Slide 1Review from last lecture:Slide 3ProfitProfit maximization:Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12AGEC/FNR 406 LECTURE 7An irrigated rice field in BangladeshReview from last lecture:The mix of inputs used in production (labor, capital, raw materials) reflects tradeoffs that firms observe in the costs of using inputs. Costs are determined by the technology of production and relative prices of resources.If natural resources are relatively “cheap” and if pollution is not a recognized cost of production, then firms will make profligate use of resources and will not take steps to clean up pollution.Review from last lecture:Firms seek to use inputs that keep costs low. If policies make the use of some resources more expensive, or if “free disposal” becomes costly, then firms will alter their behavior to avoid costs. This has implications for forming environmental policies.ProfitProfit = Total Revenue - Total Cost = p*Q - pXX = p*f(X) - pXXProfit maximization:Maximize profit by setting marginal revenue equal to marginal cost:set / X = 0 ==> p f / X = pX i.e. MR = MCSupply CurveThe supply curve is the upward sloping portion of the marginal cost curve, above the average cost curve.It measures the incremental private cost of producing additional units of the good.QPS=MCSupply CurveThe upward slope reflects diminishing returns to input use.The shape of the supply curve is determined by the technology of production.The area under the supply curve is the measure of the total cost of resources used to produce that level of output.QP SChanges in supplyQPSA shift in supply can result from either:1. A change in inputprices2. Technological innovation • •• •Some problems with the storyof static profit maximizationQP S1. Externalities2. Depletion over time3. Ecological dynamicsExample 1: ExternalityCorn = f (land, labor, fertilizer)Nitrogen loads = g(fertilizer)Hypoxia = h(nitrogen loads)Impact of fertilizer on hypoxia is ignored when decision about fertilizer use is made by a corn farmer.Example 2: Depletion over timeCornt = f (landt, labort, fertilizert) Cornt+1 = f (landt+1, labort+1, fertilizert+1)Impact of changes in land quality on production at time t+1 may ignored when land use decisions are made at time t.Example 3: EcologyQFish = f (effort, current fish population)The population dynamics of the resource may be complicated and poorly understood when harvesting decisions are made.Feed back
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