students should be familiar with how to calculate and
interpret elasticities (e.g., for in-class exams), but no specific elasticity values (or outside research about
elasticity values) are needed to write Section Three. Instead, students need only evaluate their market’s good
or service in terms of those factors that affect elasticity (e.g., how “necessary” is the product to consumers?).
Which factors affecting demand elasticity seem most relevant? Which factors affecting supply elasticity
seem most relevant? Does one set of factors seem more applicable (i.e., effectual) than the other set? The
answers to these questions will guide students in writing Section Three.
26
PRICE ELASTICITY OF DEMAND
Price elasticity of demand tells us how much quantity demanded (QD) will change for a 1% change in the price of
the same good or service, ceteris paribus. The basic formula to calculate the price elasticity of demand (ED) is:
% 𝛥 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
% 𝛥 𝑃𝑟𝑖𝑐𝑒
𝐸𝐷 =
There are at least two ways to calculate percent change. One is to measure the percent change from some initial
period to some new period. This approach yields what we call the “point elasticity” estimate for demand
elasticity (ED). This formula is as follows:
𝐸𝐷 (𝑝𝑜𝑖𝑛𝑡 𝑓𝑜𝑟𝑚𝑢𝑙𝑎)
𝑄2 − 𝑄1
𝑄1
=
𝑃2 − 𝑃1
𝑃1
where Q1 and P1 equal the quantity and price in the initial period
respectively and Q2 and P2 equal the quantity and price in the
subsequent period, respectively.
The problem with the point elasticity formula is that you will get a different elasticity estimate depending on the
direction of the price change. That is, the elasticity estimate will be different if the price changes from $1 to $2 or
from $2 to $1. The solution is to measure the average percent change within the range of the price difference. In
the example above, we would estimate the average elasticity over the range of $1 to $2. This formula is called
the “arc elasticity” formula. This formula is as follows:
𝐸𝐷 (𝑎𝑟𝑐 𝑓𝑜𝑟𝑚𝑢𝑙𝑎)
𝑄2 − 𝑄1
(𝑄2 + 𝑄1 )/2
=
𝑃2 − 𝑃1
(𝑃2 + 𝑃1 )/2
𝐸𝐷 (𝑎𝑟𝑐 𝑓𝑜𝑟𝑚𝑢𝑙𝑎)
𝑠𝑖𝑚𝑝𝑙𝑖𝑓𝑖𝑒𝑑
𝑄2 − 𝑄1
(𝑄2 + 𝑄1 )
=
𝑃2 − 𝑃1
(𝑃2 + 𝑃1 )
Some textbooks reverse Q1 and Q2 and reverse P1 and P2. It doesn’t matter. That’s precisely why we use the arc
elasticity formula. The arc elasticity estimate is invariant to the direction of change.
Now, you remember that the price elasticity of demand is always negative. The confusing part is that sometimes
people drop the negative sign. When they do this, they say an elasticity value between 0 and 1 is “inelastic” and a
value greater than 1 is “elastic”. Again, most agricultural products have an inelastic own-price demand elasticity
(i.e. one with a value between 0 and 1 if you drop the negative sign or between 0 and -1 if you don’t).
PRICE ELASTICITY OF SUPPLY
Price elasticity of supply tells us how much quantity supplied (QS) will change for a 1% change in the price of the
same good or service, ceteris paribus. The basic formula for calculating the price elasticity of supply (ES) is:
𝐸𝑆 =
% 𝛥 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
% 𝛥 𝑃𝑟𝑖𝑐𝑒
As you already know, the “arc elasticity” formula is often preferred since it allows us to estimate the average
elasticity over a range of prices without any thought as to whether prices are increasing or decreasing. The
simplified arc elasticity formula for elasticity of supply (ES) is as follows:
𝐸𝑆 (𝑎𝑟𝑐 𝑓𝑜𝑟𝑚𝑢𝑙𝑎)
𝑠𝑖𝑚𝑝𝑙𝑖𝑓𝑖𝑒𝑑
𝑄2 − 𝑄1
𝑄 + 𝑄1
= 2
𝑃2 − 𝑃1
𝑃2 + 𝑃1
where Q1 and P1 represent quantity and price in one period,
respectively, and Q2 and P2 represent quantity and price in another
period, respectively.
The price elasticity of supply is always positive, confirming the direct or positive relationship between price and
quantity (i.e., the “law of supply”). Just like the price elasticity of demand (which is always negative), if the price
elasticity of supply value is between 0 and 1 we say that supply is “inelastic”, and if it is greater than 1 we say
that supply is “elastic”.
27
INCOME ELASTICITY
Income elasticity tells us how much quantity demanded (QD) changes for a 1% change in income, ceteris paribus.
Using the simplified arc elasticity formula, income elasticity (EI) would be:
𝐸𝐼 (𝑎𝑟𝑐 𝑓𝑜𝑟𝑚𝑢𝑙𝑎)
𝑠𝑖𝑚𝑝𝑙𝑖𝑓𝑖𝑒𝑑
𝑄2 − 𝑄1
𝑄 + 𝑄1
= 2
𝐼2 − 𝐼1
𝐼2 + 𝐼1
where Q1 and I1 represent quantity and income in one period,
respectively, and Q2 and I2 represent quantity and income in
another period, respectively.
Unlike price elasticity of demand (that is always negative), income elasticity can be either negative or positive.
In fact, the sign on the income elasticity value is very important:
If income elasticity is positive, this means that the percent change in quantity demanded and the percent change in
income are directly related. That is, an increase in income is associated with an increase in quantity demanded.
Consequently, goods that have positive income elasticities are also known as normal goods. Goods with very
high positive income elasticities (normally greater than +1) are sometimes called “luxury” goods.
Normal Good: those goods for which a rise (fall) in consumer incomes leads to an increase (decrease) in
quantity demanded. Most goods are normal goods. Examples: gasoline, housing, and steak.
If income elasticity is negative, this means that the percent change in quantity demanded and the percent change
in income are indirectly (or negatively) related. That is, an increase in income is associated with a decrease in
quantity demanded. Consequently, goods that have negative income elasticities are also know as inferior goods.
Inferior Good: those goods for which a rise (fall) in consumer incomes leads to a decrease (increase) in
quantity demanded. Examples: Ramen noodles, Spam®, and generic toilet paper.
CROSS PRICE ELASTICITY
Cross price elasticity tells us how much the quantity demanded (QD) of one good changes given a 1% change in
the price of another good, ceteris paribus. The cross price elasticity (EXY) may be calculated in the same way as
the own-price demand elasticity with just one change: in the denominator of the formula, you calculate the
percent change in price of another good rather than the percent change in price of the “own” good.
𝐸𝑋𝑌 (𝑎𝑟𝑐 𝑓𝑜𝑟𝑚𝑢𝑙𝑎)
𝑠𝑖𝑚𝑝𝑙𝑖𝑓𝑖𝑒𝑑
𝑄2𝑋 − 𝑄1𝑋
𝑄 𝑋 + 𝑄1𝑋
= 2𝑌
𝑃2 − 𝑃1𝑌
𝑃2𝑌 + 𝑃1𝑌
where X refers to one good (the “own” good) and Y refers to
another, related good, Q and P refer to “price” and “quantity”,
respectively, and the subscripts 1 and 2 refer to two time periods.
Cross price elasticity values are like income elasticity values in the sense that the critical point is zero. If cross
price elasticity is positive, this means that the percent change in quantity demanded of one good and the percent
change in the price of another good are directly related. That is, an increase in the price of the other good is
associated with an increase in quantity demanded of the “own” good. Consequently, goods that have positive
cross-price elasticities are called substitutes. Furthermore, the higher (i.e. more positive) the cross-price
elasticity, the more the two goods are substitutable (i.e. “closer substitutes”).
Substitutes: Two goods are substitutes if consumers tend to substitute one good for the other good as
prices change. Examples: Coke and Pepsi. Chicken and pork (“the other white meat”).
If cross price elasticity is negative, this means that the percent change in quantity demanded of one good and the
percent change in the price of another good are indirectly (or negatively) related. That is, an increase in the price
of the other good is associated with a decrease in quantity demanded of the “own” good. Consequently, goods
that have negative cross-price elasticities are called complements. Furthermore, the lower (i.e. more negative) the
cross-price elasticity, the more the two goods are complementary (i.e. “closer complements”).
Complements: Two goods are complements if consumers typically consumed them at the same time.
Examples: Peanut butter and jelly. Rum and Coke.
28
FACTORS AFFECTING DEMAND ELASTICITY
1. The availability of substitutes
MORE (or better) substitutes suggests MORE elastic demand
FEWER (or worse) substitutes suggests LESS elastic demand
If a commodity has many good substitutes, consumers will be more responsive to changes in the price
of that commodity than if it has only a few, poor quality substitutes.
Examples:
LESS ELASTIC
Tractors (fewer substitutes) vs.
Cigarettes (fewer substitutes) vs.
MORE ELASTIC
John Deere Tractors (more substitutes)
Green beans (more substitutes)
NOTE: the definition of the market is important here; more specifically defined markets generally
have more substitutes and vice versa. For example, the demand for Tropicana brand orange juice will
be more elastic than the demand for orange juice or fruit juice.
2. The budget share
A HIGHER budget share suggests MORE elastic demand
A LOWER budget share suggests LESS elastic demand
If a commodity is relatively cheap to start with, even a major percentage increase in price will affect
the quantity demanded by consumers relatively little.
Examples:
LESS ELASTIC
Salt (low budge share)
Pencils (low budget share)
vs.
vs.
MORE ELASTIC
John Deere Tractors (high budget share)
Laptop computers (high budget share)
3. Adjustment period
LONGER adjustment suggests MORE elastic demand
SHORTER adjustment period suggests LESS elastic demand
Short-run price changes may have little influence on quantity demanded, since it may be some time
before all consumers become aware of or are able to respond to price changes. With durable goods
(e.g. cars, refrigerators, etc.) the effect of a fall in price may be slow to show effect since customers
may be reluctant to replace such goods if they are still in good condition.
Examples:
LESS ELASTIC
Gasoline in the short-run
Tuition in the short-run
vs.
vs.
