Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Chapter 3 Advanced Price Analysis: Mastering Supply and Demand

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.1. Elasticity of Demand

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.2. Impact of Supply Shifts When Demand is Inelastic and Elastic

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.3. Elasticity of Supply

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.4. Impact of Demand Shifts When Supply is Inelastic and Elastic

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.5. The Long-Run Supply Curve Can Be Perfectly Elastic

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.6. The Long-Run Supply Curve Equals the Minimum Average Cost of Production for Firms

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Cross-Price Elasticity of Demand for Good i With Respect to the Price of Good j (E i,j ) E i,j = (% Change Quantity Demanded of Good i) (% Change in Price of Good j) (% Change Quantity Demanded of Good i) = (E i,j )(% Change in Price of Good j) If E i,j > 0 goods i and j are substitutes; if E i,j < 0 they are complements Income Elasticity of Demand for Good i With Respect to Consumer Income (E i,Income ) (E i,Income ) = (% Change Quantity Demanded of Good i) (% Change in Income) (% Change Quantity Demanded of Good i) = (E i,Income )(% Change in Income) If E i,Income > 0 Good i is a normal good; if E i,Income < 0 Good i is an inferior good Figure 3.7. Cross-Price and Income Elasticity of Demand

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Elasticity TypeShort-Run Elasticity Value Long-Run Elasticity Value Own-Price Elasticity of Demand for Beer Cross-Price Elasticity of Demand for Beer with Respect to the Price of Soda Cross-Price Elasticity of Demand for Beer with Respect to the Price of Whiskey Cross-Price Elasticity of Demand for Beer with Respect to Income Figure 3.8. Elasticities of Demand for Beer Source: Tremblay and Tremblay

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.9. Long-Run Elasticities of Supply and Demand for Pork (and beef) Elasticity of Pork Supply2.15 Own-Price Elasticity of Pork Demand-1.96 Cross-Price Elasticity of Pork Demand With Respect to Beef Prices 0.60 Elasticity of Beef Supply0.40 Own-Price Elasticity of Beef Demand-0.90 Cross-Price Elasticity of Beef Demand With Respect to Pork Prices 0.26 Source: The pork elasticities are derived and calculated in Chapter 6. The beef elasticities are adjusted from the short-run elasticities in Lusk and Anderson.

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Impact of Higher Pork Production Costs in a General Equilibrium Model The government imposes tighter environmental regulations on pork producers which raises the cost of pork production and shifts the pork supply curve upward. The pork price rises. Beef and pork being substitutes, the higher pork price increases the demand for beef, shifting the beef demand curve upward and raising beef prices. The higher beef prices, in turn, increase the pork demand, increasing pork prices further. The new general equilibrium is the pork and beef price that cause supply and demand to equal in both the pork and beef market simultaneously.

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Meet Megan Provost…. Figure 3.11 Megan graduated with a master’s degree in Agricultural Economics from Oklahoma State University in Like many students, she found lectures on elasticities boring, and never thought she would use them in her career. Wrong! After graduating, Megan took a job with the American Farm Bureau Federation (AFBF) in Washington, D.C. as the trade economist. And what does she spend a large part of her job doing? Developing and using general equilibrium displacement models! The U.S. is continually striking trade agreements with individual countries, with groups of countries or through the World Trade Organization. These trade agreements, among other things, lower the tariffs (i.e. taxes) placed on agricultural imports. Before the U.S. commits to any change in policy, however, they seek to estimate the economic impact of that change. This is where AFBF and Megan Provost enters. Megan regularly considers policy proposals, runs them through her equilibrium displacement model and writes reports for trade negotiators and policy makers on the economic impact. Like the models used in this textbook, they rely extensively on elasticities. “Sitting in my agricultural economics classes at OSU, I never thought I would debate elasticities with heads of delegations from the European Union, Japan, Canada and even the Director-General of the World Trade Organization! But today, I use elasticities on a regular basis.” -- Megan Provost

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. VariableUnits (Per Year)Average Value from Quantity Demanded of Beer (Q t ) Thousand 31 gallon barrels 140,650 Beer Price (P t Beer )Index Soda Price (P t Soda )Index90.80 Whiskey Price (P t Whiskey ) Index Consumer Income (I t ) Disposable Income in Billion Dollars 1,973 Figure Beer Demand Function Variable Descriptions Source: Denney et al.

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. VariableShort-Run ElasticityLong-Run Elasticity Own-Price Elasticity Cross-Price Elasticity With Respect to Soda Cross-Price Elasticity With Respect to Whiskey Income Figure Beer Demand Elasticities Source: Denney et al. and Tremblay and Tremblay

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure Long-Run Demand Curve for Beer

Norwood and Lusk: Agricultural Marketing & Price Analysis © 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. Figure 3.15