Economies of scale Average total costs changes as the output of a firm changes Increasing, decreasing or constant economies of scale. Short run cost curve (SRATC) Long run cost curve (LRATC)

Constant economies of scale Cost SRATC1 SRATC2 LRATC Q2 Q Q1

Increasing economies of scale Cost SRATC1 SRATC2 LRATC Q1 Q2 Q

Decreasing economies of scale Cost SRATC2 SRATC1 LRATC Q1 Q2 Q

US Pork Sector Study Financial results for 2000 Net Profit Breakeven Net Loss 1-2 65% 24% 11% 2-3 77% 15% 8% 3-5 79% 16% 5% 5-10 78% 13% 9% 10-50 77% 12% 11% 50-500 90% 5% 5% 500+ 95% 5% 0%

US Pork Sector Study Stay in price until 2003 (%) 1000 hd $36 $39 $42 $45 $48 1-2 16 36 69 86 90 2-3 18 42 71 87 97 3-5 18 39 70 90 94 5-10 16 39 75 92 98 10-50 22 49 74 91 96 50-500 4 61 88 97 99 500+ 28 50 89 94 100

Processing cost curves Specialized plants High fixed cost Cost SRATC Q

So what??? Short run price implications Supply chain management Open market or contract Packing plants Ethanol plants Soybean processing Biodiesel

Externalities and cost curves Cost curve exhibiting increasing economies of scale Q

Externalities and cost curves Cost curve with external cost internalized to the firm Q

Supply and Demand summary Demand originates with individual consumer’s utility and budget constraint Supply originates with individual firm’s marginal cost curve

Consumption is not demand Beginning stocks + production + imports – exports – ending stocks Government reports of inventory Per capita consumption = consumption / population

Equilibrium P and Q Equilibrium price is where Qs = Qd. P S Pe D Qe Q

Supply and Demand Analysis Pe Qe

Price elasticity A measure of responsiveness of the quantity supplied or demanded to changes in prices. Percentage change in quantity for a 1% change in price.

Elasticity of demand Ep = Ep = Ep = Q / Q P / P Q P Q P x P Q Q0 - Q1 P0 + P1 Ep = x Q0 + Q1 P0 - P1

Price elasticity and curves Ep changes along a sloping demand or supply curve Special exceptions

Relative measures |Ep| > 1 elastic |Ep| = 1 unitary elastic |Ep| < 1 inelastic

Price elasticity & total revenue TR = P x Q Elastic demand P and TR inversely related Inelastic demand P and TR directly related

Price elasticity & total revenue Inelastic Q

So what???? Where are you on the demand curve? P 60 55 20 15 7 10 11 Q 6

Income elasticity Percentage change in quantity for a 1% change in income Positive for most food items Relatively small i.e., 0.2 Q I Ei = x I Q

Cross-price elasticity Percentage change in quantity for a 1% change in price of a substitute or complement Positive or negative Much smaller than Ep Qk Pj Epj = x Pj Qk

Examples of Ag elasticities Ep Ei Beef -.62 .45 Pork -.73 .44 Chicken -.53 .36 Milk -.26 -.22 Grapes -1.38 .44 Lettuce -.14 .23

Own and Cross Price Elasticities Ep of demand for beef Beef -.62 Pork .11 Lamb .01 Chicken .06 Other -.01 Income .45

Net change in quantity Net effect of changes in own price, cross price, and income multiplied by the appropriate elasticities. Addresses the fact that not all else is equal.

Elasticities at various markets The greater the number of substitutes the more elastic the demand. For a given Q, look at % P More elastic at retail level

Elasticities at market levels P Hy-Vee T-bone in Ames Hy-Vee T-bone All T-bone All meat All beef All food Q

Derived Demand The demand for inputs that are used to produce the final products. Examples: Flour => wheat Soybean meal => soybeans Fed cattle => feeder cattle

Derived Demand P Retail pork chop demand Wholesale pork demand Farm level demand for hogs Demand for corn to feed hogs Demand for inputs to produce corn Q

Elasticities at retail and farm Dd = f (Dd, M) S P PR M PF DRetail = Primary DFarm = Derived Q Qe

Elasticity Summary Relationship between Q and P Changes along demand curve Elasticity and total revenue Cross-price and income elasticities Relative size Own, cross, and income Farm v. retail