MORE ELASTIC
Gasoline in the long-run
Tuition in the long-run
4. Degree of necessity
MORE necessary suggests LESS elastic demand
LESS necessary suggests MORE elastic demand
Consumers are less responsive to changes in the price of commodities that they view as essential. If
you go to Europe where the price of food is more expensive, you will likely still buy about the same
amount of food since food is essential for life. That is, you will be relatively unresponsive to the
higher food prices.
Examples:
LESS ELASTIC
Gasoline (more necessary)
Food (more necessary)
vs.
vs.
29
MORE ELASTIC
Dinner at a fancy restaurant (less necessary)
King’s Island trip (less necessary)
FACTORS AFFECTING SUPPLY ELASTICITY
1. Analytical Time Period
Times SHORTER than the marketing period suggest MORE elastic supply
Times EQUAL to the marketing period suggest LESS elastic supply
Times GREATER than the marketing period suggest MORE elastic supply
Supply elasticity changes depending how long a time the analyst is considering, especially in many
agricultural situations. Schrimper (2001) identifies three different time periods: 1) less than the marketing
period, 2) equal to the marketing period, and 3) greater than the marketing period. The marketing period is
generally from one harvest period to the next. During the marketing period, farms find it difficult to alter
amounts of an agricultural commodity (e.g. corn) they are able to produce (e.g. if the growing season is
already underway). Supply is relatively inelastic for lengths of time equal to the marketing period (due to
production lags). On the other hand, supply is relatively elastic if the time period is shorter or longer than the
marketing period. In these shorter periods, producers can store (e.g. grains) or postpone harvest (e.g.
livestock) for weeks or months in response to lower prices. This means that farmers can be relatively
responsive to price changes in this shorter period of time. Likewise, for periods that spans more than the
harvest period, farmers can plant more crops or raise more livestock and consequently exhibit a greater
responsiveness to price changes.
In some ways, it doesn’t help much to say that the most important factor affecting the responsiveness
of suppliers to changes in market prices is time. Timeliness and responsiveness seem to have more or less the
same meaning. When discussing supply responsiveness, analysts (e.g., you) should specify clearly the time
period your analysis proposes to examine (e.g., responsiveness over the next month, year, five years, etc.).
2. The amount of storage
MORE storability typically suggests MORE elastic supply
LESS storability typically suggests LESS elastic supply
If producers typically have lots of units stored (meaning storage costs are relatively low), then
suppliers will / can be more responsive to changes in price; they will simply move more product out
of storage in response to higher prices or store more product in response to lower prices.
Example:
LESS ELASTIC
Fresh vegetables (little storage)
MORE ELASTIC
Frozen vegetables (more storage)
3. The amount of excess capacity
GREATER excess capacity suggests MORE elastic supply
LESSER excess capacity suggests LESS elastic supply
If producers typically operate at or near full capacity, there is little room for them to adjust to price
changes, particularly price increases. Industries with high capital costs tend to operate nearer to full
capacity.
Example:
LESS ELASTIC
Paper mills (low spare capacity)
MORE ELASTIC
Horse farms (high spare capacity)
4. Profit or investment risk
MORE risky suggests LESS elastic supply
LESS risky suggests MORE elastic supply
Potential producers are more reluctant to enter or expand into markets that have less certain (i.e.,
more risky) profit expectation and less reluctant to enter or expand into markets with more certain
(i.e., less risky) profit expectations.
Example:
LESS ELASTIC
MORE ELASTIC
Thoroughbred farming (more risky) Cattle farming (less risky)
30
5. Extent of barriers to entry and/or exit
HIGHER barriers to entry/exit suggest LESS elastic long-term supply
LOWER barriers to entry/exit suggest MORE elastic long-term supply
If potential producers must make large, up-front investments to begin production, expansion of
production in response to price increases will be relatively slower than if production start-up costs are
lower. Entry barriers may also include certificates, special education or training requirements, or
legal costs (e.g., patent or copyright protection).
Example:
LESS ELASTIC
Automobile manufacturing
MORE ELASTIC
Business-from-home opportunities
6. Input flexibility
MORE flexibility suggests MORE elastic supply
LESS flexibility suggests LESS elastic supply
Producers of goods that have inputs with very few uses (i.e., specialized inputs) generally respond
more slowly to changes in market prices. Producers of goods with inputs that can be used to produce
a greater variety of final products or services (i.e., more flexible inputs) are able to increase or
decrease production more easily in response to changing market prices.
Example:
LESS ELASTIC
Computer producers (less flexible)
MORE ELASTIC
Soybean farming (more flexible)
ELASTICITY SUMMARY
Elasticity Type
Price elasticity of demand
Abbreviation Critical Value
ED
+1 in abs value
Interpretation
greater than +1 = elastic
less than +1 = inelastic
Income elasticity
EI
0
greater than 0 = normal good
less than 0 = inferior good
Cross price elasticity
EXY
0
greater than 0 = substitute
less than 0 = complement
Price elasticity of supply
ES
+1
greater than +1 = elastic
less than +1 = inelastic
DEMAND ELASTICITY and TOTAL REVENUE
For elastic demand, P and TR move in opposite directions.
Should you raise or lower your price?
For inelastic demand, P and TR move in the same direction.
For example, if
producers lower their
price, their TR will
increase if demand is
elastic (Fig. 1). If
demand is inelastic
(Fig. 2), a lower price
will decrease TR.
Figure 2. Inelastic demand
Figure 1. Elastic demand
31
SECTION THREE: PROPOSED OUTLINE
The following is a suggested outline including some particular language that may help you with
Section Two.3 The main heading for this section should be “Price Sensitivity”. You should first tell readers
what you intend to write in this section of your market report and why. In this section, we want to know how
sensitive consumers and producers in your chosen market are to changes in market prices and input costs,
respectively. Price sensitivity is especially valuable to business planners because it allows them to evaluate
how profits will be impacted by proposed government policies (taxes or subsidies), industry policies, or
general price volatility in input markets. You might want to do the following: 1) identify one [or more]
relevant input cost changes likely to affect your market, 2) explain the basic economic concept used to
determine the impact of these changes, 3) review the major factors that affect demand and supply elasticities
generally, 4) evaluate your market with respect to these factors, 5) draw conclusions regarding impacts of
specific input cost changes on consumers and producers, and 6) present your findings graphically.
The follow are additional suggestions about some of these parts.
Part 2. Explain how one determines which side of the market pays (enjoys) the greater price (benefit) for
production cost increases (decreases). This is where you explain the two key analytical principles for this
section:
a) The less elastic side of the market bears the greater incidence of a production cost increase.
b) The less elastic side of the market enjoys the greater benefit of a production cost decrease.
Your explanation here should include not only a restatement of these two important principles, but also
clarification possibly using examples from class or examples that make sense to you.
Parts 3 and 4. Mention briefly the major factors that affect demand and supply elasticities generally, then
evaluate your particular market with respect to these factors. Describe which demand factors affect demand
elasticity and how much (e.g., “The degree of necessity affects the demand elasticity for _________ most,
followed by the availability of substitutes and ….”). Be sure that you tell readers not only how significant
the factor is, but whether the factor suggests elasticity is more elastic or less elastic. You may choose to
present this information in a table as shown in the Section Three Worksheet. If so, be sure to make reference
to the table in the text and include a summary in the text of your findings. For example, “As shown in Table
1, the most important factors affecting demand elasticity is the availability of substitutes.” Be sure to present
a graph showing your conclusions from Parts 3 and 4 (i.e., showing either demand relatively less elastic than
supply or supply relatively less elastic than demand).
Part 5. You have now set the stage to present your conclusions. You have presented two premises that, if
accepted as true, logically lead to your conclusion. Consider how this works:
1. Since the less elastic side of the market bears (enjoys) the greater incidence (benefit) of a production cost
increase (decrease), and
2. Since one side of your market is relatively less elastic than the other,
3. You conclude that the _____________________ (fill in “supply” or “demand”) side of your market bears
(enjoys) the greater incidence (benefit) of a production cost ___________________ (fill in “increases” or
“decreases”) due to _____________________ (name the specific event in your market that cased a change in
production costs; e.g., “higher gasoline prices”).
Part 6. Present the graph that shows what you have concluded in Part 5 and be sure to explain the graph in
the text.
3
If you use this outline, you should write a footnote (put it at the end of the first full sentence) that says, “Organization, graphs,
and some wording for this Section were adapted from suggestions provided by Roger Brown” and then reference this guide.
Students should note that reference of this guide in this way is a special exception to the normal demands of clear attribution.
Attribution of any other work (e.g., former students’ papers, wording proposed by others, etc.) used for your writing assignments
in this class requires much clearer attribution than this; in this case, I know what work is yours vis-à-vis work from this guide.
32
SECTION THREE: FINAL GRAPHS
Below are graphs showing gains and losses to consumers and producers as a result of production cost
increases and decreases. Consumer gains (and losses) are reflected in lower (higher) market prices, and
producer gains (and losses) are reflected in higher (lower) profits. The total change in production cost
(negative or positive) is represented approximately by the per unit cost change (C) times either Q1 (for cost
decreases) or Q2 (for cost increases).
Figure 1. Incidence due to production cost
decrease assuming demand is less elastic
than supply.
Figure 2. Incidence due to production cost
increase assuming demand is less elastic than
supply.
Figure 3. Incidence due to production cost
decrease assuming supply is less elastic than
demand.
Figure 4. Incidence due to production cost
increase assuming supply is less elastic than
demand.
33
SECTION THREE: WORKSHEET
Name: _______________________________________
This worksheet will help students 1) evaluate which side of the market—demand or supply—is less
elastic, and 2) how to show graphically the share of potential production cost changes each side pays (or, for
cost decreases, enjoys). Students must complete and turn in a copy of this worksheet before they leave class
today. Students should work together in groups of 3 or 4 students to complete this worksheet.
Task 1. Consider the current retail market for rice in rural China. With help from your group, indicate what
each factor below suggests about the relative elasticity of rice in this market over the next year. Use (↑) to
indicate more elastic or (↓) to indicate less elastic.
