Supply curvesSupply Shift from CostSteps to shift curvesS&D Analysis to Evaluate Market ProgramsConsumer SurplusProducer SurplusS & D AnalysisNew TechnologyNew Sales TaxSlide 11Price RationingPrice and Costs in AgLaw of One PriceSlide 15Slide 16Slide 17Supply curvesOriginate with individual firm’s Originate with individual firm’s marginal cost curvemarginal cost curveWhat causes a change in supply?What causes a change in supply?Supply Shift from Cost DQ QP1CostMC1MC2Q2Q1P2Q1Q2S1S2Steps to shift curves1.1.The impact changes the MC curve of the firm.The impact changes the MC curve of the firm.2.2.The firm chooses output so that MC = MR.The firm chooses output so that MC = MR.3.3.Market supply shifts.Market supply shifts.4.4.Price moves along demand curve to new level.Price moves along demand curve to new level.5.5.Repeat steps 2 - 4.Repeat steps 2 - 4.S&D Analysis to Evaluate Market Programs What are the objectives?What are the objectives?What are the impacts?What are the impacts?Winners and losersWinners and losersDeadweight lossDeadweight lossConsumer SurplusThe difference between what consumers The difference between what consumers actually paid for a given quantity and the actually paid for a given quantity and the maximum amount the would have paid on maximum amount the would have paid on an individual basis.an individual basis.PQP0DArea above Area above equilibrium price equilibrium price and below the and below the demand curvedemand curveProducer SurplusThe difference between what producers The difference between what producers actually received for a given quantity and the actually received for a given quantity and the minimum they would have accepted on an minimum they would have accepted on an individual basis.individual basis.PQP0DArea below Area below equilibrium equilibrium price and above price and above the supply the supply curvecurveS & D Analysis SDP QPeQeCSPSNew Technology S1DP QP1Q1abS2P2Q2c defgNew Sales Tax SD1P QP1Q1a bPpQ2dD2cTPcPrice controls SDP QPeQePfPcSurplusShortageWho holds the surplus?How will the shortage be filled?Price controls SDP QPeQePfPcadbeQ1Q2fgcPrice RationingPrices adjust to match quantity Prices adjust to match quantity demand to available supply.demand to available supply.Short run supply is fixedShort run supply is fixedConsumers switch to subsConsumers switch to subsProducers try to alter supplyProducers try to alter supplyPrice and Costs in AgShort runShort run»Not necessarily a relationship between Not necessarily a relationship between cost and pricecost and price»May be profit or lossMay be profit or lossLong runLong run»Firms expand output to profits and Firms expand output to profits and reduce output to lossesreduce output to losses»Average price = ATC Average price = ATCLaw of One PriceDefinition: Under competitive Definition: Under competitive market conditions all prices market conditions all prices within a market are uniform within a market are uniform after taking into account the cost after taking into account the cost of adding place, time, and form of adding place, time, and form utility.utility.Law of One PriceReason: arbitrageReason: arbitrage»Profit seeking individualsProfit seeking individuals»Buy low and sell high for profitBuy low and sell high for profitExamplesExamples»TransportationTransportation»StorageStorage»ProcessingProcessingLaw of One Price