Consumer DemandSlide 2Downward sloping demandSlide 4Slide 5Market or Aggregate DemandSlide 7Demand is a function ofChange in Demand or in Quantity DemandedFactors effecting aggregate demand for a productIncome effect on food demandInverse DemandSupplySlide 14Production FunctionOpportunity costCost CurvesSlide 18Cost curvesSupply curveProfitOptimal Q at P=MCMarket or Aggregate SupplyMarket supply curvesCost curves and supplySlide 26Supply Shifts from ChangeAdditional referencesConsumer DemandConsumer DemandVarious quantities of a commodity Various quantities of a commodity that an individual is willing and that an individual is willing and able to buy as the price of the able to buy as the price of the commodity varies holding all commodity varies holding all other factors constant.other factors constant.Consumer DemandConsumer DemandDemand begins with individual Demand begins with individual consumerconsumerInverse relationship between Inverse relationship between quantity and pricequantity and price•Two dimensional, Price and QuantityTwo dimensional, Price and QuantityDownward sloping Downward sloping demanddemandBegin with individual’s utility Begin with individual’s utility function and a budget constraintfunction and a budget constraintSubstitution effectSubstitution effect•consumers buy what’s cheaperconsumers buy what’s cheaperIncome effectIncome effect•““income” increases if prices fallincome” increases if prices fallRetail Poultry Deflated Price and Consumption$0.90$1.00$1.10$1.20$1.30$1.40$1.50$1.60$1.70$1.8035 45 55 65 757577767270717374858483828180797889888786979694959392919098Per Capita Consumption in PoundsPork Deflated Price and Consumption, Retail$1.00$1.10$1.20$1.30$1.40$1.50$1.60$1.70$1.80$1.90$2.0048 50 52 54 56 58969786878290918483898588009893959294998180Per Capita Consumption in PoundsMarket or Aggregate Market or Aggregate DemandDemandAdd individual demand curvesAdd individual demand curvesHorizontally across consumersHorizontally across consumershttp://www.aaec.vt.edu/rilp/Demand%http://www.aaec.vt.edu/rilp/Demand%20Changes-2000.pdf20Changes-2000.pdf (Pages 1-10) (Pages 1-10)Beef and Pork Demand Index, 1997 Base0501001502002501980 1985 1990 1995 2000Beef PorkSource: Research Institute on Livestock PricingDemand is a function ofDemand is a function ofPrice of substitutesPrice of substitutesPrice of complementsPrice of complementsConsumer incomeConsumer incomeTaste and preferencesTaste and preferencesIS NOT FUNCTION OF THE IS NOT FUNCTION OF THE GOOD’S OWN PRICEGOOD’S OWN PRICEChange in Demand orChange in Demand orin Quantity Demandedin Quantity DemandedPxQxD1D2ABMoving from A to B due to a price decline is a change in quantity demand.A shift of the demand curve from D1 to D2 is a change in demand.CFactors effecting Factors effecting aggregate aggregate demand for a productdemand for a productExportsExportsNew product developmentNew product developmentAdvertisingAdvertisingNew informationNew informationProduct differentiationProduct differentiationIncome effect on food demandIncome effect on food demandFood is normal goodFood is normal good• Income demandIncome demand•Particularly important for meats Particularly important for meats •Emerging economiesEmerging economiesServices are a normal goodServices are a normal good• Income servicesIncome servicesInverse Demand Inverse Demand Price is a function of quantityPrice is a function of quantity•P = P = ff(Q)(Q)Important in agricultureImportant in agriculture•Short run supplies are relatively fixedShort run supplies are relatively fixed•Prices change to clear the marketPrices change to clear the marketSupplySupplyThe amount of a given commodity The amount of a given commodity that will be offered for sale per that will be offered for sale per unit time as the price varies, other unit time as the price varies, other factors held constant.factors held constant.SupplySupplyDerived from cost functionDerived from cost function•Production functionProduction function•Input - output relationshipInput - output relationshipAssume that firms seek toAssume that firms seek to•Maximize profitsMaximize profits•Minimize costsMinimize costsSupply starts will individual firmSupply starts will individual firmProduction FunctionProduction FunctionTotal ProductInputOutputIncreasing returns to the inputDecreasing returns to the inputOpportunity costOpportunity costThe opportunity cost of commodity The opportunity cost of commodity A is income forgone by not A is income forgone by not producing commodity B.producing commodity B.Measures of opportunity costMeasures of opportunity cost•Market value of inputMarket value of input•Expected return over other cost of not Expected return over other cost of not producing commodity B.producing commodity B.Cost CurvesCost CurvesAverage variable cost = AVCAverage variable cost = AVC•Total variable cost / QTotal variable cost / Q•Variable costs change with QVariable costs change with QAverage fixed cost = AFCAverage fixed cost = AFC•Total fixed cost / QTotal fixed cost / Q•Fixed costs do not change with QFixed costs do not change with QAverage total cost = ATC Average total cost = ATC = AVC+AFC= AVC+AFCCost CurvesCost CurvesMarginal cost = MCMarginal cost = MC• Change in total cost by producing 1 moreChange in total cost by producing 1 more• TC / QTC / QCost curvesCost curves CostQMCATCAVCSupply curveSupply curveMC curve above AVC curveMC curve above AVC curveUpward sloping curveUpward sloping curve•Optimal output @ MC = MROptimal output @ MC = MR•MR = Price => Optimal at MC=PriceMR = Price => Optimal at MC=Price•The last unit of input just pays for itselfThe last unit of input just pays for itselfProfitProfitProfit = total revenue - total costProfit = total revenue - total cost•TR= P x QTR= P x Q•TC = ATC x QTC = ATC x QProfit per unit = Profit/QProfit per unit = Profit/Q•= TR/Q - TC/Q= TR/Q - TC/Q•= P - ATC= P - ATCProfit maximizing QProfit maximizing Q•MC=MR=PMC=MR=P•Profit/Q = P-ATC at optimal QProfit/Q = P-ATC at optimal QOptimal Q at P=MCOptimal Q at P=MC MCATCAVCP1P2CostQQ1Q2Market or Aggregate Market or Aggregate Supply Supply Combination of individual supply Combination of individual supply schedulesschedules•Add horizontally across