(↑) (↓)
Demand
_____ Availability of substitutes
_____ Budget share …………. .
_____ Adjustment period ……..
_____ Degree of necessity …...
Sum
(↑) (↓)
Supply
_____ Analytical time period …………
_____ Amount of storage …………….
_____ Amount of excess capacity …...
_____ Profit or investment risk ………
_____ Extent of barriers to entry or exit
_____ Input flexibility ……………….
Sum
Task 2. With help from your group, indicate the relative importance of each factor using a 1-5 scale, where
lower number indicate lesser importance, and use signs (+/-) to indicate direction (negative is lower
elasticity, positive is higher elasticity). Then sum the values in each column, and then divide by the number
of factors. The side of the market with the most negative number is the relatively less elastic side of the
market.
Task 3. With help from your group, discuss which side of the market would pay a greater proportion of a
production cost increase?
□ consumers
□ producers
□ neither (equal shares)
□ unknown (not enough info)
Task 4. In one sentence, write down the market you are analyzing. Remember to identify your market
characteristically in time and space.
Task 5. Share with your other group members the market you are analyzing. Address any points of
clarification, if needed.
□ done
Task 6. With help from your group, indicate what each factor below suggests about the relative elasticity of
the good or service you are examining over the time period specified in Assignment One. Use (↑) to indicate
more elastic or (↓) to indicate less elastic.
(↑) (↓)
Demand
_____ Availability of substitutes
_____ Budget share …………. .
_____ Adjustment period ……..
_____ Degree of necessity …...
Sum
(↑) (↓)
Supply
_____ Analytical time period …………
_____ Amount of storage …………….
_____ Amount of excess capacity …...
_____ Profit or investment risk ………
_____ Extent of barriers to entry or exit
_____ Input flexibility ……………….
Sum
(see Task 7 on next page)
34
Task 7. With help from your group, indicate the relative importance of each factor using a 1-5 scale, where
lower number indicate lesser importance, and use signs (+/-) to indicate direction (negative is lower
elasticity, positive is higher elasticity). Next, sum the values in each column and then divide by the number
of factors. The side of the market with the most negative number is the relatively less elastic side of the
market. (Remember, your conclusion here depends importantly on the length of the analytical time period
that you specified; be sure to note this important point from Assignment One again in this assignment.)
Task 8. With help from your group, select from the list below which graph best exemplified the relative
elasticity of your market (i.e., not the rural China rice market).
Figure 1. Demand is less elastic than supply.
Figure 2. Supply less elastic than demand.
Task 9. Assume that producers in your market face an increase in the costs of production. Over the time
period you specify, which side the market is likely to pay a greater share of this production cost increase?
Do your group members agree with your assessment?
□ consumers
□ producers
□ neither (equal shares)
□ unknown (not enough info)
Task 10. With help from your group, determine which of the two graphs below best reveals the effects of a
production cost increase on consumers and producers in your market based on your analysis.
Figure 1. Demand is less elastic than supply.
Figure 2. Supply less elastic than demand.
35
SECTION FOUR: “Profit Expectations”
Analysis of Market Structure
BASIC DESCRIPTION
In this section, students will 1) analyze the market structure of their chosen market, and 2) determine
reasonable profit expectations and strategies for individual firms in that market. Economists have shown that
an individual firm’s profit margins are correlated, in part, with that firm’s market structure. As you already
have learned, profit expectations also are affected by overall market demand and supply shift factors (see
Section Two).
For this assignment, students should first evaluate and explain the degree to which their chosen
market is more like perfect competition or more like imperfect competition. Secondly, students should
present graphically and explain the baseline profit situation (perfect competition or imperfect competition)
for a representative firm in (or entering into) their chosen market. Finally, students should predict, describe,
and show graphically how three significant changes in general market forces and/or engagement in firmspecific profit strategies are likely to affect individual firms’ profits.
Note: Significant general market forces may work to reduce (rather than enhance) profits for
representative firms in your market. These factors are fine to consider provided they are significant.
The text of Section Four should be type-written and all figures and charts should be labeled clearly
and digitally produced. The text (excluding figures) should be about 6 to 8 pages in length, double-spaced
with 1” margins (12 pt. Times New Roman font). Students should consult Appendix A for details about how
this section will be graded. Students should note in particular that any written assignment that has 1) unclear
attribution, 2) incorrectly spelled words, or 3) grammatically incorrect sentence structures will receive zero
points for that assignment.
This section is worth a total of 3 points and is due at the start of class on the due date (consult your
syllabus for due dates). Students must submit a hardcopy of this section in class on the due date along with a
completed Grading Score Sheet for Section Four (see Appendix A).
36
SECTION FOUR: BACKGROUND
Profit is the return to (i.e., compensation for) entrepreneurship by firm managers. Consider the four
primary inputs or “factors” of production: land, labor, capital, and entrepreneurship. The return to land is
rent. The return to labor is wages. The return to capital is interest. And the return to entrepreneurship is
profit.
Profit is defined as total revenue minus total costs, п = TR – TC or alternatively п = Q(P – ATC).
Total revenue includes all returns to the various factors of production. Total costs include all the costs
associated with employing those factors of production. Thus, from an economic point of view, a firm that
has zero profit only means that it hasn’t generated any returns to the entrepreneurial factor of production. If
the firm is “breaking even” then it has still made normal returns to the other factors of production: to the
owners of the land, to any laborers (including wages for the “boss”), and to the owners of any capital. In
other words, firms that make zero profit (i.e., only break even) will / can stay in business in the long-run
provided they do not depend on returns to entrepreneurship. Profit expectations are zero for firms that make
no successful investments in entrepreneurship.
Some firms, surprisingly, do not (in fact, should not) invest in entrepreneurship. This set of firms has
a market structure that is “perfectly competitive” (i.e., market structure = “perfect competition”). Firms that
belong to “imperfectly competitive” markets (i.e., “monopolistically competitive”, “oligopoly”, and
“monopoly”) may invest, to varying degrees, in entrepreneurship.
Market structure may be divided into two main categories: (1) perfect competition and (2) imperfect
competition. Imperfect competition may be further divided into (a) monopolistic competition, (b) oligopoly,
and (c) monopoly. All of these market structures are typically distinguished using the following criteria: 1)
the number of buyers and sellers, 2) the degree of product homogeneity, 3) information availability, and 4)
the strength of barriers to entry into and exit from the market. (See Table 1).
Table 1. Four basic types and characteristics of market structure.
Perfect Competition
Imperfect Competition
Monopolistic Competition
Characteristics
Number of buyers/sellers
very many
many
Product similarity
Homogeneous
slightly differentiated
Ease of entry / exit
Easy
relatively easy
Degree of info available to
competitors
Perfect
lots
↔
Oligopoly ↔
few
differentiated or not
Monopoly
one
unique
difficult
closed / blocked entry
some
none, unless regulated
or legally permitted
Profits (π) of individual firms may be affected in two general ways: as a result of 1) general market
forces, or 2) firm-specific choices. General market forces are factors that affect the profits of every firm in
the market. Firm-specific choices are strategies undertaken by individual firms that—if successful—increase
the profits only of that firm. Individual firms that attempt but implement profit enhancing strategies
unsuccessfully usually only drive up their production costs and, consequently, lower their profits. The
following outline shows how profits are affected by both successful and unsuccessful implementation of
various profit-enhancing strategies. These individual strategies are described in more detail in the pages that
immediately follow (see “Understanding Profit Strategies”).
37
OUTLINE of GENERAL MARKET FORCES and FIRM-SPECIFIC PROFIT STRATEGIES
AFFECTING PROFITS
I.
General market forces (affecting all firms in market)
a. Change in production costs
i. Decrease in firm’s production costs (↑π)
ii. Increase in firm’s production costs (↓π)
b. Change in demand
i. Increase firm’s demand (↑π)
ii. Decrease firm’s demand (↓π)
c. Change in demand elasticity
i. Firm’s demand curve more inelastic (↑π)
ii. Firm’s demand curve more elastic (↓π)
NOTE: Consider generic advertising or any change in the four factors that affect demand
elasticity for all market firms. For example, the demand curve for chicken may become more
elastic as a result of the generic advertising campaign: “Pork: the other white meat” (i.e.,
more consumers judge that pork and chicken are better quality substitutes)
II.
Firm-specific choices (affecting a single firm in market)
a. Engage in price competition
i. Successfully: Decrease firm’s production costs (↑π)
ii. Unsuccessfully: No effect or increase firm’s production costs (↓π)
b. Increase market concentration
i. Successfully: Makes product differentiation and price coordination easier (lower cost)
ii. Unsuccessfully: No effect or increases firm’s production costs or legal costs
c. Differentiate product from rival firms’ products
i. Successfully: Makes firm’s demand curve more inelastic (↑π)
May also increase demand (↑π)
ii. Unsuccessfully: No effect or increase firm’s production costs (↓π)
d. Engage in price coordination
i. Successfully: Makes firm’s demand curve more inelastic (↑π)
ii. Unsuccessfully: No effect or increase firm’s production costs or legal costs (↓π)
e. Increase barriers to entry and/or exit
i. Successfully: Avoids or limits decreases in market concentration
ii. Unsuccessfully: No effect or increases firm’s production costs or legal costs (↓π)
NOTE: If barriers to entry and/or exit decrease, existing firms may face increased
competition from new rival firms, causing market concentration to decrease and
making production differentiation and price coordination harder, further reducing
profits. (↓π)
f. Engage in Price Discrimination
i. Successfully: Segments consumers; creates second, more inelastic demand curve (↑π)
ii. Unsuccessfully: No effect or increases firm’s production costs (↓π)
38
UNDERSTANDING PROFIT STRATEGIES
MAJOR STRATEGY: Engage in Price Competition. Eliminate rival firms (i.e., increase market
concentration) by charging lower prices. Firms engage in price competition by finding ways to lower
production costs or increase productivity (i.e., output / input). Price competition allows successful firms to
charge lower prices than rival firms.
While any firm may engage in price competition, this profit-making strategy is the only strategy
available to individual firms in truly perfectly competitive markets, and even so profits are only possible in
the short-run.4 With zero barriers to entry, other firms will move into the market and drive any short-run
profits back to zero. With perfect and freely available information, other firms will adopt cost-saving
technologies, again driving economic profits back to zero. All other forms of competition (e.g., product
differentiation, price coordination, increasing barriers to entry, etc.) are called “non-price competition”
strategies.
