Economies of scaleConstant economies of scaleIncreasing economies of scaleDecreasing economies of scaleUS Pork Sector Study Financial results for 2000US Pork Sector Study Stay in price until 2003 (%)Processing cost curvesSo what???Slide 9Externalities and cost curvesSlide 11Supply and Demand summaryConsumption is not demandSlide 14Equilibrium P and QSupply and Demand AnalysisPrice elasticityElasticity of demandPrice elasticity and curvesRelative measuresPrice elasticity & total revenueSlide 22So what????Income elasticityCross-price elasticityExamples of Ag elasticitiesOwn and Cross Price ElasticitiesNet change in quantityElasticities at various marketsElasticities at market levelsDerived DemandSlide 32Elasticities at retail and farmElasticity SummaryEconomies of scaleEconomies of scaleAverage total costs changes as Average total costs changes as the output of a firm changesthe output of a firm changesIncreasing, decreasing or Increasing, decreasing or constant economies of scale.constant economies of scale.Short run cost curve (SRATC)Short run cost curve (SRATC)Long run cost curve (LRATC)Long run cost curve (LRATC)Constant economies of scaleConstant economies of scale LRATCSRATC1SRATC2QCostQ1Q2Increasing economies of scaleIncreasing economies of scale SRATC1SRATC2QCostLRATCQ2Q1Decreasing economies of scaleDecreasing economies of scale SRATC1SRATC2QCostLRATCQ1Q2US Pork Sector Study US Pork Sector Study Financial results for 2000Financial results for 2000Net ProfitNet ProfitBreakevenBreakevenNet LossNet Loss1-21-265%65%24%24%11%11%2-32-377%77%15%15%8%8%3-53-579%79%16%16%5%5%5-105-1078%78%13%13%9%9%10-5010-5077%77%12%12%11%11%50-50050-50090%90%5%5%5%5%500+500+95%95%5%5%0%0%US Pork Sector StudyUS Pork Sector StudyStay in price until 2003 (%)Stay in price until 2003 (%)1000 hd1000 hd$36$36$39$39$42$42$45$45$48$481-21-2161636366969868690902-32-3181842427171878797973-53-5181839397070909094945-105-101616393975759292989810-5010-502222494974749191969650-50050-500446161888897979999500+500+2828505089899494100100Processing cost curvesProcessing cost curvesSpecialized plantsSpecialized plantsHigh fixed costHigh fixed costSRATCQCostSo what???So what???Short run price implicationsShort run price implicationsSupply chain managementSupply chain managementOpen market or contractOpen market or contract•Packing plantsPacking plants•Ethanol plantsEthanol plants•Soybean processingSoybean processing•BiodieselBiodieselWeekly Prices and Slaughter, 1998-991.21.41.61.82.02.21 14 27 40 53 66 79 92 105$10$15$20$25$30$35$40$45PriceSlaughterMillionExternalities and cost curvesExternalities and cost curves QCostCost curve exhibiting increasing economies of scaleExternalities and cost curvesExternalities and cost curves Cost curve with external cost internalized to the firmCostQSupply and Demand summarySupply and Demand summaryDemand originates with Demand originates with individual consumer’s utility and individual consumer’s utility and budget constraintbudget constraintSupply originates with individual Supply originates with individual firm’s marginal cost curvefirm’s marginal cost curveConsumption is not demandConsumption is not demandConsumption =Consumption =•Beginning stocks + production + Beginning stocks + production + importsimports•– – exports – ending stocksexports – ending stocks•Government reports of inventoryGovernment reports of inventoryPer capita consumption =Per capita consumption =•consumption / populationconsumption / populationPercapita Boneless Meat Consumption01020304050607080901001970 1975 1980 1985 1990 1995 2000Beef Pork PoultryEquilibrium P and QEquilibrium P and Q QPSDQePeEquilibrium price is where Qs = Qd.Supply and Demand AnalysisSupply and Demand AnalysisPeQePrice elasticityPrice elasticityA measure of responsiveness of A measure of responsiveness of the quantity supplied or the quantity supplied or demanded to changes in prices.demanded to changes in prices.Percentage change in quantity Percentage change in quantity for a 1% change in price.for a 1% change in price.Elasticity of demandElasticity of demand Q / Q Q / Q P / PP / PEp =Ep =Ep =Ep =QQPPPPQQxEp =Ep =QQ0 0 - Q- Q1 1 P P0 0 + P+ P11QQ0 0 + Q+ Q1 1 P P0 0 - P- P11xPrice elasticity and curvesPrice elasticity and curvesEp changes along a sloping Ep changes along a sloping demand or supply curvedemand or supply curveSpecial exceptionsSpecial exceptionsRelative measuresRelative measures|Ep| > 1 elastic|Ep| > 1 elastic|Ep| = 1 unitary elastic|Ep| = 1 unitary elastic|Ep| < 1 inelastic|Ep| < 1 inelasticPrice elasticity & total revenuePrice elasticity & total revenueTR = P x QTR = P x QElastic demandElastic demand•P and TR inversely relatedP and TR inversely relatedInelastic demandInelastic demand•P and TR directly relatedP and TR directly relatedPrice elasticity & total revenuePrice elasticity & total revenue PPQQElasticInelasticSo what????So what???? PPQQ6102060557 1115Where are you on the demand curve?Income elasticityIncome elasticityPercentage change in quantity Percentage change in quantity for a 1% change in incomefor a 1% change in incomePositive for most food itemsPositive for most food itemsRelatively small i.e., 0.2Relatively small i.e., 0.2Ei =Ei =QQIIIIQQxCross-price elasticityCross-price elasticityPercentage change in quantity for a 1% Percentage change in quantity for a 1% change in price of a substitute or change in price of a substitute or complementcomplementPositive or negativePositive or negativeMuch smaller than EpMuch smaller than EpEpEpjj = =QQkkPPjjPPjj QQkkxExamples of Ag elasticitiesExamples of Ag elasticitiesEpEpEiEiBeefBeef-.62-.62.45.45PorkPork-.73-.73.44.44ChickenChicken-.53-.53.36.36MilkMilk-.26-.26-.22-.22GrapesGrapes-1.38-1.38.44.44LettuceLettuce-.14-.14.23.23Own and Cross Price ElasticitiesOwn and Cross Price ElasticitiesEp of demand for beefEp of demand for beefBeefBeef-.62-.62PorkPork .11 .11LambLamb .01 .01ChickenChicken .06 .06OtherOther-.01-.01IncomeIncome .45 .45Net change in quantityNet change in quantityNet effect of changes in own Net effect of changes in own price, cross price, and income price, cross price, and income multiplied by the appropriate multiplied by the appropriate elasticities.elasticities.Addresses the fact that Addresses the fact that not all not all else is equal. else is equal.Elasticities at various