AGEC Test 1 Study Guide Calculate elasticity Ed Q1 Q2 Q1 Q2 P1 P 2 P1 P2 o Q1 Quantity of first observation o Q2 Quantity of second observation o P1 Price of first observation o P2 Price of second observation o Ed Price elasticity of demand o Calculated as the percentage change in quantity divided by the percentage change in price o Elasticity value calculated is based on the change in the price of the good from which we are calculating the elasticity Marginal rate of substitution o Slope of the indifference curve o Amount of one good you give up to gain another good to keep the same level of utility o The rate at which one good is substituted for another good while maintaining the same utility o Different at different points on the indifference curve o However utility stays the same on different points Indifference curves o A line that represents all the different combinations of two goods that are consumed that provide the consumer with the same level of utility o Properties of indifference curves Downward sloping to the right If a consumer gives up some amount of one good he she must be compensated with an additional amount of the other good to keep the consumer with the same level of utility Convex to the origin The marginal rate of substitution decrease in absolute value as one moves along the indifference curve from top left to bottom right Indifference curves do not intersect Indifference curves above a given indifference curve represent bundles of two goods that provide higher utility to the consumer Difference between changes in quantity demanded and changes in demand o Changes that result from other things than the change in price o What will make the demand curve move Change in quantity demanded is when the price of a good increases the quantity demanded of a good decreases all other factors constant However when the price of a good is held constant and other factors change we have a shift in the demand curve Change in demand is the income or preferences changing o What drives a shift in the demand curve Increase in demand for goods from an increasing population Decrease in demand from tastes and preferences of consumers e g when the Atkins diet was first introduced less people wanted bread o What I see observing and seeing what happens Positive economics Normative economics o What ought to be Independent variable Dependent variable Ceteris paribus o Something that can change from outside price people change quantity they consume based on that o Quantity changes based on price dependent on the price o All other things remaining equal constant Law of diminishing marginal utility o For each additional unit we will still get more utility but we still get less utility from the last one o This is why the demand curve goes down because you are willing to pay less o As we consume more we get less utility o When someone consumes an additional amount of a good assuming the consumption of all other goods remains unchanged satisfaction from the consumption of that additional good decreases During the last century o There have been fewer farms o BUT those farms are more productive and bigger there is better machinery and better farmers more productive in agriculture Concept of scarcity o Supply and demand o Condition created when society has unlimited wants and needs but limited resources to satisfy those needs Opportunity cost o The costs of alternative opportunities that you sacrifice o Budget line if we consume more of one good we have to give up some of the other good Ag business Cooperatives o Sum of all operations from taking a product from its production point to where its consumed o Storage process distribution o Includes not only commodity production but includes value added commodity processing marketing transport and wholesale retail activities o Businesses that are organizations a number of individuals allows them to buy goods at lower costs than they would otherwise o A business that is organized capitalized and managed for its member patrons furnishing or marketing goods and services to the patrons at cost Member patrons receive patron dividends which are a return of the profits or new savings of the cooperative Most common types are supply and marketing cooperatives US agriculture and the world market o We depend on the world market because they have a higher population and produce more product than the US o What is produced anywhere in the world by a US company Ford s Gross national product production in Europe Gross domestic product o What is produced in the US either foreign based or US based o Gives true representation of what s going on in the US economy o John Deere is a US company product o What s the interest rate they are going to charge federal funds rate Farm size has increased Monetary policy money supply Fiscal policy o Spending or taxing function of the government o More taxes on your student job more spending programs to stimulate the economy Louisiana agriculture and why we are diverse o Compared to Midwestern states we have a diverse climate and soil o Very productive swamps etc many things can be grown here o We produce 20 times as much stuff as they do Vertical coordination the market o Relationship between production of a product and the processing and o Combines the processes you can have ownership throughout the process o More contracts between them as well o Linking the successive stages in the marketing and production of a commodity in one decision entity Horizontal coordination o They are all completely separated Cross price elasticity of demand o Percentage change in the quantity of one good from one percent change in the price of another good o Change in quantity vs price o Measures the percent change in the quantity demanded of good two given a percent change in the price of good one Substitute good o Beef pork poultry o Goods that can be substituted in the same ratio Compliment good Income elasticity o Hamburger and hamburger buns bacon and eggs o Goods are only consumed in fixed proportions o If its positive more than 0 that is a normal good Negative income elasticity o That good is going to be an inferior good Inferior goods have negative income elasticity Own price elasticity o Elastic demand quantity 1 percent change in price is a greater than 1 percent change in Measures the percent change in the quantity demanded of good 2 given a percent change in the price of good 1 o Inelastic demand Less than 1 percent change Individual