Markets with few firms (i.e., oligopolistic markets) generally can and do avoid price competition,
preferring instead to pursue non-price competition strategies such as product differentiation and price
coordination. Why? With many firms, the odds are higher that at least one firm will engage in price
competition, requiring all other firms to cut their prices in response. However, with fewer firms, the odds are
higher that all firms will “live and let live” with respect to prices. With fewer firms, price cuts may be
relatively easy for rival firms to match, but non-price competition efforts (e.g., developing well-designed
products or creative promotion campaigns) tend to be harder for rival firms to match in oligopolistic markets.
STRATEGY: Vertically Integrate. Firms may lower costs by vertically integrating. Vertical integration
occurs when firms combine successive elements of the marketing or supply chain. Vertical integration may
be described as “backward integration” (e.g., a firm merging with its input supplier) or “forward integration”
(e.g., a wholesale firm merging with a retail supplier). Example: One of the earliest, largest and most famous
examples of vertical integration was the Carnegie Steel company. The company not only controlled the mills
where the steel was manufactured, but it also owned the mines where the iron ore was extracted, the coal
mines that supplied the coal, the ships that transported the iron ore, the railroads that transported the coal to
the factory, and even the coke ovens where the coal was coked. Carnegie even established an institute of
higher learning to teach the steel processes to the next generation.5
STRATEGY: Merge with Rival Firms. When rival firms in the same market merge (a.k.a. “horizontal
integration”), it is generally in an effort to lower production costs (e.g., by eliminating redundant employees
or managers, operating at a more efficient scale, or reducing taxes). Mergers typically occur by mutual
consent of shareholders or boards of directors; mergers that are not consensual are called “hostile takeovers”
(i.e., the purchase of a controlling interest in a firm through open market acquisitions against the wishes of
the target firm’s board). In addition to lowering production costs, mergers may also increase market
concentration and thereby reduce competition and lead to higher consumer prices. Consequently, large
mergers in the U.S. often require approval by the Federal Trade Commission and/or the Department of
Justice.
STRATEGY: Increase Scale of Production. Firms may lower production costs by taking advantage of
economies of scale. The idea is that per unit costs (ATC) are lower the larger the size or scale of production.
Growing farm size in the U.S. is an excellent example of this profit enhancing strategy.
4
Generic advertising is a strategy available to groups of perfectly competitive firms. Generic advertising promotes a particular
commodity with financial contributions (often required) from all individual market suppliers. Generic advertising campaigns in
the U.S. are often supported through “Check-Off” programs. Examples of Generic Advertising: “Beef, it’s what’s for dinner”
(promoting the beef industry); “Got Milk?” (promoting purchase of milk), “The incredible edible egg.” (promoting egg
consumption).
5
Example from Wikipedia. “Vertical Integration”. March 24, 2008.
39
MAJOR STRATEGY: Increase Market Concentration. Market concentration is a measure of the number and
size distribution of firms in a market. Fewer, larger firms are associated with higher profits. More, smaller
firms are associated with lower profits. There are two basic ways to measure market concentration: 1) using
a Concentration Ratio or 2) using a Herfindahl Index. Limit pricing, loss leader pricing, predatory pricing,
merger / horizontal integration, and price competition are strategies for increasing market concentration.
With fewer rival firms (i.e., increased market concentration), opportunities generally increase for a) price
coordination and b) product differentiation.
TERM: Concentration Ratio (CR). A concentration ratio is a measure (0-100) of market concentration. Lower
CR values indicate lower concentration; higher CR values indicate greater concentration. CR values are
calculated as the sum of market share for a given number of firms (e.g., “CR-4” is concentration ratio of top
four firms). Other common CR measures include: CR-8, CR-12, and CR-50. Market shares are based on each
firm’s share of overall market sales or total revenues.
TERM: Herfindahl Index (HI). A Herfinidahl Index is a measure (0-1) of market concentration. Lower values
indicate lower concentration; higher values indicate greater concentration. A HI is calculated as the sum of
squared market shares for a given number of the largest firms. Market shares are based on individual firm’s
share of overall market sales or total revenues.
STRATEGY: Practice Limit Pricing. The limit price is the highest per unit price an existing firm or
cooperating group of firms may charge before attracting other competing firms to the market. The limit
price is meant to discourage potential rival firms from entering a market. The limit price should be just low
enough to make entering not profitable. Limit pricing is a strategy for increasing (or not decreasing) market
concentration. Example: For some firms (e.g., internet firms such as hotmail), the limit price may initially be
zero (so hotmail was initially free). As these firms generate name recognition (see branding and product
differentiation barriers to entry), they are able to charge a higher limit price for their products / services.
STRATEGY: Engage in Predatory Pricing. Firms engaged in predatory pricing (also known as “destroyer
pricing”) sell their product at a very low price (e.g., P < ATC) in an effort to eliminate rival firms and to
create barriers to entry for potential rival firms. Rival firms that are unable to compete (i.e., sustain equal or
lower prices profitably) go out of business. Once rival firms are eliminated, remaining firms may increase
prices higher due to less competition. Predatory pricing is a strategy for increasing market concentration and
is illegal in many countries. Example: In the mid-1990s, Netscape was selling their web browser for
approximately $30 retail. A new competitor called Microsoft entered the market by introducing Internet
Explorer at $0 retail, thus selling the software below development cost. This action quickly drove Netscape's
browser market share to almost-zero, and the company was forced to liquidate to AOL. Hence, Microsoft
used predatory pricing (selling below cost) to drive out a competitor. This action eventually brought the
scrutiny of the U.S. Justice Department in an anti-trust case. 6
DISTINCTION: Loss Leader Pricing. A product sold at a low price in order to stimulate more profitable sales
in other areas. Loss leader products are typically popular items that consumer purchase regularly (e.g., eggs,
milk, or bread for a grocery store or gasoline for a “quick mart” type gas station). Loss leader pricing is legal
(as opposed to predatory pricing) provided the firm’s intent (hard to prove) is not to eliminate rival firms from
the market but simply to generate additional sales.
STRATEGY: Merge with Rival Firms. With approval from government regulatory agencies, rival firms
may merge (also known as “horizontal integration”) in an effort to increase market concentration. However,
most government regulatory agencies (e.g., the Federal Trade Commission in the U.S.) will not approve
mergers if they reduce competition to the point of harming consumers (with higher prices). The strategy is
for the firm to claim publically that it wants to integrate horizontally as a cost cutting strategy (see Merger
under Price Competition above) rather than as a market concentration strategy.
6
Example from Wikipedia. “Predatory Pricing”. March 24, 2008.
40
MAJOR STRATEGY: Differentiate Product from Rival’s Product: Products that are differentiated in the
minds of consumers are, by definition, not homogeneous and therefore not perfectly substitutable. As such,
product differentiation is a profit strategy firms use to avoid the constraints of perfect competition. Product
differentiation, if recognized (i.e., valued) by consumers, makes the individual firm’s demand curve more
inelastic. General product differentiation strategies include: a) product-based differentiation, b) deliverybased differentiation, and c) advertising.
Opportunities for product differentiation generally increase as market concentration increases. As the
number of rival firms increases, the odds decrease that any single firm will successfully distinguish its
product from all others. Few products are perfectly undifferentiated (close example: North Dakota wheat),
and thus most markets may be characterized partially as monopolistically competitive. Differentiation tends
to be higher, easier, and less costly for products that are more complicated or where buyers’ tastes and
preferences are diverse (e.g. digital cameras have many features, and buyers often have preferences for
specific combinations of features).
STRATEGY: Differentiate Product Physically. Product-based differentiation occurs when rival firms’
products are physically different. Firms may innovate by creating new, better or different products.
Innovation may also include improvements to the product quality or design. Apple Computer Corporation is
a good example. Instead of innovating, firms may instead seek ways to take innovative ideas from rival
firms. This general tactic is known as industrial espionage or surveillance. Firms may also re-define their
market by creating a niche market. For example, beef farmers may differentiate their product physically by
altering their growing practices to comply with organic food standards.
STRATEGY: Differentiate Product’s Delivery Characteristics. Firms that seek to enhance profits through
delivery-based differentiation alter non-physical product attributes that will enhance consumer value. For
example, Wal-mart has a no-questions-asked return policy. The products at Wal-mart are not substantially
different from those at rival stores, but Wal-mart is a “different” place to shop because it so willingly accepts
returned merchandise. MagLite offers a “lifetime guarantee” on all of its flashlights. Similarly, doctors that
keep their appointments differentiate themselves from others based on the timely delivery of their services.
STRATEGY: Advertise. Advertizing occurs when firms seek to create or reinforce real or perceived product
differences in the minds of consumers. Successful advertising may not only make the individual firm’s
demand curve more inelastic, but it may also increase demand. Advertising by individual firms may be
characterized as a) informative, b) promotional, and c) branding. Groups of usually perfectly competitive
firms may engage in generic advertizing. Informative advertising typically seeks to inform consumers about
differences between one firm’s product and its rival’s products (e.g., Burger King’s hamburgers are “flame
broiled”). However, some informative advertising (e.g., by Microsoft) may be to inform consumers about
the availability of a new or changes to an existing (e.g., software updates). Promotional advertizing seeks to
change consumer preferences by emphasizing how one product is not only different from, but better than its
rivals (soap versus antibacterial soap). Branding (e.g., of cattle with a hot iron) originally sought to establish
ownership by making a simple, low-cost mark or symbol on the product. Branding still is a form of
advertizing that uses symbols to help consumers distinguish one firm’s product from its rival’s products.
Branding generally includes both informative and promotional elements.
NOTE: Physical difference versus economic difference. Products may be different, but not differentiated by
consumers. Example: Two types of coal may be physically different (e.g., one may produce more heat per
ton than another). However, if all buyers make the same appraisal of the value (in thermal units of heat
output per ton, for example), there is no economic difference. All buyers see the difference and they all pay
a fixed amount more for the more energy-intensive coal.
41
NOTE: Products may be differentiated, but not different. Firms may seek to differentiate (e.g., through
branding) products that are physically and in all other respects essentially the same. Example: The
ingredients and manufacturing of many medicines (e.g., ibuprofen, Advil) is prescribed by the Food and
Drug Administration (FDA), yet branding (e.g., Advil) persists. Consumers may pay for more branded
products because 1) the utility received from consumption is ill-defined (e.g., “Did that pill really cure my
headache or was it something else?”); and/or 2) the purchase decision was based on perception about utility
received from others’ approval (e.g., “I don’t want to be thought of as someone who can’t afford to feed my
children name-brand cereals like Cheerios.”). Interestingly, drug companies that develop new medicines
identify (in patent applications) the branded name (e.g., Nexium) and the generic equivalent (e.g.,
esomeprazole magnesium). Not surprisingly, the branded name is easy to remember while the generic name
(that must be used by eventual rivals) is much harder to say and/or remember.
MAJOR STRATEGY: Coordinate Prices. Price coordination among firms occurs when / if price decisions
are based on direct or indirect interaction among firms rather than reactions only to impersonal market
forces. Price coordination is the hallmark of oligopoly. To the extent that firms are able to work jointly in
explicit or implicit ways to set higher prices (i.e., interdependent pricing), price coordination may be a
potential strategy for increasing profits. Firms may coordinate price in various ways: tacit price collusion
(legal), price leadership (legal), or complete price collusion (usually illegal). Opportunities for price
coordination generally increase as market concentration increases.
STRATEGY: Engage in Tacit Price Collusion. Tacit collusion is also known as “unspoken collusion” and as
such is legal. Firms monitor each other’s prices and keep them the same tacitly without any explicit
agreement. Firm behavior involving tacit collusion is often analyzed using game theory. As the following
example shows, tacit collusion leads generally to higher consumer prices and/or lower levels of innovation
and advertising.
A small town contains two (and only
two) competing coffee shops (Shop A
and Shop B). Owners of each shop are
considering installing wireless internet
services in their shops as a form of nonprice competition. To add wireless
internet services, each shop’s total costs
would increase above its current costs.
What will / should Shop A and Shop B
do?
STRATEGY: Become or Respond to Price Leader. Price leadership is a pattern of price coordination that
requires no formal (i.e., it’s “tacit”) organization among market rivals. Generally, price leadership is when a
single firm ostensibly sets the market price and other, rival firms agree informally to comply. Price leading
firms are usually the dominant firms in the market. Sometimes, however, a representative or “barometric
firm” may be identified as the price leader.
STRATEGY: Form a Cartel. A cartel is formed when rival firms agree explicitly to set prices jointly
(usually by restricting production) in order to increase profits. In most countries, cartel formation is illegal
without government sanction. Cartel formation usually occurs in markets with a) few rival firms, b)
producing a homogeneous product, c) with inelastic demand and where d) cartel enforcement costs (i.e.,
detection and deterrence of cheaters) are low. Cartel members always have an incentive to cheat (e.g.,
secretly produce and sell more than its cartel approved amount). If cheating occurs or cartel membership
42
does not encompass all firms in the market, supply increases by these rogue firms pushes prices down and
reduces profit for cartel members. Several economic studies and legal decisions of antitrust authorities have
found that the median price increase achieved by cartels in the last 200 years is around 25%. 7 Examples:
OPEC (the Organization of Petroleum Exporting Countries) and DeBeers (cartel of rough diamond
producing firms). Some accuse (but are challenged to prove) that various trade associations, including labor
unions, are fronts for cartels.
MAJOR STRATEGY: Increase Barriers to Market Entry and Exit. Firms seeking to enter markets may find
enhanced profit opportunities if they can enter into (and exit easily from) markets with high barriers to entry.
Existing firms may find enhanced profit opportunities if they can maintain or increase barriers to entry.
Recent advances in technology (e.g., email, cell phones, low-cost international calling) have lowered barriers
to entry. Successful entrepreneurs may gain entry into new markets by using and combining these
technologies in creative ways (e.g., creation of international call centers).
STRATEGY: Lower the Minimum Efficient Scale. The minimum efficient scale is the lowest output level a
firm may produce and still achieve the market’s lowest average total cost (ATC). If a market already
contains three firms each with 33% market share and if each plant is precisely at the MES, there appears to
be no room for another firm. For potential market entrants, cost-saving innovations may lower MES (e.g.,
internet, microcomputers, and Amazon.com).
STRATEGY: Establish Market Norms Requiring Higher Fixed Costs. Existing firms that can establish
higher (and especially higher cost) consumer expectations have the effect of raising MES. Example: Cell
phone users were once charged expensive “roaming” fees (for using rival cell phone companies’ cell towers)
when they travelled outside of an existing firm’s service area. Now consumers expect individual companies
to have nationwide cell phone coverage without roaming charges. Thus, potential rival cell phone companies
face much higher investment costs as a result.
STRATEGY: Enter Market Early. Firms that enter emerging (rather than mature) markets may gain longrun, cost-lowering benefits that lower the initial investment costs relative to rival firms who enter afterward.
Example: Consider a copper processing plant that is just downstream from a copper mine and just upstream
from the primary market (a town) for that copper. Suppose now that another copper processing firm wants to
enter this market, but the only place to locate is downstream from the town. For every ton that this new plant
produces, it has to pay extra shipping costs to transport the processed copper upstream while the existing
firm just floats it downstream. Cell phone companies that enter markets and contract with landowners to
place their proprietary towers in the best locations similarly enjoy the advantages of entering markets early.
STRATEGY: Build Brand Identity through Product Differentiation. If products in a market are
differentiated, brands may exist and these brands may have a “reservoir of good will” or name recognition.
Example: Toyota cars are well known to be very reliable (i.e., initial retail prices are higher due to better
resale value). When Hyundai (who also produces very reliable cars) wanted to enter this market, they didn’t
(or couldn’t) offer the same warranty as Toyota (3 years/36,000 miles). Instead, they offered a better warrant
at a higher cost to the firm (10 years/100,000 miles) in an effort to “overcome” the consumer notion that
Toyotas are the most reliable. The better (and more costly) warranty offered by Hyundai is a barrier to entry
that Hyundai had to overcome in order to enter the market for reliable cars.
STRATEGY: Lock Consumers into Long-Term Contracts. Rival firms may find entry more difficult (or
cost) if existing firms have locked most consumers into long-term contracts. Example: Cell phone
7
From Wikipedia. “Cartel.” March 24, 2008
43
companies typically require consumers to pay for two-years (24 months) of service or pay a hefty
cancelation fee (e.g., $250). To attract new consumers, rival firms must either wait until consumers’ service
contracts have expired or offer services for fees low enough for consumers to justify the switching costs.
STRATEGY: Seek Government Regulation. Firms (particularly in service industries) may limit entry by
rival firms by seeking (e.g., through the use of lobbyists) government-sanctioned certification, permit,
licenses, or accreditation requirements. Example: Doctors, nurses, and pharmacists all must be certified to
practice (otherwise people might die). What about massage therapists? Beauticians? Plumbers?
Electricians? Teachers? Lawyers? Do all these service professions need regulating?
STRATEGY: Protect Trade Secrets. Existing firms that obtain government protections of intellectual
property (e.g., patents) or that protect trade secret in other ways (e.g., Coke’s “secret formula”) discourage
competition from rival firms. Through the use of patents, governments make competition illegal and
establish statutory monopolies (for 20 years in the U.S.). After expiration, firms holding patent lose the right
to exclude or demand compensation from rival firms who utilize the invention.
STRATEGY: Employ Restrictive Practices. Firms that restrict the movement of trained employees (e.g., “no
compete” clauses) may restrict competition (especially in service markets) for a period of time. Courts
however generally look unfavorably on non-compete contracts that limit competition “excessively”.
Example: Coke negotiates a distributor agreement to supply its products to certain venues (e.g., football
stadiums, fast food restaurants, etc.) if those retail vendors agree not to offer rival products. Airlines too may
not agree to open large new “hubs” at particular airports unless airport managers agree to restrict entry by
other large rival airline companies.
OTHER MINOR STRATEGY: Differentiate Prices. Firms (particularly monopolies and some oligopolies)
may charge different groups of consumers (that have different demand elasticities) different prices in order to
increase profits. Successful price discrimination requires 1) market segmentation and 2) an ability to prevent
arbitrage (i.e., competing firms reselling for a profit). Example: Airlines charge lower prices to “vacation”
travelers (who plan many weeks ahead and buy their tickets early) and higher prices to “business” travelers
(who must get to meetings planned at the last minute and, therefore, buy their tickets late). Other examples:
Some firms charge “students” or “seniors” (who are typically less able to pay and therefore have more elastic
demand elasticities) different prices than “regular” customers (who have more money and therefore have
more inelastic demands). Movie theaters charge lower “matinee” prices to people who don’t have to work in
the afternoons (i.e., who have more substitute times slots for entertainment) and charge higher prices to folks
who can only attend in the evenings (i.e., who have fewer substitute times available for entertainment).
44
More Like Perfect Competition
Break Even (baseline)
The MC always “cuts” the ATC curve at the ATCmin. Profit is not
possible in the long-run (i.e., a period of time sufficient to alter all
factors of production). Profit loss is also not sustainable in the longrun. Break even is the normal long-run condition in perfect
competition. To increase profits, individually perfectly competitive
firms have only one option: price competition (i.e., lower production
costs and drive ATC and MC down). General market forces (e.g.,
upward shift of the market demand curve) also affect profit
expectations of these firms. Individual perfectly competitive firms
cannot control prices or alter market supply / demand conditions.
Lower Production Costs
Increased Demand
More Like Imperfect Competition
Demand More Inelastic
Profit (baseline)
The MC always “cuts” the ATC curve at the ATCmin. Also, the MR
curve “falls” twice as fast as the demand curve. General market forces
(e.g., shifts in market demand curve) affect profit expectations for all
firms. Individual firms may increase profits through various strategies
including price competition, product differentiation, price
coordination, market concentration, or increasing barriers to entry/exit.
Imperfectly competitive firms have varying degrees of price control
and influence on market demand and supply conditions. Baseline
demand elasticity depends on how closely (or not) the firm is
characteristic of monopoly (or monopolistic competition).
Lower Production Costs
Increased Demand
45
Demand More Inelastic
SECTION FOUR: PROPOSED OUTLINE
This is only a proposed outline for Section Four.8 The general goal of this section is to identify how
profits likely will or could change in the near future.
Part 1:
This will be an introduction section / paragraph. Mention that this section of your market
analysis evaluates the market structure for ________________ in order to anticipate and
discern future profit expectations. That is, understanding of market structure gives us insights
into profit expectations. Using four basic classification criteria, you will first examine how
nearly your market matches either perfect competition or imperfect competition. Secondly,
you will present the baseline profit expectations for an individual firm in your market.
Finally, you will evaluate how several (3) changes in general market conditions or firmspecific profit strategies are likely to affect future profit expectations for individual firms.
Part 2:
Present a concise justification for describing your market as 1) more like perfect competition
or 2) more like imperfect competition. You should be very careful not to overstate your case.
You want to present yourself as a judicious and critical thinker. That means that you want to
explain (concisely and clearly) reasons for and against arriving at any particular conclusion.
Part 3:
Present the baseline profit expectations graph for an individual, representative firm in the
market you think (based on your reasoning above) best fits your market (either perfect
competition or imperfect competition). You should explain how P, MR, MC, and ATC
interact to identify the optimal output level (Q*), equilibrium price (P*), average total costs
(ATC), and baseline profits (if any). The equilibrium price should be an actual number (the
price from Section Two). The equilibrium quantity should be the output quantity for a single,
representative firm (and therefore different than the aggregate market output level from
Section Two).
Part 4:
Tell readers upfront what you will be doing in this lengthier section. You will analyze how
three significant factors likely will or could potentially affect expected future profits for
representative firms in the market for ______________________. You will evaluate ____
general market factors and ____ firm-specific profit strategies. Graphical depictions will be
used to describe how each of these factors affects profits. Secondly, you should tell readers
clearly and concisely how each factor is likely to affect profits. Again, you should not
overstate your case, and you should anticipate and respond to any likely counter-arguments.
If you do this well, it will have the effect of strengthening your overall argument. Finally,
you should draw and explain your graphs. You should compare (in the text of this section)
each graph showing how profits change compared to your baseline graph (as shown in the
Section Four worksheet).
8
If you use this outline, you should write a footnote (put it at the end of the first full sentence) that says, “Organization, graphs,
and some wording for this Section were adapted from suggestions provided by Roger Brown” and then reference this guide.
Students should note that reference of this guide in this way is a special exception to the normal demands of clear attribution.
Attribution of any other work (e.g., former students’ papers, wording proposed by others, etc.) used for your writing assignments
in this class requires much clearer attribution than this; in this case, I know what work is yours vis-à-vis work from this guide.
46
SECTION FOUR: WORKSHEET
Name: _______________________________________
This worksheet will help students 1) identify factors that affect individual firms’ profits, and 2) determine
how to represent these effects graphically. Students must complete and turn in a copy of this worksheet
before they leave class today. Students should work together in groups of 3 or 4 students.
Task 1. In one sentence, write down the market you are analyzing. Remember to identify your market
characteristically in time and space.
Task 2. Share with your other group members the market you are analyzing. Address any points of
clarification, if needed.
□ done
Task 3. Write down notes below about the market structure of your market.
a. Number of sellers (and buyers)
b. Degree of product differentiation
c. Barriers to entry into / exit from market
d. Availability of information
Task 4. Obtain feedback from group members about your analysis. Help your group members avoid overlysimple analyses. Note any good “contrary” arguments or evidence to complete your analysis. □ done
Task 5. With help from your group members, identify which market your market is most like (circle one):
A.
B.
Task 6. Discuss with the members of your group the baseline graph you selected. You will have to explain
this graph in your paper. Talk about a) slope of demand curve, elasticity of demand, and what this says
about the availability of substitutes, b) optimal production point, and how it is related to marginal revenue
and marginal cost, c) the difference between ATC and P and how this difference relates to profits.
47
Task 7. With your group members’ help, identify three factors that will or could likely affect the profits of a
representative firm in your market over the specified time (from Assignment One). Is each factor 1) a
general market force that affects all firms in the market, or 2) a profit enhancing strategy that could be
undertaken by an individual firm? How would you show the effect of this factor graphically?
a) Factor 1: _________________________________________________________________________
Is this factor: □ a general market force that affects all firms in the market?
□ a profit enhancing strategy that could be undertaken by an individual firm?
How does this factor affect a firm’s profit? Discuss. Make notes.
What graph will you draw and compare to your baseline graph to show how this factor affects profits?
□A □B □C □D □E □F □G □H □I □J □K □L
b) Factor 2: _________________________________________________________________________
Is this factor: □ a general market force that affects all firms in the market?
□ a profit enhancing strategy that could be undertaken by an individual firm?
How does this factor affect a firm’s profit? Discuss. Make notes.
What graph will you draw and compare to your baseline graph to show how this factor affects profits?
□A □B □C □D □E □F □G □H □I □J □K □L
c) Factor 3: _________________________________________________________________________
Is this factor: □ a general market force that affects all firms in the market?
□ a profit enhancing strategy that could be undertaken by an individual firm?
How does this factor affect a firm’s profit? Discuss. Make notes.
What graph will you draw and compare to your baseline graph to show how this factor affects profits?
□A □B □C □D □E □F □G □H □I □J □K □L
48
More Like Perfect Competition:
Lower Production Costs
A
Increased Demand
B
Higher Production Costs
Demand More Inelastic
C
Decreased Demand
Demand More Elastic
Not a likely scenario since
demand for the individual firm
is, by definition, (nearly)
perfectly elastic already. Again,
perfectly competitive firms have
many fewer available profit
enhancing strategies available.
D
E
More Like Imperfect Competition:
Lower Production Costs
G
Increased Demand
H
Higher Production Costs
J
F
Demand More Inelastic
I
Decreased Demand
K
49
Demand More Elastic
L
APPENDIX A: Grading Criteria and Grading Score Sheets
SECTION ONE: Grading Score Sheet
Required for a Passing Grade
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ No
□ No
□ No
□ No
□ No
□ No
□ No
I clearly attribute to others all work that is not my own.
Attribution of others’ work is done in a consistent and unobtrusive way.
I spell all words correctly.
I use grammatically correct sentence structures.
I convey all important points/ideas clearly in separate paragraphs.
I do not use any unnecessary words, sentences, or paragraphs (writing is succinct).
My conclusion (or justification of my thesis) is valid, meaning that, if my premises and
facts are accepted as true, my conclusion must be accepted as true.
□ Yes □ No
All my premises and factual statements are true and/or are clearly justified as true (i.e., my
argument is sound).
□ Yes □ No
The market that I selected was approved by my instructor.
□ Yes □ No
The market that I selected is related to agriculture, and I clarify this connection in writing
(if it is unclear).
□ Yes □ No
I state clearly (e.g., in a single sentence near the beginning) the market I propose to
examine. (Note: This is the thesis statement for Section One. It might read something
like: “In this analysis, I examine the current global retail market for widgets.”)
□ Yes □ No
I explain clearly in writing why my market definition (i.e., the particular combination of
“characteristics”, “time”, and “space”) makes good economic sense.
□ Yes □ No
I explain in writing that there are consumers in the market area that (could) recognize and
value the good or service differently than similar products or services.
□ Yes □ No
I explain in writing that there are producers that recognize (or should recognize) these
consumers and that have reasons to market their products or services to this group
differently than to other consumer groups.
□ Yes □ No
I clearly identify a well-reasoned market price or price range (i.e., the price of one unit of
production) for my good or service.
□ Yes □ No
I clearly identify a well-reasoned market quantity or quantity range (i.e., total number of
units produced by all producers in the market area for a specified period of time).
□ Yes □ No
The underlying supportive facts and details add credibility to my analysis.
□ Yes □ No
While succinct, my analysis is not overly brief either. I anticipate and respond to
reasonable objections as a way of clarifying my argument for readers.
□ Yes □ No
I make good use of the available space given limitations.
□ Yes □ No
The look of my paper (i.e., use of headings, visual aids, placement and design of figures
and tables, etc.) is attractive.
□ Yes □ No
My writing flows well stylistically and is a pleasure to read with sentence structures that
are varied and not awkward.
□ Yes □ No
I organize my argument in a logical and coherent manner that is easy for my reader to
follow and understand.
_______________________________________________________________________________________
Grade: □ Fail (0 pts)
□ Pass (2 pts)
□ High Pass (3 pts)
Comments:
50
SECTION TWO: Grading Score Sheet
Required for a Passing Grade
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ No
□ No
□ No
□ No
□ No
□ No
□ No
I clearly attribute to others all work that is not my own.
Attribution of others’ work is done in a consistent and unobtrusive way.
I spell all words correctly.
I use grammatically correct sentence structures.
I convey all important points/ideas clearly in separate paragraphs.
I do not use any unnecessary words, sentences, or paragraphs (writing is succinct).
My conclusion (or justification of my thesis) is valid, meaning that, if my premises and
facts are accepted as true, my conclusion must be accepted as true.
□ Yes □ No
All my premises and factual statements are true and/or are clearly justified as true (i.e., my
argument is sound).
□ Yes □ No
I clearly number, labeled, and attached a description to all figures, charts, and tables.
□ Yes □ No
I make textual reference to and provided clear explanations of all figures and charts.
□ Yes □ No
I evaluate a total of six supply and demand shift factors, including at least two of each.
□ Yes □ No
I show and explain clearly how I discern overall (or joint) effects from multiple individual
shift factors.
□ Yes □ No
The shift factors I choose are the most significant for the time-period I am examining.
□ Yes □ No
The underlying supportive facts and details add credibility to my analysis.
□ Yes □ No
While succinct, my analysis is not overly brief either. I anticipate and respond to
reasonable objections as a way of clarifying my argument for readers.
□ Yes □ No
I make good use of the available space given limitations.
□ Yes □ No
The look of my paper (i.e., use of headings, visual aids, placement and design of figures
and tables, etc.) is attractive.
□ Yes □ No
My writing flows well stylistically and is a pleasure to read with sentence structures that
are varied and not awkward.
□ Yes □ No
I organize my argument in a logical and coherent manner that is easy for my reader to
follow and understand.
_______________________________________________________________________________________
Grade: □ Fail (0 pts)
□ Pass (2 pts)
□ High Pass (3 pts)
Comments:
51
SECTION THREE: Grading Score Sheet
Required for a Passing Grade
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ No
□ No
□ No
□ No
□ No
□ No
□ No
I clearly attribute to others all work that is not my own.
Attribution of others’ work is done in a consistent and unobtrusive way.
I spell all words correctly.
I use grammatically correct sentence structures.
I convey all important points/ideas clearly in separate paragraphs.
I do not use any unnecessary words, sentences, or paragraphs (writing is succinct).
My conclusion (or justification of my thesis) is valid, meaning that, if my premises and
facts are accepted as true, my conclusion must be accepted as true.
□ Yes □ No
All my premises and factual statements are true and/or are clearly justified as true (i.e., my
argument is sound).
□ Yes □ No
I clearly number, labeled, and attached a description to all figures, charts, and tables.
□ Yes □ No
I make textual reference to and provided clear explanations of all figures and charts.
□ Yes □ No
I describe a reasonable production cost increase or production subsidy that may affect my
market in the time period described.
□ Yes □ No
I present one graph showing which side of the market is less elastic and another graph
showing that the less elastic side of the market bears the greater cost (benefit) from a
production cost increase (decrease).
□ Yes □ No
I explain which side of the market pays (enjoys) more of the cost increase (decrease) and
why.
□ Yes □ No
The underlying supportive facts and details add credibility to my analysis.
□ Yes □ No
While succinct, my analysis is not overly brief either. I anticipate and respond to
reasonable objections as a way of clarifying my argument for readers.
□ Yes □ No
I make good use of the available space given limitations.
□ Yes □ No
The look of my paper (i.e., use of headings, visual aids, placement and design of figures
and tables, etc.) is attractive.
□ Yes □ No
My writing flows well stylistically and is a pleasure to read with sentence structures that
are varied and not awkward.
□ Yes □ No
I organize my argument in a logical and coherent manner that is easy for my reader to
follow and understand.
_______________________________________________________________________________________
Grade: □ Fail (0 pts)
□ Pass (2 pts)
□ High Pass (3 pts)
Comments:
52
SECTION FOUR: Grading Score Sheet
Required for a Passing Grade
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ Yes
□ No
□ No
□ No
□ No
□ No
□ No
□ No
I clearly attribute to others all work that is not my own.
Attribution of others’ work is done in a consistent and unobtrusive way.
I spell all words correctly.
I use grammatically correct sentence structures.
I convey all important points/ideas clearly in separate paragraphs.
I do not use any unnecessary words, sentences, or paragraphs (writing is succinct).
My conclusion (or justification of my thesis) is valid, meaning that, if my premises and
facts are accepted as true, my conclusion must be accepted as true.
□ Yes □ No
All my premises and factual statements are true and/or are clearly justified as true (i.e., my
argument is sound).
□ Yes □ No
I clearly number, labeled, and attached a description to all figures, charts, and tables.
□ Yes □ No
I make textual reference to and provided clear explanations of all figures and charts.
□ Yes □ No
I clearly explain why, and to what degree, my market is more like perfect versus imperfect
competition. (Markets have characteristics of both; do not oversimplify.)
□ Yes □ No
I include a baseline graph that includes 1) an actual equilibrium price (or price range)
from Section Two, and 2) a quantity representative of a single firm and time period.
□ Yes □ No
I talk about the three profit-changing factors that I believe are the most significant, and I
present justification in writing for this opinion.
□ Yes □ No
The underlying supportive facts and details add credibility to my analysis.
□ Yes □ No
While succinct, my analysis is not overly brief either. I anticipate and respond to
reasonable objections as a way of clarifying my argument for readers.
□ Yes □ No
I make good use of the available space given limitations.
□ Yes □ No
The look of my paper (i.e., use of headings, visual aids, placement and design of figures
and tables, etc.) is attractive.
□ Yes □ No
My writing flows well stylistically and is a pleasure to read with sentence structures that
are varied and not awkward.
□ Yes □ No
I organize my argument in a logical and coherent manner that is easy for my reader to
follow and understand.
_______________________________________________________________________________________
Grade: □ Fail (0 pts)
□ Pass (2 pts)
□ High Pass (3 pts)
Comments:
53
APPENDIX B: Understanding and Avoiding Plagiarism
Most students and many instructors do not know what plagiarism is. Most “definitions” of
plagiarism quickly resort to making lists of unacceptable behavior and basically conclude with, “Don’t
engage in this kind of activity.” Still, if you plagiarize in this class, you will receive a failing grade. This
document is an attempt to clarify what plagiarism is.
What is Plagiarism?
Plagiarism is unclear attribution given an assumption of originality.
What is an Originality Assumption?
An originality assumption as an expectation on the part of readers that all work is that of the author
unless clear attribution indicates otherwise. It is an assumption on the part of the reader that any work
without attribution is the original work of the author. In this class, an originality assumption applies to all
writing assignments. I assume that all assignments you submit to me are completely the result of your own
work unless you indicate clearly the extent to which they are not. In this class only, a simple footnote is
sufficient to clearly attribute any ideas, graphs, wording, etc. from this guide to its author.
What is Work?
Work is any product that results from the physical or mental activity of any person. Work includes
photographs, data, graphs, wording, ideas, pictures, arguments, outlines, organization of ideas, maps,
arrangement of information, and much, much more. Any work done by another person that you use in any
way in the preparation of your assignments must have clear attribution. The only exception is for so-called
“common knowledge”.
What is Common Knowledge?
Common knowledge is any work that has no unique credible source.
What is a Unique Credible Source?
A unique credible source is a single source, among all sources with correct attribution, where
the alleged common knowledge appears without attribution. In other words, work is “common
knowledge” when it appears in at least two sources prepared by authors who themselves followed the
standards of attribution correctly. Authors of most peer-reviewed journal articles provide correct
attribution, for example. And by contrast, authors of many internet websites do not. If you are
unsure about whether a source is credible, ask your instructor.
What is clear attribution?
Attribution is indication by an author that work was done by others. Many specialized symbols (e.g.,
quotation marks) have been developed to make clear attribution less obtrusive. In fact, whole systems of
symbols have been developed (e.g., MLA and APA styles) to give authors attribution tools that are not
distracting to readers. But, clear attribution does not require knowledge of any of this, not even quotation
marks. To avoid plagiarism, authors need only specify exactly—in whatever way they want—what work is
theirs and what work is from others. Authors cannot be guilty of plagiarism just because their attribution is
clumsy looking as long they clearly distinguish their work from others’. Attribution that is inconsistent and
obtrusive may merit a failing grade, but if attribution is clear it cannot be construed as plagiarism.
MAIN MESSAGE:
If you are in doubt about the “rules” of attribution or about the academic conventions of proper
attribution, you must at least be clear what work is yours and what work is from others. I assume that you
possess, and consequently I hold you completely responsible for, communication skills sufficient to
distinguish clearly your work from others. If you do not make this distinction clear, I assume that you
deceive me (your reader) intentionally, and you are guilty of plagiarism.
54
APPENDIX C: Writing Suggestions
Writing is an author’s attempt to convey an important message (sometimes called a thesis) to readers. In
academic writing, authors often construct arguments that are meant to persuade readers or to challenge their
beliefs. Readers are generally inclined to trust authors unless given reasons to think otherwise. Academic
writers should avoid any writing practice that causes readers to second-guess the author’s trust-worthiness as
a credible analyst.

Students should submit written assignments for this class with 1) attribution that is clear, unobtrusive,
and consistent, 2) words that are correctly spelled, and 3) grammatically correct sentences structures.
Rationale: Some poor writing practices reflect more negatively on authors than others. For example, some
basic expectations are that authors will provide clear attribution, spell correctly, and use correct grammar.
Consider each of these more closely. Unclear attribution suggests that the author has or may have taken
credit for others work and isn’t an expert and may be passing his or her work off as something original when
it isn’t. This is a tragic flaw. (See Appendix B on plagiarism for more explanation.) Incorrect spelling
suggests that the author either doesn't know how or doesn't care to use a dictionary. Sloppy disregard for
spelling makes readers wonder what other simple aspects of the study or assignment the author might have
disregarded as unimportant. Incorrect grammar similarly conveys the same negative impressions as
incorrect spelling.

Students should submit written assignments for this class that 1) convey important points/ideas
clearly in separate paragraphs, 2) are written succinctly, and 3) contain valid conclusions.
Rationale: Readers expect authors to put important points/ideas in separate paragraphs and write succinctly
(i.e., exclude unimportant points/ideas). Clarity of expression is compromised and writing becomes
confusing for readers to follow when important ideas are not presented in separate paragraphs. Likewise,
clarity suffers when unimportant information in included or important information is excluded. Word or
page limits are guides, not absolutes. Make every word, sentence, and paragraph count. Don’t write more
when less will do as well. Don’t write less when more is needed.
Readers also have strong expectations that authors’ conclusions will be valid. A valid conclusion is a
conclusion that logically follows from the points/ideas presented in the manuscript. All dogs like bones.
Rover is a dog. Therefore, Rover likes bones. This is a valid argument. Readers need not be experts to
identify invalid conclusions. For example, they don’t need to know anything about dogs or bones or Rover.
If the information presented first is accepted as true (“All dogs like bones” and “Rover is a dog”) a valid
conclusion is one that must also be true (“Rover likes bones”). Manuscripts with invalid conclusions signal
to readers that authors are either careless or illogical—not a good way to preserve readers’ confidence.

Students should submit written assignments for this class that 1) have sound arguments, and 2) are
well written.
Rationale: The “soundness” of a paper’s argument is the most critical factor distinguishing average, good,
and excellent papers. A second, but less important, distinguishing factor is how well written a paper is. A
sound argument is one where all the points/ideas presented as premises are true. The argument above (about
Rover) is valid but unsound. One premise (“All dogs like bones”) is not true; some dogs do not like bones.
55
Arguments fail most often because authors 1) do not define important terms or conditions, 2) overstate their
conclusion, or 3) do not address reasonable objections. The soundness of the “Rover” argument can be
vastly improved if the author defines “bones” to include only those meaty-type bones that come from pet
supply stores. However, the author must explain this to readers in the manuscript since most readers are
unlikely to assume this. The argument can be improved further by not overstating the conclusion or any
premises. The author, for example, might change the argument to read: “Nearly all dogs like bones. Rover
is a dog. Therefore, Rover likely likes bones.” With this change, the author reduces readers’ objections and
appears more credible as a result. Finally, the author would likely improve the argument further by
anticipating and addressing readers’ most probable objections. For example, this reader might add, “While
Rover has a long bushy tail and generally lands on his feet when dropped, his interactions with other dogs
confirm that he is, in fact, a dog and not a cat as some readers might incorrectly assume.”
Excellent papers (i.e., “high pass” papers) are distinguished to a lesser extent by writing quality.
Writing is a learned skill that requires practice, determination, and hard work. High-quality writing is
writing that is easy to read and comprehend (i.e., writing that “flows well”). High-quality writing has as its
foundation well-reasoned arguments. (Remember, lists are not arguments.) Authors may benefit from three
suggestions: 1) clarify your argument for yourself by describing your argument to others before you start to
write, 2) allow time before submission to review your manuscript yourself, and 3) invite others to read your
manuscript and provide feedback (e.g., “this part here isn’t very clear”).
Stylistic quality of writing is also to some degree subjective. Negative feedback from reviewers—no
matter how well-intended—is frustrating to hear and often sparks defensive feelings. Don’t be discouraged.
My suggestion: find the best reviewers you can find, ask them to give you brutally honest feedback, and
don’t disregard their suggestions lightly.
Some Specific Writing Suggestions:
1. Consider using footnotes. Use footnotes not only for attribution of other work (e.g., data, quotes, images,
etc.). Use them also for supportive or personal information that is useful to readers, but not necessary for
general understanding. For example, you may write in the body of your paper, “Standardbred yearlings
generally sell for about one-tenth the price of similar quality thoroughbred yearlings,” and then add a
footnote that gives the supporting statistics: “For example, the top price paid in 2007 for a thoroughbred
yearling at Keeneland was $____ while the top price paid in the same year for a standardbred was $____.”
Also, if you use any of this guides’ proposed outlines, you should add a footnote (and put it at the end of the
first full sentence of that section of your paper) that says, “Organization, graphs, and some wording [list
whatever is applicable] for this section was adapted from suggestions provided by Roger Brown” and then
reference this guide. See Appendix B on plagiarism for more information. The automatic footnote feature in
MicroSoft Word is excellent (under “References” go to “Insert Footnote”).
2. Avoid “you” and “yours”. Use of the personal pronoun “I” is fine (in my opinion). However, avoid
using “you” and “your” when referring to readers or unspecified persons. Write: “Typically farmers fertilize
their fields in the spring.” Do not write: “Typically you fertilize your fields in the spring.” Do not refer to
your market as “my market”. Instead, refer to it as “this market” or “the market under examination here”.
3. Include a visual aid. You might also want to include a picture or other visual aid to orient and interest
readers. Remember, if you did not create the image or visual aid entirely yourself, you must clearly attribute
(i.e., give credit for) the work that others did. A reference in small print under the image generally works
well. If you include a picture, you should include a description under the figure (e.g., “Figure 1. Field of
Kentucky-grown tobacco”) and provide attribution if needed (in a footnote normally).
56
4. Avoid contractions. Contractions (e.g., “don’t” instead of “do not”) are normally avoided in academic
writing.
5. Avoid unclear antecedents. Pronouns (e.g., “this”, “that”, “his”, “its”, “theirs”, “they”) should have clear
antecedents (i.e., an actual person, place, or thing that is the object of the pronoun reference). Sentences that
start with pronouns often—but not always—have unclear antecedents. Double check: make sure every
pronoun clearly refers only to one person, place, or idea. Sentences that start with “It is…” have unclear
antecedents.
6. Make pronouns and antecedents agree in number and gender. Some pronouns are singular (e.g., “I”
and “his”) and some pronouns are plural (e.g., “we”, “ours”, and “they”). Pronouns also have gender (e.g.,
“his” refers to males and “hers” refers to females; “its” is gender neutral). Antecedents (i.e., nouns) also
have “number” (i.e., singular or plural) and gender (i.e., masculine or feminine). Double check: make sure
pronouns refer back to like nouns. For example: “A farmer must plant their corn in the spring.” The word
“their” is a plural pronoun but it refers back to “a farmer” that is singular. Re-write: “Farmers must plant
their corn in the spring.”
7. Use the plural to avoid unnecessary articles. Articles are words like “a”, “an”, and “the”. Often the use
of these words is unnecessary. Omit these when the meaning is unchanged by doing so. For example, write
“Farmers need plows” rather than “A farmer needs a plow.”
8. Avoid split infinitives. Split infinitives occur when writers insert an adverb between the word “to” and
the infinitive form of verb. For example, write “I need to eat politely” or “I need politely to eat” but not “I
need to politely eat”.
9. Use active voice, not passive voice. Active voice occurs when the subject of the sentence does the action
to or with an object (e.g., “John picked the corn.”). Passive voice occurs when the object of action (e.g., “the
corn”) has the action done to or with it (passively) by the subject (e.g., “The corn was picked by John.”).
10. Avoid metaphorical or colloquial language. Metaphorical or colloquial language includes figures of
speech and jargon. Examples include: “cast a shadow”, “pushing the envelope”, the controversy creates “a
fuzzy line”, is “the juice worth the squeeze”, and suppliers are “stoked” when consumers buy this. For
example, write “The rain fell hard” rather than “The rain fell like cats and dogs”, or “The store recently sold
out of peaches” rather than “The store was fresh out of peaches.”
11. Use parallel structure and signposting to aid organizational transparency. A good writing technique
is to tell readers about the structure of your papers. Examples are given in the proposed outlines for each
assignment. A paragraph near the beginning of the paper includes a description or narrative outline of what
follows. For example, students should write “In order to define a market appropriately, one must rationally
connect three factors: the market’s characteristics, its time, and its space. This paper first examines these
three factors in more detail and how they relate to one another economically.”
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APPENDIX D: Creating Figures and Tables
A number of conventions apply to the creation of figures and tables. The following is a basic
checklist when preparing final drafts of your figures and tables:
● Tables and figures should be identified with a number and a description (e.g., “Table 1. Joint effects of
supply and demand shifts on equilibrium price and quantity in the widget market”). Descriptions
should be detailed enough to allow readers to understand basically the content of the table or figure
without any need to read the text.
● All tables and figures should be referenced in the main text along with an explanation or summary of all
the important aspects of the table or graph (e.g., “As shown in Table 2, among the three factors affecting
demand elasticity, the most significant is the availability of substitute followed by adjustment period.”)
● Tables and figures may be placed in a separate appendix at the end of your paper (e.g., “Appendix A.
Tables and Figures”) or incorporated into the main body of the text. However, in no case should a
single table or figure be split onto more than one page.
● Tables are generally composed only of horizontal lines and with vertical lines not shown.
Creating Figures
Three basic steps are needed to create professional-looking figures in MicroSoft Word.9 First, draw
lines/curves. Two, draw identifying text boxes. Three, group the lines and text boxes.
1. To draw lines, go to “Insert” and select “Shapes”. From the drop-down menu, select the line type you want.
Crosshairs will appear on the screen. Click (and hold) to indicate the start of the line you want to draw and release to
complete the line. (Some curve types require multiple clicks; double click to complete the line). After drawing a line,
you can click and drag it to other locations. Drag only one end to rotate. Hold down the “Alt” key and/or zoom in for
more precise movements. I suggest drawing the axes of your graphs first. If you select then right-click on a line, you
can choose “Format AutoShape” from the pop-up menu to make a line dotted, differently colored, add arrows, change
the size, etc.
2. Use textboxes to label your curves/lines. In MicroSoft Word, go to “Insert” and select “Text Box”. From the dropdown menu, select “Draw Text Box”. Crosshairs will appear on the screen. Click (and hold) to indicate one corner of
your box, drag to change the box’s size, and release to complete your box. Click on the inside of the box and, when
cursor appears, type identifying letters (e.g., D1). Next, right-click on the boundary of the textbox and select “Format
Text Box”. Under “Color and Lines”, choose to “No Color” under the “Fill” option and “No Color” under the “Line”
option to erase the black boundary of the text box. Under “Layout”, choose “In front of text” to allow more flexibility
in placing each textbox. Under the “Text Box” tab, you may want to reduce the “Internal Margin” to zero all around
(top, bottom, left, right), again, to allow greater flexibility in text box placement.
3. Finally, you may want to “Group” all the lines and text boxes for greater ease in moving each figure. To group lines
and/or text boxes, hold down the “Shift” key and (carefully) click on each of the items (each one should be
highlighted) and then release the “Shift” key. Place your cursor over one of the lines or text boxes just selected until
you see the plus-sign with arrows symbol. Right-click and choose “Grouping” and then “Group”. Now you can move,
cut, paste, etc. all the lines together as a unit. To make changes to individual lines or text boxes, right-click on the
“grouped” items, select “Grouping” and choose “Ungroup”.
Creating Tables
Tables can easily be created in MicroSoft Word. Select “Insert” and “Table”. Select table size. Enter text and
data. Drag lines to changes table cells or right-click for more options.
To reproduce figures from this guide, go to Roger Brown’s AEC 305 webpage, open file, place selected figure in the middle of
your screen (zoom in to increase resolution), hit “Print Screen”, and open the “Paint” program usually under “Accessories”. In
Paint, select “Edit” and “Paste”. Select the dotted box, click and drag to select the portion of the figure desired, and then choose
“Copy”. In MicroSoft Word, right-click and “Paste”. Adjust size as needed and/or insert figure into a textbox.
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